SRI T VARADARAJ PAI vs UNION OF INDIA

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

TH
DATED THIS THE 6 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

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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,
RD
3 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

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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 16.04.2024	Annexure -AG"
[Originally Demand Notice (Section 13(2)) dated
04.05.2023 Annexure-E] declaration for the NPA
by the Respondent No.2.

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	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

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	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

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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) t he 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

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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<br>defaulter.<br>2. The committee who has examined whether the<br>petitioner has committed willful default or not<br>should issue a show cause notice.<br>3. The Show Cause Notice issued by the Chief General<br>Manager of Canara Bank which is contrary to the<br>Master Circular particularly clause 3(a)(b) of the<br>Master Circular.	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:

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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		CAM Wing		Chairman of
	Manager				the Committee
Deputy General<br>Manager		Deputy General	RL & FP Wing	RL & FP Wing	Member
		Manager			of the
					Committe
					e
Deputy General<br>Manager		Deputy General	Mid Corporate<br>Credit Wing	Mid Corporate	Member
		Manager		Credit Wing	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.

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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

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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

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	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.”

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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

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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:<br>1. To permit Circle/Branch to issue 15 days’ show<br>cause notice to all the above persons/entities.<br>2. In case any representation is not received within<br>the reasonable period of 15 days, we may be<br>permitted to classify the borrower and its<br>partners/guarantors as willful defaulters once the<br>decision of the identification committee is confirmed<br>by the review committee for willful defaulters.<br>3. In case any representation is received, the same<br>will be placed before the committee for identification<br>and classification of willful defaulters for taking<br>decision with regard to providing an opportunity of<br>personal hearing if deemed fit.”	“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.

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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

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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

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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

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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.<br>ii. Pending I.As., in the writ petition shall stand<br>closed.	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