Borrower has no right to legal representation before being declared Wilful Defaulter by In-House Committee, SC

Justices Rohinton Nariman and Vineet Saran
Justices Rohinton Nariman and Vineet Saran

The Supreme Court has ruled that a borrower does not have a right to be represented by a lawyer before he is declared a wilful defaulter by In-House committee.

Justices RF Nariman and Vineeth Saran passed a judgment to this effect on Friday while setting aside the contrary ruling of the Delhi High Court in State Bank of India v. M/s. Jah Developers Pvt. Ltd. and Ors. The State Bank of India (SBI) had filed an appeal against the Delhi High Court verdict.

The case before the Supreme Court involved consideration of Master Circulars issued by the Reserve Bank of India (RBI) on wilful defaulters in 2013 and 2015 (revised circular). Both circulars dealt with defining a “wilful defaulter”, the in-house proceedings that would have to be conducted before a borrower is declared a wilful defaulter and the consequences that would follow for the borrower if such a declaration is made.

The question before the Court was framed as follows,

…  whether a lawyer ought to be allowed to represent the borrower before the First Committee and/or Review Committee under the Revised Circular dated 01.07.2015.


Amicus Curiae Parag Tripathi focused on Section 30 of the Advocates’ Act, 1961, which states that a lawyer has the right to practice before any tribunal or person legally authorised to take evidence. It was his contention that the In-House committees tasked with examining whether a borrower was a wilful defaulter or not, is a tribunal.

This was also the premise on which the Delhi High Court had ruled that lawyers can appear for borrowers before they are declared wilful defaulters. Appearing on behalf of the borrower, Advocate Rakesh Kumar also supported this position.

This apart, it was also pointed out that serious civil and criminal consequences follow once a person is declared a wilful defaulter. On the other hand, he argued that the only adverse consequence apprehended by Banks if lawyers were to appear for borrowers is that the proceedings could be protracted unnecessarily. To settle this apprehension, Tripathi suggested that limits could be placed on the number of adjournments given or the time to make arguments.

Appearing for SBI, Senior Advocates Neeraj Kishan Kaul and BB Sawhney, however, contended that the In-House committees referred to in the RBI circulars could not be termed tribunals by any stretch of imagination. This was because there is no investment of any judicial power by the State in these in-house committees. Further, it was argued that the right to legal representation is not part of the right of natural justice, as established by precedent.

Therefore, SBI argued that the Calcutta High Court’s ruling on the issue ought to prevail. The Calcutta High Court in Kingfisher Airlines Ltd. v. Union of India and Ors had ruled against legal representation for borrowers before the in-house committee.

Verdict: No right to legal representation before in-house proceedings concerning wilful defaulters

The Court found merit in the arguments forwarded by SBI, concluding that the In-House Committee referred to in the RBI circulars could not be viewed as a tribunal. The Court noted that, as established by precedent, in order to be termed a tribunal, the body in question must be invested with judicial powers by a statute.

In this case, the RBI circulars, from which the in-house committee’s powers are derived, would not constitute a statute. There was no other law investing the in-house committee with judicial powers. Therefore, the committee cannot be termed a tribunal. The natural consequence following is that Section 30 of the Advocates’ Act would not apply. The Court observed,

“… 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 impugned [Delhi High Court] judgment’s conclusion that such Circulars have statutory force, as a result of which the State’s judicial power has been vested in the two committees, is wholly incorrect.”

The Court further explained its conclusion as follows:

  • The State’s judicial power is the power to decide a lis between the parties after gathering evidence and applying the law, as a result of which, a binding decision is then reached. This is far from the present case as the in-house committees are not vested with any judicial power at all, their powers being administrative powers given to in- house committees to gather facts and then arrive at a result.
  • It cannot be said that the Circulars in any manner vests the State’s judicial power in such in-house committees. On this ground, therefore, the view of Delhi High Court is not correct, and no lawyer has any right under Section 30 of the Advocates Act to appear before the in-house committees so mentioned.
  • The said committees are also not persons legally authorised to take evidence by statute or subordinate legislation, and on this score also, no lawyer would have any right under Section 30 of the Advocates Act to appear before the same.

The Court added that there is no unconditional right to legal representation, and that the same would depend on the facts of each case.

When it comes to whether the borrower can, given the consequences of being declared a wilful defaulter, be said to have a right to be represented by a lawyer, the judgments of this Court have held that there is no such unconditional right, and that it would all depend on the facts and circumstances of each case, given the governing rules and the fact situation of each case.”

The Court further opined that even oral hearings may not be insisted on as a right in all proceedings. It was observed,

Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at.”

Allow borrower better opportunity to defend himself before he is declared a Wilful Defaulter

Under the 2013 RBI circular, the borrower was to be given two opportunities to present his case. After a Committee intimates the proposal to classify him as a wilful defaulter, the borrower would be given 15 days to make his reply in defence. This reply would then be submitted before a Grievance Redressal Committee. Further, the Grievance Redressal Committee was also expected to give the borrower an opportunity to be heard.

However, under the revised circular of 2015, the borrower is only entitled to one opportunity to make his case i.e. before the First Committee which would issue him a show cause notice if they proposed to declare him a wilful defaulter. The borrower may make his submissions upon such notice being served.

However, this Committee was left with the discretion to decide whether the borrower should be given a personal hearing. The First Committee is not barred from finding that the borrower should be declared a wilful defaulter without hearing him further. The First Committee’s order becomes final once a Review Committee confirms the same. The Court noted,

Neither does the order of the First Committee have to be given to the borrower, nor is any representation required against the aforesaid order, nor is there any personal hearing before the Review Committee, which goes through the First Committee’s order by itself and then comes to a conclusion without involving the borrower at all.”

In this backdrop, the Court opined that the revised RBI circular must be construed reasonably in view of the drastic consequences that follow the declaration of a borrower as a wilful defaulter. The Court proceeded to direct the incorporation of certain features of the 2013 RBI circular in the in-house proceedings so that a borrower is in a better position to defend himself before he is declared a wilful defaulter.

To this end, the Court directed that if the First in-house Committee finds that a borrower must be declared a wilful defaulter, a copy of such an order must be given to the borrower immediately. Thereafter, he must also be given an opportunity to make his representation within 15 days to the Review Committee, after which the Committee is expected to pass a reasoned order in the matter. This order must also be given to the borrower.

As stated in the judgment,

“… 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.

[Read Judgment]

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