- 1 - NC: 2025:KHC:17071 WP No. 6850 of 2025 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25TH DAY OF APRIL, 2025 BEFORE THE HON'BLE MR JUSTICE M.NAGAPRASANNA WRIT PETITION NO. 6850 OF 2025 (GM-RES) BETWEEN: B.G.CHANDRASHEKAR AGED ABOUT 54 YEARS S/O GIDDEGOWDA RESIDING AT H.NO.45 GG BADAVANE, DATTAGALLI MYSURU – 570 028. …PETITIONER (BY SRI RUDRABHUSHAN C. B., ADVOCATE) AND: THE AUTHORIZED OFFICER CANARA BANK KUVEMPU NAGAR BRANCH NO.1, SMT. UDAYARAVI ROAD KUVEMPUNAGAR, MYSORE – 570 023 REPRESENTED BY ITS CHIEF MANAGER SRI RAVI MOHAN GUPTHA. …RESPONDENT (BY SRI VINAY SWAMY C., ADVOCATE) THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED SHOW CAUSE NOTICE DATED 25.02.2025 BEARING REF. RLFP/NPAMS/WILFUL/829/2024/SM ISSUED BY THE RESPONDENTS BANK IN FAVOUR OF THE PETITIONER VIDE ANNEXURE -A. R Digitally signed by NAGAVENI Location: High Court of Karnataka - 2 - NC: 2025:KHC:17071 WP No. 6850 of 2025 THIS PETITION, COMING ON FOR PRELIMINARY HEARING, THIS DAY, ORDER WAS MADE THEREIN AS UNDER: CORAM: HON'BLE MR JUSTICE M.NAGAPRASANNA ORAL ORDER The petitioner is before this Court calling in question a show cause notice dated 25.02.2025, issued by the respondent – Canara bank, which seeks the petitioner to show cause as to why the account of the petitioner should not be declared as a willful defaulter’s account. 2. Heard Sri Rudrabhushan C.B., learned counsel for petitioner and Sri Vinay Swamy C., learned counsel for respondent. 3. Facts in brief, germane, are as follows: The petitioner is the borrower from the hands of the respondent – Canara Bank; the petitioner borrows huge sums of money and defaults in payment. The bank takes steps in terms of the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, against the petitioner and registers a recovery petition in O.A.No.149/2024 for recovery of `7,07,94,378/-, before the - 3 - NC: 2025:KHC:17071 WP No. 6850 of 2025 Debts Recovery Tribunal (for short ‘DRT’). The matter is pending adjudication before the DRT. 4. What drives the petitioner before this Court is not the proceedings pending before the DRT. It is the action that the bank seeks to initiate after having initiated the proceedings before the DRT. The respondent – bank issues a show cause notice on 25.02.2025 seeking show cause from the hands of the petitioner as to why he should not be declared to be a willful defaulter and his account to be identified as willful defaulter’s account. The petitioner does not submit his reply, but is at the doors of this Court challenging the show cause notice itself, on the score that what is issued is blatantly contrary to law, which would touch upon the jurisdiction of the bank to issue the notice. 5. This Court in terms of its order dated 17.03.2025, grants an interim order of stay of the impugned notice and all further action to be taken thereto. The said interim order is subsisting even as on today. The matter is heard with the consent of the parties. - 4 - NC: 2025:KHC:17071 WP No. 6850 of 2025 6. Learned counsel appearing for the petitioner takes this Court through the master circular / guidelines issued by the Reserve Bank of India from time to time and with particular reference to a circular issued on 30.07.2024. It is the submission of the learned counsel that the said circular details procedure with regard to declaration of a account holder as a willful defaulter. Learned counsel would submit that the show cause notice issued to the petitioner is in blatant violation of several clauses of the aforesaid circular of the year 2024. Learned counsel would submit that he is not on the merit of the matter, but only on the violation of the master circular of the RBI. To buttress his submission, he seeks to place reliance upon the judgment of the Apex Court in the case of STATE OF BANK OF INDIA VS. M/S. JAH DEVELOPERS PVT. LTD. reported in (2019) 6 SCC 787. 7. Per contra, Sri Vinay Swamy, learned counsel representing the respondent - bank would vehemently refute the submissions of the learned counsel for petitioner contending that what is challenged is only a show cause notice, the petitioner can always submit a reply and seek personal hearing before the appropriate Committee. It is only then the - 5 - NC: 2025:KHC:17071 WP No. 6850 of 2025 petitioner would be considered to be declared as a willful defaulter. It is his submission that this Court should not interfere at this stage, as it is only a show cause notice. He would take this Court through the statement of objections to contend that the respondent – bank itself has formulated its procedure in consonance with the RBI master circular and two Committees are drawn for different pecuniary jurisdictions. He submits that the petitioner has attempted to alienate the property, which is the subject matter of mortgage to another entity and therefore, such borrower should not be shown any indulgence. He would seek dismissal of the petition. 8. I have given my anxious consideration to the submissions made by the learned counsel for the respective parties and have perused the material on record. 