Supreme Court clarifies the right to representation for wilful defaulters in banking cases (08 May 2019)

Introduction

Date of the Judgment: 08 May 2019
Citation: 2019 INSC 467
Judges: R.F. Nariman J. and Vineet Saran J.
Can a borrower facing the serious consequences of being labeled a “wilful defaulter” be denied the right to be represented by a lawyer? The Supreme Court of India addressed this critical question, clarifying the procedures that banks and financial institutions must follow when classifying a borrower as a wilful defaulter. This judgment balances the need for efficient banking processes with the fundamental rights of borrowers, particularly their right to be heard. The Supreme Court bench comprised of Justice R.F. Nariman and Justice Vineet Saran. The judgment was authored by Justice R.F. Nariman.

Case Background

The case involves appeals against decisions of various High Courts regarding the rights of borrowers when declared wilful defaulters by banks under the Reserve Bank of India (RBI) guidelines. The central issue revolves around whether borrowers have a right to legal representation during the process of being declared a wilful defaulter. The banks argued that the in-house committees determining wilful defaulter status are not judicial tribunals, and therefore, legal representation is not required. The borrowers, on the other hand, contended that the severe consequences of being declared a wilful defaulter necessitate the right to legal representation to ensure fairness.

Timeline

Legal Framework

The judgment primarily revolves around the interpretation of the following:

• Section 30 of the Advocates Act, 1961: This section defines the right of advocates to practice before courts, tribunals, and other legally authorized persons. The relevant portion states:
  
  “30. Right of advocates to practise .—Subject to the provisions of this Act, every advocate whose name is entered in the State roll shall be entitled as of right to practise throughout the territories to which this Act extends,—
  (i)in all courts including the Supreme Court;
  (ii)before any tribunal or person legally authorised to take evidence; and
  (iii)before any other authority or person before whom such advocate is by or under any law for the time being in force entitled to practise.”
• RBI Master Circular dated 01.07.2013: This circular outlines the definition of wilful default and the grievance redressal mechanism for borrowers. It defines wilful default as:
  
  “2.1. Definition of wilful default
  The term “wilful default” has been redefined in supersession of the earlier definition as under:
  A “wilful default” would be deemed to have occurred if any of the following events is noted:-
  (a)The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
  (b)The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
  (c)The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
  (d)The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.”
• RBI Revised Circular dated 01.07.2015: This circular consolidates instructions on dealing with wilful defaulters, modifying the mechanism for identifying them. It states:
  
  “3. Mechanism for identification of Wilful Defaulters
  The mechanism referred to in paragraph 2.5 above should generally include the following:
  (a)The evidence of wilful default on the part of the borrowing company and its promoter/whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM/DGM.
  (b)If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.
  (c)The order of the Committee should be reviewed by another Committee headed by the Chairman/Chairman & Managing Director or the Managing Director & Chief Executive Officer/CEOs and consisting, in addition, to two independent directors/non-executive directors of the bank and the Order shall become final only after it is confirmed by the said Review Committee. However, if the identification Committee does not pass an order declaring a borrower as a wilful defaulter, then the Review Committee need not be set up to review such decisions.”

Arguments

Arguments on Behalf of the Borrowers (Supported by Amicus Curiae):

• Right to Legal Representation: Borrowers argued that Section 30 of the Advocates Act grants a right to legal representation before any tribunal or person legally authorized to take evidence. They contended that the in-house committees under the RBI guidelines should be considered as such.

• Impact on Fundamental Rights: They emphasized that being classified as a wilful defaulter has severe consequences, impacting the fundamental right to carry on business under Article 19(1)(g) of the Constitution.

• Need for Fair Process: Borrowers asserted that they might not be competent to represent themselves effectively, and the denial of legal representation could lead to discrimination.

• Precedent: They supported the Delhi High Court’s view, which allowed legal representation, and argued that the Bombay and Calcutta High Courts had taken a contrary view.

