# 13 S.C.R. 697 KOTAK MAHINDRA BANK LTD v. HINDUSTAN NATIONAL GLASS & IND. LTD. AND ORS

- **Citation:** [2012] 13 S.C.R. 697
- **Court:** Supreme Court of India
- **Decided:** 2012-12-11
- **Case number:** Civil Appeal No. 8916 of 2012
- **Bench:** A.K. Patnaik, Swatanter Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/13-s-c-r-697-kotak-mahindra-bank-ltd-v-hindustan-national-glass-ind-ltd-and-ors-28160
- **Pages:** 43

## Headnote

Bank/Banking - Master Circular on wilful default issued
A
B
by Reserve Bank of India - Whether covers a derivative
transaction - Held: In view of the mischief the Master Circular C
seeks to remedy and the purpose of the Master Circular, the
definition of 'wilful default' would be construed to mean not
only wilful defaults of dues by a bonuwer to the bank under
/ender-borrower relationship, but also wilful defaults of dues
by a client of the bank under other banking transactions such D
as bank guarantees and derivative transactions - Reserve
Bank of India, Act, 1934 - ss. 45A(c)(v), 45C and 45E.
Interpretation of Statutes: Rule of construction - Held:
Words in a statute or a document are to be interpreted in the E
context or subject-matter in which the words are used and not
according to its literal meaning.
The question for consideration in the present
appeals against the judgments passed by the Calcutta
High Court and the Bombay High Court, which arose was
F
whether the Master Circular on wilful default issued by
Reserve Bank of India would cover the cases of willful
default under a derivative transaction or it was confined
only to a wllful default by a borrower of the bank in a
lender-borrower relationship.
G
Allowing the appeal No. 8916 of 2012 and dismissing
the appeal Nos. 8917 and 8918 of 2012, the Court.
HELD: 1. The Master Circular on wilful default issued
~7
H
698
SUPREME COURT REPORTS
(2012) 13 S.C.R.
A
by Reserve Bank of India, covers not only wilful defaults
of dues by a borrower to the bank but also covers wilful
defaults of dues by a client of the bank under other
banking transactions such as bank guarantees and
derivative transactions. [Para 39] [739-C]
B
2. From the definition of wilful default in the Master
Circular, it is evident that a wilful default would be
deemed to have occurred in any of the events mentioned
in sub-clauses {a), {b), {c) and {d) of clause 2.1 of the
Master Circular. These sub-clauses use the word
C "lender" and for this reason the Calcutta High Court has
taken a view in the impugned judgment that the Master
Circular applies only to a lender-borrower relationship
and a party who has defaulted in meeting its payment
obligation to the bank under the derivative transaction is
D not covered by the Master Circular. The Calcutta High
Court has gone by a literal interpretation of the word
"lender" in sub-clauses {a), {b), {c) and {d) in the definition
of wilful default in clause 2.1 of the Master Circular. This
approach of the Calcutta High Court in interpreting the
E Master Circular is not correct because it is a settled
principle of interpretation that the words in a statute or a
document are to be interpreted in the context or subjectmatter in which the words are used and not according
to its literal meaning. [Paras 28 and 29] [727-C-G]
F
'Principles of Statutory Interpretation' by G.P. Singh
(11th Edition) • referred to.
3. The Bombay High Court has come to the
conclusion in the impugned judgment that the Master
G Circular covers also a default in complying with the
payment obligations under derivative transactions by
relying on the language of not only the Master Circular
dated 01.07.2009 but also of the circulars issued by the
RBI on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and
H 01.07 .2010 which relate to prudential norms, assets
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
699
NATIONAL GLASS & IND. LTD.
classification as non-performing assets, etc. This
A
approach of the Bombay High Court in interpreting the
Master Circular is also not correct because the subject
matter of the circulars of the RBI issued on 08.08.2008,
13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 do not
relate to wilful default. These circulars are not even
B
amending or clarifying the definition of wilful default in
the Master Circular. The circulars do not constitute the
context or the subject-matter in which the definition of
wilful default in the Master Circular has to be construed.
The context will only includ

## Text

_Characters 0–39,922 of 90,093. This is a partial read: ask again with offset=39922 for what follows._