9. The afore-narrated facts, dates and the link in the chain of events are all a matter of record. The issue lies in a narrow compass. What drives the petitioner to this Court, as observed hereinabove, is not the proceedings before the DRT but a notice issued on 25.02.2025, seeking to show cause as to why the petitioner should not be declared as a willful defaulter. - 6 - NC: 2025:KHC:17071 WP No. 6850 of 2025 The contention is that, it is in blatant violation of the circular / guidelines notified by the RBI from time to time. Learned counsel for the petitioner has placed heavy reliance upon the circular of the RBI dated 30.07.2024. Circulars issued by the RBI do have a statutory force as they are issued invoking power under Section 35-A of the Banking Regulation Act, 1949. This is what is held by the Apex Court in the case of PRO KNITS VS. BOARD OF DIRECTORS AND CANARA BANK AND OTHERS AND CONNECTED MATTERS reported in (2024) 10 SCC 292. The Apex Court has held as follows: “8. At this juncture, it would also be apt to refer to the relevant provisions contained in the Banking Regulation Act, 1949. Section 21 of the said Act empowers the Reserve Bank of India to control advances by banking companies. The said section inter alia provides that where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interest of the depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any company in particular and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined. Sub-section (3) of Section 21 states that every banking company shall be bound to comply with any directions given to it under the said section. Further, Section 35-A of the said Banking Regulation Act reads as under: - 7 - NC: 2025:KHC:17071 WP No. 6850 of 2025 “35-A. Power of the Reserve Bank to give directions.—(1) Where the Reserve Bank is satisfied that— (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2) Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.” (emphasis supplied) 9. Thus, Section 21 read with Section 35-A makes it clear that the directions issued by the Reserve Bank of India to the banking companies are binding on them and they are bound to comply with such directions. 15. Sections 21 and 35-A of the said Act empower the Reserve Bank of India to frame the policy and give directions to the banking companies in relation to the advances to be followed by the banking companies. Such directions have got to be - 8 - NC: 2025:KHC:17071 WP No. 6850 of 2025 read as supplement to the provisions of the Banking Regulation Act and accordingly are required to be construed as having statutory force and mandatory.” (Emphasis supplied) One of the guidelines so issued by the RBI forms the fulcrum of the lis, it is issued on 30.07.2024. These guidelines are the sheet anchor of the submissions of the learned counsel for the petitioner. Certain clauses of the guidelines therefore, becomes germane to be noticed. 10. The relevant clauses in the master circular / guidelines of the RBI concerning the case at hand are, Clause 3(1)(j) – Identification Committee, 3(1)(t) – Wilful Default and Clause 4 (1) – Mechanism for Identification and Classification of Wilful Defaulters. They read as follows: “(j) “identification committee" means the committee constituted by a lender for identifying a wilful defaulter and shall comprise of: (i) In case of commercial banks (other than foreign banks and RRBs) and AIFIs, a Whole- Time Director other than the Managing Director and Chief Executive Officer (MD & CEO)/ CEO or equivalent official as chairperson and two senior officials as members, not more than two ranks below the chairperson of the committee. In cases where there is only one Whole-Time Director other than the MD & CEO/ CEO or equivalent official, such Whole-Time Director may be - 9 - NC: 2025:KHC:17071 WP No. 6850 of 2025 part of the review committee [as defined in para 3 (1) (r) below] if the post of MD & CEO/ CEO or equivalent official is vacant. In such cases an official one rank below the Whole-Time Director may chair the identification committee, with two senior officials as members, not more than one rank below the chairperson of the committee. Provided that in respect of credit facilities below a suitable threshold, commercial banks (excluding Foreign Banks, Small Finance Banks, LABs and RRBs) may, as per their board-approved policy, set up the Identification Committee, with an officer just below the rank of the Whole-Time Director as chairperson and two senior officials as members, not more than two ranks below the chairperson of the committee. Commercial banks (excluding Foreign Banks, Small Finance Banks, LABs and RRBs) may form multiple identification committees under this clause. (ii) In case of Foreign Banks, an officer not more than one rank below the Country Head/ CEO as chairperson and two senior officials, not more than two ranks below the chairperson of the committee, as members. (iii) In case of UCBs and NBFCs, an officer not more than one rank below the MD/CEO as chairperson and two senior officials, not more than two ranks below the chairperson of the committee, as members. (iv) In case of RRBs, an officer not more than one rank below the chairman of the RRB as chairperson and two senior officials, not more than two ranks below the chairperson of the committee, as members.” “(t) "wilful default" (i) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/ repayment obligations to the lender and any one or more