Arguments on Behalf of the Banks:

• No Judicial Power: Banks argued that the in-house committees are not “tribunals” as they are not invested with the judicial power of the State. They stated that these committees have administrative powers to gather facts and arrive at a result.

• No Right to Legal Representation: They contended that the right to legal representation is not a part of natural justice and is not an absolute right.

• Delay Concerns: Banks expressed concerns that allowing lawyers would delay the process of declaring wilful defaulters through adjournments and prolonged arguments.

• Precedent: They supported the Bombay and Calcutta High Courts’ view, which did not allow legal representation.

The core of the arguments revolved around whether the in-house committees under the RBI guidelines are “tribunals” and whether the severe consequences of being declared a wilful defaulter necessitate the right to legal representation.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether a person declared to be a wilful defaulter under the Circulars of the Reserve Bank of India is entitled to be represented by a lawyer of its choice before such declaration is made.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Court considered the following authorities:

Cases:

• Jaswant Sugar Mills Ltd., Meerut v. Lakshmi Chand and Ors. [1963] Supp (1) SCR 242 (Supreme Court of India): The Court held that a Conciliation Officer under the U.P. Industrial Disputes Act, 1947, is not a tribunal as it is not invested with the judicial power of the State. The court used this case to define what constitutes a tribunal.
• Engineering Mazdoor Sabha and Anr. v. Hind Cycles Ltd., [1963] Supp (1) SCR 625 (Supreme Court of India): The Court held that an arbitrator appointed under Section 10-A of the Industrial Disputes Act, 1947, is not a tribunal because the State has not invested him with judicial power. The court used this case to further define what constitutes a tribunal.
• Associated Cement Companies Ltd. v. P.N. Sharma and Anr., [1965] 2 SCR 366 (Supreme Court of India): The Court held that the State of Punjab is a tribunal when exercising its authority under the Punjab Welfare Officers Recruitment and Conditions of Service Rules, 1952, as it is vested with the judicial powers of the state. This case was used to define the basic test for a body to be considered a tribunal.
• Mohinder Singh Gill and Anr. v. Chief Election Commissioner, New Delhi and Ors., (1978) 1 SCC 405 (Supreme Court of India): The Court held that natural justice is flexible, and the need for expedition must be balanced with the need to give a full opportunity to the defendant. This case was used to highlight the flexible nature of natural justice.
• Kavita v. State of Maharashtra and Ors. (I), (1981) 3 SCC 558 (Supreme Court of India): The Court held that an Advisory Board has the discretion to allow or disallow legal assistance to a detenu, even though legal assistance may be essential for the protection of fundamental rights. This case was used to show that there is no absolute right to legal representation.
• Nand Lal Bajaj v. State of Punjab and Anr., (1981) 4 SCC 327 (Supreme Court of India): The Court held that lawyers normally have no place in proceedings before the Advisory Board, but if the detaining authority is allowed to be represented by counsel, the detenu should also be allowed. This case was used to further demonstrate that there is no absolute right to legal representation.
• J.K. Aggarwal v. Haryana Seeds Development Corporation Ltd. and Ors., (1991) 2 SCC 283 (Supreme Court of India): The Court held that the right of representation by a lawyer cannot be held to be a part of natural justice and that a decision has to be reached on a case-to-case basis. This case was used to show that there is no absolute right to legal representation.
• Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 (Supreme Court of India): The Court held that a workman under the Industrial Disputes Act, 1947, has no right to be represented by counsel under principles of natural justice. This case was used to show that there is no absolute right to legal representation.
• D.G., Railway Protection Force and Ors. v. K. Raghuram Babu, (2008) 4 SCC 406 (Supreme Court of India): The Court held that a person accused of misconduct in a domestic/departmental inquiry has to conduct his own case, and there is no vested right to representation by a lawyer. This case was used to show that there is no absolute right to legal representation.
• Krishna Chandra Tandon v. Union of India, (1974) 4 SCC 374 (Supreme Court of India): The Court held that if the facts are known to the person and there are no complex questions of law, no lawyer is needed. This case was used to show that a lawyer is not always necessary.
• National Seeds Corporation Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 (Supreme Court of India): The Court held that there is no absolute right to representation in domestic inquiries unless the rules or regulations specifically recognize such a right. This case was used to show that there is no absolute right to legal representation.
• Gorkha Security Services v. Govt. (NCT of Delhi) and Ors., (2014) 9 SCC 105 (Supreme Court of India): The Court held that in a blacklisting case, natural justice is satisfied once a show cause notice is issued and an opportunity to reply is afforded, and it is not necessary to give an oral hearing. This case was used to show that oral hearings are not always mandatory.

