- 1 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 6TH DAY OF APRIL, 2026 BEFORE THE HON'BLE SMT. JUSTICE LALITHA KANNEGANTI WRIT PETITION NO. 3043 OF 2026 (GM-DRT) BETWEEN: 1. SRI T.VARADARAJ PAI S/O. SRI RANGANATH T., AGED ABOUT 47 YEARS R/A. 43-1-P, CHENNAITHODY VILLAGE, MAVINKATTE, BANTWAL TALUK DAKSHINA KANNADA DISTRICT-574 324 2. M/S. SHRI LAKSHMI VENKATARAMANA YAJAMANA INDUSTRIES, O/AT NO.1-83/4A, SY.NO.43- 2-AP 1, CHENNAITHODY, MAVINAKATTE, VAMADAPADAVU, BANTWAL, DAKSHINA KANNADA DISTRICT, KARNATAKA -574 324 REPRESENTED BY THE PETITIONER NO. 1. 3. M/S. VISHNUPRIYA CASHEW INDUSTRIES, O/AT SY.NO.13/8A4, KADABETTU CROSS, KADABETTU VILLAGE, BANTWAL CROSS, DAKSHINA KANNADA, KARNATAKA 574 211. REPRESENTED BY THE PETITIONER NO. 1 ® Digitally signed by SUVARNA T Location: HIGH COURT OF KARNATAKA - 2 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 4. M/S. SHRI LAKSHMI VENAKTARAMANA CASHEW RURAL INDUSTRIES, O/AT 2-103, FIRST FLOOR, CHENNAITHODY, MAVINAKATTE P.O, BANTWAL, DAKSHINA KANNADA DISTRICT, KARNATAKA- 574 324. REPRESENTED BY THE PETITIONER NO. 1 5. M/S. SHASHANK CASHEW INDUSTRIES, O/AT SY. NO.79/5, PILATHABETTU, NAINADU P.O, BANTWAL, DAKSHINA KANNADA DISTRICT, KARNATAKA -574 211 REPRESENTED BY THE PETITIONER NO. 1 …PETITIONERS (BY SRI. VINAYAK KAMATH K.,ADVOCATE) AND: 1. UNION OF INDIA THROUGH ITS SECRETARY, MINISTRY OF MINISTRY OF FINANCE, 3RD FLOOR, JEEVAN DEEP BUILDING, SANSAD MARG, NEW DELHI – 110 001 2. THE MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER, CANARA BANK, HEAD OFFICE, 112, J C ROAD BANGALORE, KARNATAKA-560 002 3. THE AUTHORIZED OFFICER, CANARA BANK, ARM BRANCH CIRCLE OFFICE, BALMATTA ROAD, MANGALURU, KARNATAKA-575 001 - 3 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 4. THE SECRETARY, MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES, KARTAVYA BHAWAN BUILDING 03 KARTAVYA PATH NEW DELHI- 110 001 …RESPONDENTS (BY SRI. SWAMINI GANESH MOHANAMBAL, CGC FOR R1 & R4 SRI.PRAKASHA HEGDE K., ADVOCATE FOR R2 & R3) THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA, PRAYING TO QUASH THE NOTICE FOR THE DECLARATION OF WILLFUL DEFAULTER DATED 06.06.2024 ANNEXURE-A. THIS PETITION, COMING ON FOR ORDERS, THIS DAY, ORDER WAS MADE THEREIN AS UNDER: CORAM: HON'BLE SMT. JUSTICE LALITHA KANNEGANTI ORAL ORDER The present writ petition is filed seeking the following prayers: a. To quash the Notice for the declaration of Willful Defaulter dated 06.06.2024 "Annexure-A" issued by the Respondent No.3. b. To quash the “Annexure-B" Forensic Audit Notice dated 03.12.2025 issued by E-mail by the Respondent No. 2 & 3. b. Under the facts and circumstances stated in the above petition the Petitioner prays that a direction in the form of a Writ of Quo warrant or any other writ be issued for the Demand Notice (Section 13(2)) dated 16.04.2024Annexure -AG" [Originally Demand Notice (Section 13(2)) dated 04.05.2023 Annexure-E] declaration for the NPA by the Respondent No.2. - 4 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 d. To issue Writ of Mandamus against the Respondent No.2 to comply with the "ANNEXURE-F" Gazette Notification dated 29.05.2015, "ΑΝΝEXURE-G" RBI, Framework dated 17.03.2016 and "ANNEXURE-H to H2 the COVID-19 to H2 crisis, the RBI, acknowledging the unique vulnerabilities of MSMES, introduced special financial support frameworks under various Resolution Frameworks dated 07.09.2020, 05.05.2021, and 04.06.2021 legally mandated directives before declaring the eligible Petitioner MSME Firms Loan Account as NPA and resultantly to Quash all that proceedings initiated under the provisions of SARFAESI Act, 2002 and RDB Act, 1993. e. To issue Writ of Mandamus to the Respondent No. 1 to 3 to adhere to the "ANNEXURE-F" Gazette Notification dated 29.05.2015, "ANNEXURE-G" RBI, Framework dated 17.03.2016 and "ANNEXURE-H to H2 the COVID-19 crisis, the RBI, acknowledging the unique vulnerabilities of MSMEs, introduced special financial support frameworks under various Resolution Frameworks dated 07.09.2020, 05.05.2021, and 04.06.2021 legal mandates and such directives to verify the compliance and to consider the "ANNEXURE-N" The original a formal Request Letter seeking COVID-19 assistance, dated 26.05.2020, "ANNEXURE-P" The original Proposal for Restructuring of Working Capital facilities and Moratorium for the existing term loan supplied Request Letter dated 18.06.2021, The original Proposal for under a "ANNEXURE-Q" Restructuring of Working Capital facilities and Moratorium for the existing term loan supplied under a Request Letter dated 19.06.2021 and "ANNEXURE-R20 The Original online generated reminder letters (emails) on 09.07.2021, 13.08.2021 and 27.09.2021. The representations of the Petitioners before declaration of NPA. f. Under the facts and circumstances stated in the above petition a direction in the form of a - 5 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 Mandamus or any other writ against the Respondent No.1, 4 and 5 to initiate appropriate legal actions under the law against the Respondent No. 2 and 3 for non compliance of the ANNEXURE-F Gazette Notification dated 29.05.2015, ANNEXURE-G RBI Framework dated 17.03.2016 and ANNEXURE-H the COVID-19 crisis, the RBI, acknowledging the unique vulnerabilities of MSMES, introduced special financial support frameworks under various Resolution Frameworks dated 07.09.2020, 05.05.2021, and 04.06.2021 the legal mandates.” 