of the following features are noticed: - 10 - NC: 2025:KHC:17071 WP No. 6850 of 2025 (A) the borrower has the capacity to honour the said obligations; (B) the borrower has diverted the funds availed under the credit facility from lender; (C) the borrower has siphoned off the funds availed under the credit facility from lender; (D) the borrower has disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender; (E) The borrower or the promoter has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions. (ii) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues or has disposed of immovable or movable assets provided for the purpose of securing the credit facility, without the approval of the lender or has failed in commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment.” “CHAPTER II Treatment of Wilful Defaulters 4. General requirements 1) Mechanism for Identification and Classification of Wilful Defaulters A lender shall identify and classify a person as a 'wilful defaulter' by following the procedure enumerated in these Directions. The identification of the wilful default should - 11 - NC: 2025:KHC:17071 WP No. 6850 of 2025 be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be intentional, deliberate, calculated and meeting the conditions set out in para 3 (1) (t) above. (a) (i) The evidence of wilful default shall be examined by an Identification Committee. (ii) If the Identification Committee is satisfied that an event of wilful default has occurred, it shall issue a show-cause notice to borrower/ guarantor/ promoter/director/ persons who are in charge and responsible for the management of the affairs of the entity, and call for the submissions from them within 21 days of issuance of show cause notice. Lenders shall disclose to them all materials and information on which show cause notice is based.” The RBI directs that the cases of willful defaulters shall be placed before a particular Committee as is found in Clause 3(1)(j), which mandates that the Committee should comprise of a Whole-Time Director other than the Managing Director and Chief Executive Officer or the Chief Executive Officer or equivalent official of the bank. Clause 3(1)(t) defines what is ‘willful default’ and the clause has several features of default. Clause 4 deals with general requirements and Sub-clause (1) of Clause 4 deals with mechanism for identification and classification of willful defaulters. The Identification Committee - 12 - NC: 2025:KHC:17071 WP No. 6850 of 2025 while issuing show cause notice should disclose all the materials upon which the show cause notice is based. 11. The afore-quoted are the clauses, which are germane to be noticed in the circular dated 30.07.2024. Any declaration of any account or the account holder to be a willful defaulter, the afore-quoted clauses are to be mandatorily adhered to. Whether the impugned notice is in consonance with the circular / guidelines of the RBI is necessary to be considered. Therefore, I deem it appropriate to notice, the notice. It reads as follows: “Ref: RLFP:NPAMS:WILFUL:829:2024:SM Date:25-02-2025 Mr. Chandrashekar B G S/O Giddegowda H.No: 45 GG, Badavane, Dattagalli, Mysuru - 570028 Dear Sir, Sub: Show Cause notice- Mr. Chandrashekar B G Ref: (1) Account No 1512256010222 Limit. Rs.5,00,00,000/- Liability. Rs.6,52,28,220/- Int. due from 01/02/2025 (2) Account No.1512755000040 Limit. Rs.80,00,000/- Liability Rs.1,03,89,093/- Int. due from 15/02/2025 - 13 - NC: 2025:KHC:17071 WP No. 6850 of 2025 (3) Account No.1512757000001 Limit. Rs.78,30,732.90/- Liability Rs.42,87,254/- Int. due from 22/02/2025 As per terms of Reserve Bank of India Master Circular RBI/DoR/2024 - 25/122DOR.FIN.REC.No.31/20.16.003/2024-25 dated July 30, 2024, Banks and Financial Institutions are required to report the list of Wilful Defaulters to Credit Information Companies. The Committee for Identification of Wilful Defaulters of our Bank has identified you as wilful defaulter on account of the following reasons. Reasons for Wilful default Borrowers defrauded the bank by mortgaging already sold property and availed credit facility In view of the above, you are coming within the purview of Wilful Defaulter as defined under the above RBI Circular. Hence, the Committee proposes to classify you as Wilful Defaulter and report to Credit Information Companies. If you have any submission to make in this regard, the same may be furnished to the Committee with in 21 days from the date of receipt of this letter. If no reply is received from you in this regard within the stipulated time, it shall be presumed that you do not have any submission to make and Committee shall be free to proceed forward and classify you as a wilful defaulter and report the same to the Credit Information Companies. Please note that any submission received from you after the above due date will not be considered for reconsideration of our decision. The documents / material & information supporting the reasons are enclosed herewith. (This is without prejudice to any other rights available to us under any other law in force.) This Notice has the approval of committee for identification of wilful defaulters consisting of following members - 14 - NC: 2025:KHC:17071 WP No. 6850 of 2025 Chief General