Legal Provisions:

• Section 30 of the Advocates Act, 1961: This section defines the right of advocates to practice before courts, tribunals, and other legally authorized persons. The court interpreted this section to determine whether the in-house committees are tribunals.
• Article 19(1)(g) of the Constitution of India: This article guarantees the fundamental right to carry on any occupation, trade, or business. The court considered the impact of being declared a wilful defaulter on this right.
• Article 21 of the Constitution of India: This article guarantees the right to life and personal liberty. The court referred to this article in the context of procedural fairness.
• Article 22(3)(b) of the Constitution of India: This article states that the right to consult and be defended by a legal practitioner of his choice is denied to a person who is arrested or detained under any law providing for preventive detention. The court referred to this article to show that there is no absolute right to legal representation.
• Section 29A of the Insolvency and Bankruptcy Code, 2016: This section states that a wilful defaulter cannot be a resolution applicant. The court considered this provision to highlight the serious consequences of being declared a wilful defaulter.

Judgment

The Supreme Court held that:

• The in-house committees under the RBI guidelines are not tribunals within the meaning of Section 30 of the Advocates Act.
• There is no absolute right to legal representation before these committees.
• However, given the serious consequences of being declared a wilful defaulter, the following procedure must be followed:
  • The First Committee must provide its order to the borrower after following the procedure in paragraph 3(b) of the Revised Circular dated 01.07.2015.
  • The borrower has 15 days to represent against this order to the Review Committee.
  • The Review Committee must pass a reasoned order on the representation, which must be served on the borrower.

How each authority was viewed by the Court?

• The Court relied on Jaswant Sugar Mills Ltd., Meerut v. Lakshmi Chand and Ors. [1963] Supp (1) SCR 242* and Engineering Mazdoor Sabha and Anr. v. Hind Cycles Ltd., [1963] Supp (1) SCR 625* to conclude that the in-house committees were not tribunals as they were not vested with the judicial powers of the state.
• The Court relied on Associated Cement Companies Ltd. v. P.N. Sharma and Anr., [1965] 2 SCR 366* to define the basic test for a body to be considered a tribunal, which the in-house committees did not satisfy.
• The Court relied on Mohinder Singh Gill and Anr. v. Chief Election Commissioner, New Delhi and Ors., (1978) 1 SCC 405* to explain the flexible nature of natural justice.
• The Court relied on Kavita v. State of Maharashtra and Ors. (I), (1981) 3 SCC 558*, Nand Lal Bajaj v. State of Punjab and Anr., (1981) 4 SCC 327*, J.K. Aggarwal v. Haryana Seeds Development Corporation Ltd. and Ors., (1991) 2 SCC 283*, Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115*, D.G., Railway Protection Force and Ors. v. K. Raghuram Babu, (2008) 4 SCC 406* and National Seeds Corporation Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645* to establish that there is no absolute right to legal representation.
• The Court relied on Krishna Chandra Tandon v. Union of India, (1974) 4 SCC 374* to show that a lawyer is not needed if the facts are known to the person and no complex questions of law are involved.
• The Court relied on Gorkha Security Services v. Govt. (NCT of Delhi) and Ors., (2014) 9 SCC 105* to show that oral hearings are not always mandatory.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by a balance of factors:

• No Absolute Right to Legal Representation: The Court reiterated that there is no absolute right to legal representation in all administrative proceedings. This was based on a consistent line of precedents that emphasized the flexibility of natural justice.
• Impact on Fundamental Rights: The Court acknowledged that being declared a wilful defaulter has severe consequences that impact the fundamental right to carry on business under Article 19(1)(g). This recognition led to the Court mandating a fair procedure.
• Need for a Fair Process: The Court emphasized the need for a fair process given the serious consequences of being declared a wilful defaulter. This included the borrower being informed of the First Committee’s order, having an opportunity to make a representation, and the Review Committee passing a reasoned order.
• Administrative Efficiency: The Court also considered the need for administrative efficiency and did not want to unduly burden the process with requirements that could cause delays.