[2012) 13 S.C.R. 697
KOTAK MAHINDRA BANK LTD.
v.
HINDUSTAN NATIONAL GLASS & IND. LTD. AND ORS.
(Civil Appeal No. 8916 of 2012)
DECEMBER 11, 2012
[A.K. PATNAIK AND SWATANTER KUMAR, JJ.]
Bank/Banking - Master Circular on wilful default issued
A
B
by Reserve Bank of India - Whether covers a derivative
transaction - Held: In view of the mischief the Master Circular C
seeks to remedy and the purpose of the Master Circular, the
definition of 'wilful default' would be construed to mean not
only wilful defaults of dues by a bonuwer to the bank under
/ender-borrower relationship, but also wilful defaults of dues
by a client of the bank under other banking transactions such D
as bank guarantees and derivative transactions - Reserve
Bank of India, Act, 1934 - ss. 45A(c)(v), 45C and 45E.
Interpretation of Statutes: Rule of construction - Held:
Words in a statute or a document are to be interpreted in the E
context or subject-matter in which the words are used and not
according to its literal meaning.
The question for consideration in the present
appeals against the judgments passed by the Calcutta
High Court and the Bombay High Court, which arose was
F
whether the Master Circular on wilful default issued by
Reserve Bank of India would cover the cases of willful
default under a derivative transaction or it was confined
only to a wllful default by a borrower of the bank in a
lender-borrower relationship.
G
Allowing the appeal No. 8916 of 2012 and dismissing
the appeal Nos. 8917 and 8918 of 2012, the Court.
HELD: 1. The Master Circular on wilful default issued
~7
H
698
SUPREME COURT REPORTS
(2012) 13 S.C.R.
A
by Reserve Bank of India, covers not only wilful defaults
of dues by a borrower to the bank but also covers wilful
defaults of dues by a client of the bank under other
banking transactions such as bank guarantees and
derivative transactions. [Para 39] [739-C]
B
2. From the definition of wilful default in the Master
Circular, it is evident that a wilful default would be
deemed to have occurred in any of the events mentioned
in sub-clauses {a), {b), {c) and {d) of clause 2.1 of the
Master Circular. These sub-clauses use the word
C "lender" and for this reason the Calcutta High Court has
taken a view in the impugned judgment that the Master
Circular applies only to a lender-borrower relationship
and a party who has defaulted in meeting its payment
obligation to the bank under the derivative transaction is
D not covered by the Master Circular. The Calcutta High
Court has gone by a literal interpretation of the word
"lender" in sub-clauses {a), {b), {c) and {d) in the definition
of wilful default in clause 2.1 of the Master Circular. This
approach of the Calcutta High Court in interpreting the
E Master Circular is not correct because it is a settled
principle of interpretation that the words in a statute or a
document are to be interpreted in the context or subjectmatter in which the words are used and not according
to its literal meaning. [Paras 28 and 29] [727-C-G]
F
'Principles of Statutory Interpretation' by G.P. Singh
(11th Edition) • referred to.
3. The Bombay High Court has come to the
conclusion in the impugned judgment that the Master
G Circular covers also a default in complying with the
payment obligations under derivative transactions by
relying on the language of not only the Master Circular
dated 01.07.2009 but also of the circulars issued by the
RBI on 08.08.2008, 13.10.2008, 29.10.2008, 09.04.2009 and
H 01.07 .2010 which relate to prudential norms, assets
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
699
NATIONAL GLASS & IND. LTD.
classification as non-performing assets, etc. This
A
approach of the Bombay High Court in interpreting the
Master Circular is also not correct because the subject
matter of the circulars of the RBI issued on 08.08.2008,
13.10.2008, 29.10.2008, 09.04.2009 and 01.07.2010 do not
relate to wilful default. These circulars are not even
B
amending or clarifying the definition of wilful default in
the Master Circular. The circulars do not constitute the
context or the subject-matter in which the definition of
wilful default in the Master Circular has to be construed.
The context will only include parimateria circulars issued c
by the RBI, but will not include circulars issued by the
RBI on subject-matters other than wilful default. [Para 30]
[729-C-G]
4. The Master Circular originated pursuant to the
instructions of the Central Vigilance Commission, on the
D
subject "improving vigilance administration in banks",
which required collection of information on wilful defaults
of Rs.25 lakhs and above. These instructions of the