Manager CAM Wing Chairman of the Committee Deputy General Manager RL & FP Wing Member of the Committee Deputy General Manager Mid Corporate Credit Wing Member of the Committee” (Emphasis added) The show cause notice carries with it 3 instances, first – reasons for willful default is that, the borrower has defrauded the bank by mortgaging already sold property and availed credit facility. Second, if the petitioner would not submit the reply, he would be declared wilful defaulter and the third, this has the Committee approval. Barring this, there is no indication of any disclosure of reasons as to why the petitioner should be declared as willful defaulter. The notice is as vague as vagueness could be. The guidelines are quoted supra. The guidelines of the RBI have a statutory force is what the Apex Court has held in the afore-quoted judgment. Therefore, it is necessary to consider whether the notice meets the necessities as enumerated under the guidelines. 12. Clause 3(1)(j) supra deals with Identification Committee. The Identification Committee must have those members as are enumerated. The Committee should constitute - 15 - NC: 2025:KHC:17071 WP No. 6850 of 2025 a Whole Time Director other than the Managing Director and Chief Executive Officer or any equivalent official of the bank. Now, who are the members of the Committee constituted by the bank to issue the show cause notice is evident itself in the notice. They are as follows: Chief General Manager CAM Wing Chairman of the Committee Deputy General Manager RL & FP Wing Member of the Committee Deputy General Manager Mid Corporate Credit Wing Member of the Committee” There is no Whole-Time Director, there is no Chief Executive Officer nor an Officer of the equivalent rank. The Chief General Manager and two Deputy General Managers have constituted the Committee. It is thus, in violation of Clause 3(1)(j) of the guidelines. This is the first blush of illegality. Clause 4 which deals with general requirements, prior to declaration of willful defaulter. Sub-clause (1) of Clause 4 (supra) mandates the Identification Committee to issue a show cause notice in complete disclosure of all the material upon which the show cause notice is based. The show cause notice is quoted hereinabove. It does not bear even a semblance of reason in consonance with the guidelines of the RBI. This is - 16 - NC: 2025:KHC:17071 WP No. 6850 of 2025 the second blush of illegality, as it is in violation of the guidelines of the RBI. The aforesaid twin violations would render the notice invalid. 13. Learned counsel for the petitioner seeks to submit that playing fraud with the bank is not the one which is enumerated as willful default. I decline to accept the same as playing fraud with the bank, if alleged with substance would cut at the root of the matter. Therefore, the said submission does not merit any acceptance. 14. Now, let me consider the submissions of the learned counsel for the respondent - bank. It is his submission that the show cause notice is preceded by deliberations of the Committee and the Committee has gone into details as to why the petitioner should not be declared a willful defaulter and therefore, the petition should not be entertained, inter alia. The deliberations of the Committee insofar as the present petitioner is concerned, read as follows: - 17 - NC: 2025:KHC:17071 WP No. 6850 of 2025 “…. …. …. 39. AGENDA – WD – 39 – 2024-25 Identification of Wilful Default and permission to issue Show Cause Notice to Mr. Chandrashekar B G, Mysore Jayanagar Branch, Bengaluru circle Account is declared as Fraud on 04.05.2024. Hence Committee permitted to issue Show Cause Notice to the borrower.” (Emphasis added) The deliberations is not even to its remotest sense in consonance with the law. The agenda is placed for identification of a willful defaulter and the account is declared as fraud on 04.05.2024 and therefore, the Committee was permitted to issue a show cause notice. Neither the deliberations of the Committee nor the show cause notice is in consonance with the guidelines quoted supra. 15. The other submission of the learned counsel for the bank is that, the bank itself has constituted two Committees, one Committee for the default below `25 lakhs and the other is for, above `25 lakhs and the Committee constituted for above `25 lakhs has considered the case of the petitioner. The bank having nominated two Committees for its working purpose, cannot override the guidelines of the RBI. Therefore, it is for - 18 - NC: 2025:KHC:17071 WP No. 6850 of 2025 the respondent - bank to draw up Committees strictly in consonance with the guidelines of the RBI. Those Committees would not cure the illegality of it being contrary to the guidelines of the RBI. In the light of the preceding analysis, the petition deserves to succeed, with the obliteration of the show cause notice. 16. For the aforesaid reasons, the following: ORDER a. The writ petition is allowed in part. b. The impugned show cause notice dated 25.02.2025 stands quashed. c. The respondent - bank is at liberty to initiate proceedings in accordance with law bearing in mind the observations made in the course of the order. Ordered accordingly. Sd/- (M.NAGAPRASANNA) JUDGE NVJ/List No.: 1 Sl No.: 19 CT:SS