Fact:Law Ratio

The Court’s reasoning was a mix of legal precedents (60%), which defined the scope of natural justice and the concept of a tribunal, and factual considerations (40%), which included the impact on fundamental rights and the need for a fair process in light of the severe consequences of being declared a wilful defaulter.

Logical Reasoning:

The Court considered alternative interpretations, such as the Delhi High Court’s view that the in-house committees are tribunals, but rejected it based on the lack of judicial power vested in these committees. The Court also considered that oral hearings are not mandatory in all cases and that written representationsare sufficient to meet the requirements of natural justice.

Implications

The Supreme Court’s judgment has several implications:

• For Borrowers:
  • Borrowers do not have an absolute right to legal representation before the in-house committees.
  • However, borrowers are now entitled to a fair process, which includes receiving the First Committee’s order, having 15 days to make a representation to the Review Committee, and receiving a reasoned order from the Review Committee.
  • This provides a structured opportunity for borrowers to present their case effectively.
• For Banks and Financial Institutions:
  • Banks must comply with the new procedure mandated by the Supreme Court when declaring a borrower a wilful defaulter.
  • They must ensure that the borrower is given a copy of the First Committee’s order and is given 15 days to make a representation to the Review Committee.
  • The Review Committee must pass a reasoned order, which must be served on the borrower.
  • This judgment provides clarity on the process to be followed, reducing the ambiguity in the procedures and ensuring compliance with the principles of natural justice.
• For the Legal System:
  • The judgment clarifies the interpretation of Section 30 of the Advocates Act and the concept of a “tribunal.”
  • It reinforces the principle that there is no absolute right to legal representation in all administrative proceedings.
  • It provides a balance between the need for administrative efficiency and the protection of fundamental rights.
  • The judgment also provides guidance on the application of principles of natural justice in the context of wilful defaulter declarations.

Critical Analysis

Strengths:

• Balance of Rights: The judgment strikes a balance between the need for administrative efficiency in dealing with wilful defaulters and the protection of borrowers’ fundamental rights.
• Clarity of Procedure: The judgment provides a clear and structured procedure that banks must follow, reducing ambiguity and ensuring fairness.
• Application of Natural Justice: The judgment reinforces the importance of natural justice while acknowledging that there is no absolute right to legal representation in all administrative proceedings.
• Guidance on Tribunal Definition: The judgment provides a clear understanding of what constitutes a “tribunal” under Section 30 of the Advocates Act.

Weaknesses:

• No Legal Representation: The judgment does not grant borrowers the right to legal representation, which may put them at a disadvantage, especially if they are not well-versed in legal matters.
• Potential for Bias: The in-house committees, despite the mandated procedure, may still be prone to bias, as they are composed of bank officials.
• Limited Scope of Review: The Review Committee is also composed of bank officials, which may limit the scope of review and the possibility of an independent assessment.

Conclusion

The Supreme Court’s judgment in State Bank of India vs. M/s. Jah Developers Pvt. Ltd. & Ors. is a significant ruling that clarifies the process for declaring a borrower a wilful defaulter. While it does not grant an absolute right to legal representation, it mandates a fair procedure that includes the borrower being informed of the First Committee’s order, having 15 days to make a representation to the Review Committee, and receiving a reasoned order from the Review Committee. This judgment balances the need for efficient banking processes with the fundamental rights of borrowers, ensuring that they have an opportunity to present their case effectively. The judgment also clarifies the legal definition of a tribunal and the application of principles of natural justice in administrative proceedings.