Legal Representation in Wilful Defaulter Proceedings: Supreme Court Verdict on SBI vs. Jah Developers

The case of State Bank of India vs. M/S. Jah Developers Pvt. Ltd. revolved around a crucial legal question: whether an individual or company declared as a ‘wilful defaulter’ under the Reserve Bank of India (RBI) guidelines is entitled to legal representation before being classified as such. The decision was particularly significant as being labeled a wilful defaulter has severe financial and legal consequences, including restrictions on access to bank finance and exclusion from the Insolvency and Bankruptcy Code, 2016.

Background of the Case

The dispute emerged when Jah Developers Pvt. Ltd. was declared a wilful defaulter by the State Bank of India (SBI) under the RBI’s Master Circular on Wilful Defaulters, dated July 1, 2013. The definition of wilful default included:

• Failure to meet financial obligations despite having the capacity to do so.
• Diversion of borrowed funds for purposes other than intended.
• Siphoning of funds such that they are not available for their intended use.
• Disposal of secured assets without informing the bank.

The grievance redressal mechanism in the RBI’s Master Circular provided for a two-step process: first, a committee would classify a borrower as a wilful defaulter, and second, a review committee would confirm the classification after allowing the borrower to submit objections.

Key Legal Issues

The core question in the appeal was whether a borrower had a fundamental right to legal representation before these committees. Jah Developers argued that the absence of legal representation violated the principles of natural justice, as the decision could severely impact a borrower’s ability to conduct business.

The Delhi High Court had ruled in favor of Jah Developers, holding that the committees constituted by banks under the RBI’s Master Circular should be considered tribunals, allowing legal representation. SBI challenged this ruling in the Supreme Court.

Arguments Presented

• Petitioner (State Bank of India):
• SBI argued that the classification process was administrative rather than judicial and did not warrant legal representation.
• The committees did not function as tribunals because they did not adjudicate disputes but merely conducted an internal fact-finding exercise.
• Allowing lawyers would delay the process and obstruct the efficient classification of wilful defaulters.
• Respondent (Jah Developers Pvt. Ltd.):
• Jah Developers contended that being labeled a wilful defaulter carried severe consequences, including financial restrictions and criminal liability.
• Since the classification process affected their fundamental right to carry on business under Article 19(1)(g) of the Constitution, legal representation should be allowed.
• The principles of natural justice required that affected parties be given the opportunity to be represented by counsel.

Supreme Court’s Observations and Ruling

The Supreme Court, after hearing extensive arguments, held that while the classification as a wilful defaulter had significant repercussions, it did not equate to a judicial or quasi-judicial proceeding. The Court noted:

“Applying the aforesaid tests to the facts of the present case, it cannot be possibly said that either in-house committee appointed under the Revised Circular dated 01.07.2015 is vested with the judicial power of the State.”

The Court ruled that:

• Borrowers do not have an absolute right to legal representation before the in-house committees formed under the RBI’s guidelines.
• The classification process is primarily administrative, and legal representation is not a necessary component of natural justice in this context.
• The committees are not tribunals, as they lack judicial functions and merely facilitate an administrative decision.
• Borrowers should be allowed to submit written representations, and a reasoned order must be passed on their objections.

However, the Court also acknowledged the severe implications of being declared a wilful defaulter and directed that the borrower must be given a copy of the decision at every stage and be allowed to make written representations.

Conclusion

The Supreme Court’s judgment provided clarity on the rights of borrowers in wilful defaulter proceedings. While legal representation is not a mandatory requirement, the judgment reinforced that borrowers must be afforded a fair opportunity to present their case through written submissions. The ruling has significant implications for financial institutions and borrowers, balancing the need for efficient banking regulation with the principles of fairness and due process.

Petitioner Name: State Bank of India.
Respondent Name: M/S. Jah Developers Pvt. Ltd. & Ors..
Judgment By: Justice R.F. Nariman, Justice Vineet Saran.
Place Of Incident: India.
Judgment Date: 08-05-2019.

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