2. Petitioner is aggrieved by the notice dated 06.06.2024 and also the Forensic Audit Notice initiated by E-mail dated 03.12.2025. 3. Learned counsel appearing for the petitioner has restricted the arguments to prayer Nos.a and b i.e., to quash the notice for the declaration of willful defaulter dated 06.06.2024 “Annexure-A” issued by respondent No.3 and to quash the “Annexure B” Forensic Audit Notice dated 03.12.2025 issued by E-mail by the respondent Nos.2 and 3 respectively. 4. Learned counsel appearing for the petitioner relying on the Master Circular issued by the Reserve Bank of India dated 01.07.2015 submits that the Bank has failed to follow the - 6 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 Master Circular issued by the RBI. He relied on paragraph No.3 of Master Circular on ‘Wilful Defaulters’ i.e., Mechanism for identification of wilful defaulters. Basing on this, it is submitted that as per clause 3(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 and as per clause 3(b) if the Committee concludes that there is an willful default, they can issue a Show Cause Notice to the concerned borrower and the promoter/ whole-time director and call for their submissions. After considering their submissions to 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. As per clause 3(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 - 7 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 of the bank and the Order shall become final only after it is confirmed by the said Review Committee. 5. The submission of the learned counsel for the petitioner is as follows: 1. The petitioner cannot be declared as a willful defaulter. 2. The committee who has examined whether the petitioner has committed willful default or not should issue a show cause notice. 3. The Show Cause Notice issued by the Chief General Manager of Canara Bank which is contrary to the Master Circular particularly clause 3(a)(b) of the Master Circular. Further it is submitted that in none of their reports there is no fraud on behalf of the petitioner, even on those circumstances the petitioner cannot be declared as a willful defaulter. In support of his case he had relied on two judgments one is an order passed by a Co-ordinate Bench of this Court in the case of B.G. Chandrashekar Vs. The Authorised Officer, Canara Bank arising out of WP.No.6850/2025 and he relied on the paragraph No.12, 13, 14, 15 and 16 which read as follows: - 8 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 12. Clause 3(1)(j) supra deals with Identification Committee. The Identification Committee must have those members as are enumerated. The Committee should constitute 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 Committe e Deputy General Manager Mid Corporate Credit Wing Member of the Committe e” 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 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. - 9 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 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: “…. …. …. 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 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 - 10 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 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. 6. Learned counsel has also relied on another judgment of the Apex Court in the case of State Bank of India Vs. M/s.Jah Developers Pvt. Ltd. and others1 paragraph No.21 which reads as follows: “21. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in paragraph 3 of the Revised Circular dated 01.07.2015, as it is clear that the events of wilful default as mentioned in paragraph 2.1.3 would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the 1 2019 (6) SCC 787 - 11 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 lender may put to the borrower in a show cause notice to elicit the borrower’s submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that paragraph 3 of the Master Circular dated 01.07.2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following paragraph 3(b) of the Revised Circular dated 01.07.2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 01.07.2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 01.07.2015. The impugned judgment is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court.” - 12 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 7. Relying on these judgments learned counsel appearing for the petitioner submits that issuance of the show cause notice by the Chief General Manager is bad and the same is liable to be set aside and consequently the forensic audit Notice issued by the respondent/bank also needs to be set aside and the respondent/bank may be directed to follow the Master Circular issued by the RBI dated 01.07.2015. 8. Learned counsel appearing for the respondent/bank has filed the objections. He has drawn the attention of the Court to the committee report dated 12.03.2024. The committee consists of the Divisional Manager, General Manager, Deputy General Manager, General Manager (Recovery Legal & FPB), General Manager (MID Corporate Credit Wing) and Executive Director and chairman of the Committee. It is submitted that in the report dated 12.03.2024, the committee has considered the reasons for willful default wherein in respect of M/s Shashank Cashew Industries., it is observed that 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 for the - 13 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 purpose of securing a term loan without the knowledge of the Bank/lender and defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purpose for which finance has been availed, but has diverted the funds for other purposes. 