Delhi High Court Affirms Provision Of Requisite Documents For Effective Show Cause Notices Response

Delhi High Court Affirms Provision Of Requisite Documents For Effective Show Cause Notices Response

In a recent ruling, Justice Mini Pushkarna of the Delhi High Court emphasized the importance of banks providing all necessary documents forming the basis of Show Cause Notices (SCNs) to the concerned party. The court stated that this ensures the party can submit a comprehensive reply and effectively address all allegations. Without access to these underlying documents, the entire process of issuing an SCN and responding to it would lose its significance.

The petitioner, an ex-director and guarantor of a company that had utilized various credit facilities from a consortium of respondent banks led by SBI, sought relief from the Delhi High Court. The company had been admitted into the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) by the National Company Law Tribunal (NCLT) on May 30, 2017. Following this admission, the company's Board of Directors was suspended, and a Resolution Professional (RP) assumed management control in accordance with IBC regulations, taking custody of all company documents. The petitioner filed a plea with the Delhi High Court to quash and set aside SCNs issued by several respondent banks, which had declared the account of M/s Educomp Solution Limited as fraud.

The petitioner asserted that, in accordance with Section 17 of the IBC, the RP, supervised by the Committee of Creditors, held all of the company's documents. This situation left the petitioner without access to crucial records such as books of accounts and statutory documents. The petitioners argued that issuing SCNs without providing these necessary documents rendered the notices fundamentally flawed and thus should be invalidated. Given the inability to access the company's banking transactions, bank loans, and other documents under the control of the RP, the petitioner claimed it was impossible to respond adequately to the SCNs.

Despite court orders mandating the banks furnish the required documents, only four banks complied with the directive. However, even among those that responded, none provided the essential documents as requested.

The respondent banks countered by claiming that they had already supplied the necessary documents to the petitioner. SBI expressed its willingness to permit the petitioner to inspect the company's records. Additionally, IDBI Bank contended that the banks had not reached a final decision, as only SCNs had been issued at the preliminary stage.

The High Court observed that the banks instructed the petitioner to justify why his account should not be classified and reported as 'fraud' because, these SCNs were issued without furnishing the requisite supporting documents to the petitioner.

The High Court stressed the importance of adhering to the principles of fair procedure and natural justice, highlighting that the documents forming the foundation of a SCN must be furnished to the concerned party. This step is essential to enabling the party to respond effectively to the allegations. Without access to these documents, the entire process of issuing an SCN and providing a response loses its significance, as indicated in the case of T. Takano v. Securities and Exchange Board of India and Another.

The High Court affirmed that denying this right is impermissible, as it is crucial for submitting a substantive response. It cited the Supreme Court's ruling in the case of State Bank of India & Ors. v. Rajesh Agarwal & Ors., which underscored that labeling an account as 'Fraud' under the Reserve Bank of India's Master Directions on Frauds leads to a freeze on credit for the borrower. Consequently, adherence to the principles of natural justice becomes imperative.

Therefore, the High Court ordered that the petitioner be granted permission to examine the company's records held by the lead bank, SBI. Additionally, the petitioner was authorized to review the records held by the RP. Following the inspection of these records, the petitioner must identify the specific documents required from these records, which serve as the foundation of the SCNs. Subsequently, these documents must be furnished to the petitioner.