Any Person In Control Of Company Is Liable To Face Penal Measures If Account Is Declared Fraud: Bombay High Court In Ambani's Case

While dismissing the plea filed by industrialist Anil Ambani, the Bombay High Court held that whenever a company's account is classified as "fraud" its Promoters, Directors or anyone having control over the said company, automatically become liable to penal actions as mandated under the Reserve Bank of India (RBI) Master Directions, 2024.

Notably, Ambani and his company Reliance Communications' loan account was declared "fraud" by the State Bank of India (SBI) in June this year, over a loan amount of Rs 1,500 crore. The High Court had dismissed Ambani's plea on October 3 but the detailed order was made available today (October 7).

A division bench of Justices Revati Mohite-Dere and Dr Neela Gokhale noted that the clause 4.4 of the Master Directions, specifically provide for penal measures.

"It is evident (from the clause) that proceedings when initiated against the Company or Corporate Body, with a view to classify the account of that company as a fraud account and is declared as one, the Promoter/Directors who were in control of the affairs of the company would automatically be liable to penal measures and to be reported as fraud, more particularly, when the Promoter/Director are found to be in control of the company and responsible for the acts and omissions of the Company," the judges observed in the order pronounced on October 3.

With this finding, the bench dismissed the argument made by Ambani that the SBI didn't make any allegations, specifically against him in its Show Cause Notice (SCN) issued to him and the company.

"There is no requirement of the impugned SCN containing specific allegations against the individual or against the Promoter and Director having control over the Company. In this case, it is seen that the Petitioner had control over RCOM and that the Annual Reports of RCOM for the relevant years refers to the Petitioner as being the 'Promoter' and 'person having control' of RCOM," the judges pointed out.

As regards the argument that the SCN was issued under the Master Directions of 2016, which was modified or replaced with Master Directions, 2024 and thus, the same being illegal as the former stood substantially amended.

The judges noted that the 2016 Master Directions did not contain the provision for compliance with principles of natural justice, which was flagged by the Supreme Court and in pursuance to the apex court's order, the RBI came up with the 2024 Master Directions, including in it the mandatory compliance with principles of natural justice.

"If a subsequent Government Order or Direction is declared to be in the nature of clarification of the earlier Order/Direction, it may be made applicable retrospectively. It is only if the subsequent Order/Direction is held to be a modification or a substantive amendment of the earlier order, its application shall be prospective as the retrospective application thereof, would result in withdrawal of vested rights which is impermissible in law. The modification in the Master Directions 2024 is clarificatory, for the purpose of bringing the same in conformity with the decision of the Supreme Court," the judges held.

With regards to the argument of not providing a personal hearing by the SBI to Ambani and thus floating the principles of natural justice, the judges noted that the principles of natural justice demand that the borrowers must be served a notice, furnished with the forensic audit report, and allowed to submit their representation before their account is classified as fraud.

"The right contemplated is one of representation, not necessarily of personal hearing. Infact, the right of representation is not read specifically as meaning a right to personal hearing. representation before classifying a person/entity, followed by the passing of a reasoned order. Thus, the right available is that of making a representation, and not of a mandatory personal hearing, as contended," the judges held.

In any event, the grant of a personal hearing is not a matter of right in every case, unless specifically mandated by statute or rules. The principles of natural justice cannot be applied in a straitjacket formula; their application depends on the facts and circumstances of each case. In the present case, as long as the Petitioner was afforded an adequate opportunity to submit his objections in writing, the requirement of fairness and compliance with the principle of natural justice, stood satisfied, the bench held further.

With these observations, the judges dismissed Ambani's plea.

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