[IBC] Party Must Be Provided With All Requisite Documents That Form Basis Of Show Cause Notice: Delhi High Court

Brief Facts:

The Petitioner is an ex-director and guarantor of a company, which had availed various credit facilities from the consortium of respondent banks, with SBI as the lead bank. The company was admitted into the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) by the National Company Law Tribunal (NCLT) on 30th May 2017. Upon this admission, the company's Board of Directors was suspended, and a Resolution Professional (RP) assumed management control under IBC norms and took custody of all the company's documents. The Petitioner approached the Delhi High Court (“High Court”) seeking the quashing and setting aside of Show Cause Notices (SCNs) issued by several respondent banks, which declared the account of M/s Educomp Solution Limited as 'Fraud'.

The Petitioner argued that the RP, under the supervision of the Committee of Creditors, held all the company's documents as per Section 17 of the IBC, which left the Petitioner without access to essential records, including books of accounts and statutory records. The Petitioners contended that the SCNs issued without providing the necessary documents are fundamentally flawed and should be quashed. The Petitioner, unable to access the company's banking transactions, bank loans, and other documents under the RP's control, claimed it was impossible to respond appropriately to the SCNs.

Despite court orders for the banks to supply the necessary documents, only four banks responded, and those that did respond failed to provide the crucial documents.

The respondent banks counter that they already provided the requisite documents to the Petitioner. SBI stated that it was willing to allow the Petitioner to inspect the company's records. Furthermore, IDBI Bank argued that no final decision was made by the banks, as only SCNs have been issued at the preliminary stage.

Observations by the High Court:

The High Court noted banks directed the Petitioner to justify why his account should not be categorized and reported as 'Fraud.' However, these SCNs were issued without providing the necessary supporting documents to the Petitioner.

The High Court emphasized that the principles of fair procedure and natural justice necessitate that the documents forming the basis of an SCN must be provided to the concerned party. This is crucial to allow the party to respond effectively to the allegations. Without these documents, the process of issuing an SCN and responding to it becomes meaningless (referred to T. Takano Versus Securities and Exchange Board of India and Another).

The High Court held that this right cannot be denied, as it is essential for submitting a meaningful reply. It referred to the Supreme Court's decision in State Bank of India & Ors. vs. Rajesh Agarwal & Ors., which highlighted that declaring an account as 'Fraud' under the Reserve Bank of India's Master Directions on Frauds results in a credit freeze for the borrower, which makes adherence to natural justice principles necessary.

Therefore, the High Court directed that the Petitioner will be allowed to inspect the company's records available with the lead bank, SBI. The Petitioner was also permitted to inspect the records held by the RP. After inspecting the records, the Petitioner must specify the documents required from these records that form the basis of the SCNs. These documents must then be provided to the petitioner.

Case Title: Shantanu Prakash Vs State Bank Of India & Ors

Citation: 2024 LiveLaw (Del) 636

Case Number: W.P.(C) 1730/2024, CM APPL. 7177/2024 & CM APPL. 11269/2024

Advocate for the Petitioner: Mr. Amit Sibal, Sr. Adv. with Ms. Neeha Nagpal, Ms. Malak Bhatt, Mr. Vishvendra Tomar, Ms. Aditi Srivastava, Mr. Darpan Sachdeva and Mr. Ankur Vyas, Advs.

Advocate for the Respondent: Mr. Sanjay Kapur, Mr. Surya Prakash, Mr. Devesh Dubey, and Ms. Isha Virmani, Advs. for SBI Ms. Manisha Singh, Mr. George Pothan Poothicote, Mr. Ashu Pathak, Mr. Sbhubham Kumar Deo and Ms. Jyoti Singh, Advs. for R-2. Mr. Brijesh Kumar Tambea and Mr. Yashu Rustogi, Advocates for R-5. Mr. Santosh Kumar Rout, SC with Ms. Dharna Veragi, Adv. for Central Bank of India. Mr. V.P. Singh, Mr. Akshat Singh, Ms. Dacchita Shahi, Mr. Bhanu Gupta, Mr. Utkarsh Kandpal and Mr. Rajat Shah. Ms. Chetna Bhalla for R-4.

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