9. Further when it comes to column.No.5 with regard to the recommendations, in view of paragraph No.4 for the reasons for willful default the recommendation was made and it also contains that:- “In view of the above, we recommend as under: 1. To permit Circle/Branch to issue 15 days’ show cause notice to all the above persons/entities. 2. In case any representation is not received within the reasonable period of 15 days, we may be permitted to classify the borrower and its partners/guarantors as willful defaulters once the decision of the identification committee is confirmed by the review committee for willful defaulters. 3. In case any representation is received, the same will be placed before the committee for identification and classification of willful defaulters for taking decision with regard to providing an opportunity of personal hearing if deemed fit.” 10. When it comes to M/s. S.L.V Yajamana Industries at column No.4 the same reasons as in the earlier case were recorded and also the very same recommendations were made. - 14 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 Almost all recommendations are same in respect of the other borrower with regard to the identification of wilfull defaulter. 11. It is submitted that as per the Master Circular issued by the Reserve Bank of India, Committee is constituted and as per the Committee's recommendations show cause notice was issued to the petitioner. It is submitted that in consonance with the guidelines issued by the Reserve Bank of India they have issued the show cause notice and the petitioner could not make out any legal ground. 12. Learned Central Government Counsel appearing on behalf of respondent Nos.1 and 4 submits that as far as initiating the action against the Bank which has failed to follow the Master Circular, the Reserve Bank of India has alone got the power to deal with the same. As the petitioner is not pressing the other prayers except prayer a & b, this Court need not go into those issues. 13. Having heard the learned counsels on either side, perused the entire material on record. The whole grievance of the petitioner is that as per the Master Circular dated - 15 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 01.07.2015 particularly as per clause 3(a) and (b) of the circular the show cause notice has to be issued by the Committee but in this case the show cause notice is issued by the Chief General Manager as such, that is contrary to the guidelines and the same needs to be set aside. The petitioner has relied on order passed by the Apex Court and the order passed by the Co-ordinate Bench of this Court. This Court has specifically asked the petitioner what is the prejudice that is caused if the Chief General Manager has issued a show cause notice? Except stating that it is contrary to the Master Circular issued by the Reserve Bank of India, the petitioner has not submitted anything with regard to that and he relies on the two judgments one of the Apex Court and another Judgment of this Court that the Master Circular has to be followed. As per the Master Circular a Committee has to be constituted. 14 It is also submitted that when the show cause notice is issued by an officer who has no authority, which is as published in vernacular language caused lot of prejudice to the petitioner. The Constitution of the Committee is as per the Master Circular and the Committee has directed to issue the - 16 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 show cause notice. Here, there is no other discretion left to the Chief Manager, he is only discharging the duties as recommended by the Committee. As per the recommendations of the Committee, whether the show cause notice is issued by the Committee or by the Chief General Manager, it would not have any kind of impact or prejudice to the petitioner. It is in furtherance of the recommendation made by the Committee. It is the submission that the show cause notice shall be set aside and again the committee shall issue a show cause notice. This Court do not find any force in the submission of the learned counsel for the petitioner. As per the master circular, the whole purpose to be achieved by the said circular is to see that the party will get a reasonable opportunity and consideration by a duly constituted Committee. Once the petitioner gives his reply it will be considered by the committee. Violation of procedure does not automatically invalidate an action. The committee in terms of the master circular issued by the Reserve Bank of India had duly examined the material on record and arrived at a prima-facie satisfaction warranting initiation of proceedings and directed the Chief Manager to issue a show cause notice which is an administrative action carried out under the direction - 17 - HC-KAR NC: 2026:KHC:18570 WP No. 3043 of 2026 and authority of the Committee. The show cause notice will not determine the rights of the petitioner. Ultimately, the substantive decision making power, vests with the competent authority. In view of the above the writ petition is liable to be rejected. 15. This Court deems it appropriate to pass the following: ORDER i. Accordingly, the writ petition is dismissed. ii. Pending I.As., in the writ petition shall stand closed. SD/- (LALITHA KANNEGANTI) JUDGE TS/List No.: 1 Sl No.: 20