Person to be classified as wilful defaulter cannot be denied legal representation by bank #indianlaws

Borrowers of the Banks/FIs who are proposed to be classified/ declared as wilful defaulters and are given an opportunity of hearing before the GRC are entitled to be represented therein through advocates.

In the instant petition the Delhi High Court was to determine as to whether a person who is proposed to be classified as a wilful defaulter by a Bank / FI and has availed of opportunity to be heard by the Grievance Redressal Committee of the Bank / FI to oppose such a proposal, has a right to be represented by an Advocate in the said hearing.

The Reserve Bank of India (RBI) from time to time has issued number of Circulars to Banks and Financial Institutions (FIs), containing instructions on matters relating to wilful defaulters. To enable the Banks / FIs to have all the existing instructions on the subject at one place, a Master Circular dated 1st July, 2013, incorporating all the instructions / guidelines issued on cases of wilful default, was issued. The purpose of this was to put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning Banks / FIs so as to ensure that further bank finance is not made available to them. The Circular provides for submission by Banks / Financial Institutions of data of wilful defaulters to RBI on a quarterly basis and preparation of a list of wilful defaulters by the RBI and communication thereof to the Securities Exchange Board of India (SEBI) and to Credit Information Bureau (India) Ltd. (CIBIL).

The said Circular requires:

• Banks / FIs to (i) advise the borrower about the proposal to classify him as wilful defaulter along with the reasons therefor; ii) give the borrower time of fifteen days for making representation against proposed decision; iii) constitute a Grievance Redressal Committee (GRC) headed by the Chairman and Managing Director and two other senior officials of the Bank / FI, to hear the person sought to be classified as a wilful defaulter, if he so desires; and, iv) thereafter take a decision in that regard.

Appellant-Punjab National Bank (PNB) proposed to classify the Respondents i.e. Kingfisher Airlines Limited, United Breweries (Holdings) Ltd. and Dr. Vijay Mallya as wilful defaulters and give an opportunity to the said Respondents to represent against the said decision. The Respondents, besides representing, sought a hearing.

GRC of the Appellant- Bank gave a hearing but during the said hearing objected to the said Respondents being represented by a Senior Advocate.

Respondents moved a writ petition and in the writ it was contended on behalf of Bank that the members of the GRC of the Appellant PNB were not Law Graduates and therefore the Respondents were not entitled to be represented by an Advocate. It was further submitted that similar notices had been issued to a large number of other borrowers for declaring them also as wilful defaulters and that if the defaulting borrowers are permitted to be represented by an Advocate, the GRC would be severely impeded in disposing of those cases.

The writ petition by a single judge of High Court was disposed of with the observation that keeping in mind that an adverse decision by the GRC would be highly prejudicial to the interest of the respondents and that it would have serious civil and pecuniary consequences, denial of representation through a legal practitioner may in given facts be violative of natural justice. It was thus clarified that the respondents / writ petitioners would have a right of representation in the said hearing through an Advocate or a Senior Advocate but with the condition that the oral submissions will be confined to six hours and the hearing would be concluded on date given. The respondents/ writ petitioners were however given liberty to file written submissions and documents.

Aggrieved therefrom an appeal was filed before the Division Bench along with an application for stay of the above order on which notice was issued and the hearing before the GRC was stayed more so in the light of the fact that the respondents / writ petitioners in the meanwhile were already declared as a wilful defaulter by another Bank.

High Court held that GRC was satisfying the test aforesaid of having been constituted by the State and also of having been invested with the State’s judicial power and having the trappings of a Court i.e. the authority to determine whether the Bank’s/FIs proposal to classify a borrower as a wilful defaulter is in accordance with the requirements of the Master Circular and if so satisfied, to declare the borrower as a wilful defaulter and which declaration vitally affects the rights and reputation of the person so declared. GRC accordingly was held to be satisfying the tests prescribed to qualify as a Tribunal. Once the GRC is held to be a Tribunal within the meaning of Section 30 of the Advocates Act, the advocates would have a right to practice before it and axiomatically the borrower before such GRC will have a right to engage and avail the services of an advocate.

It was accordingly held that the GRC of the Banks erred in denying representation through the advocates to the Respondent. It was further held that the borrowers of the Banks/FIs who are proposed to be classified/ declared as wilful defaulters and are given an opportunity

of hearing before the GRC are entitled to be represented therein through advocates.

[Punjab National Bank vs. Kingfisher Airlines Limited & Ors.]

(Delhi HC, 17.1.2015) – LPA No. 589/2014 & LPA No. 113/2015