Central Vigilance Commission covered "all cases of
wilful default of Rs.25 lakhs and above" and were not E
confined to only wilful default by a borrower of his dues
to the bank in a lender-barrower relationship. Thus, all
cases of wilful defaults of Rs.25 lakhs and above were
to be reported by the banks to the RBI and not just cases
of defaults by borrowers of loans or advances from
F
banks. [Paras 31 and 32) [730-B-C; 731-C-D]
5. The mischief that was sought to be remedied was
that banks are not exploited by parties who have the
capacity to pay their dues to the banks but who willfully G
avoid paying their dues to the banks.The purpose of the
Master Circular was to have a system to disseminate
credit information pertaining to wilful defaulters amongst
banks and financial institutions so that no further bank
finance is made available to such wilful defaulters from
H
700
SUPREME COURT REPORTS
[2012] 13 S.C.R.
A such banks and financial institutions. [Paras 32 and 34]
[731-D; 732-8-C]
6. It is evident from the language of sub-clause (v) of
Section 45A(c) of the Reserve Bank of lndiaAct,1934 that
8 credit information means not only any information relating
to matters in sub-clauses (i),(ii),(iii) and (iv), but also
relates to any other information which the bank
considers to be relevant for the more orderly regulation
of credit or credit policy. Hence, "credit information" is
not confined to information relating to a borrower of the
C bank, but may also relate to a constituent of the bank who
intends to take some credit from the bank. The purpose
of the Master Circular being to caution banks and
financial institutions from giving any further bank finance
to a wilful defaulter, credit information cannot be confined
D to only the wilful defaults made by existing borrowers of
the bank, but will also cover constituents of the bank, who
have defaulted in their dues under banking transactions
with the banks and who intend to avail further finance
E
from the banks. [Para 34] [732-H; 733-A-C]
7. In view of the mischief that the Master Circular
seeks to remedy and the purpose of the Niaster Circular,
the words used in the definition of 'wilfuldefault' in clause
2.1 of the Master Circular would be interpreted to mean
F not only a wilful default by a unit which has defaulted in
meeting its repayment obligations to the lender, but also
to mean a unit which has defaulted in meeting its
payment obligations to the bank under facilities such as
a bank guarantee. The word 'lender' in sub-clauses (a),
(b), (c) and (d) means the "bank" because "payment
G obligations" mentioned in clause (a) do not ordinarily
refer to obligations to a lender and clause (d) has used
the expression "bank/lender". [Para 35) [733-D-F]
8. Paragraph 2.6 of the Master Circular states inter
H alia that in cases where a letter of comfort and/or the
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
701
NATIONAL GLASS & IND. LTD.
guarantees furnished by the companies within the group A
on behalf of the wilfully defaulting units are not honoured
when invoked by the banks/financial institutions, such
group of companies should also be reckoned as wilful
defaulters. It is, thus, clear that non-funded facilities such
as a guarantee is covered by the Master Circular and
B
when a guarantee is invoked by a bank/financial
institution but is not honoured, the defaulting constituent
of the bank is treated as a wilful defaulter even though it
may not have borrowed funds from the bank in the form
of advances or loans. [Para 35] [733-G-H; 734-A-B]
c
9. The scheme of Collection and Dissemination of
Information on cases of wilful default of Rs.25 lakhs and
above was framed by the RBI in the year 1999 when the
derivative transactions were not part of the country's
economy. Under the FEMA Regulations, 2000, only the
D
banks were authorized to deal with the derivative
transactions. Section 45V introduced along with other
provisions of Chapter lllD in the 1934 Act by the Reserve
Bank of India (Amendment) Act, 2006 declared that
transactions in derivatives, as may be specified by the
E
RBI from time to time, shall be valid, if at least one of the
parties to the transaction is the bank, a scheduled bank,
or such other agency falling under the regulatory purview
of the RBI under the 1934 Act, FEMA Act or any other Act
or instrument having the force of law, as may be specified
F
by the RBI from time to time. Derivative transactions In
India thus were valid only if they were with any bank or
any other agency falling under the regulatory purview of
the RBI because they would have a substantial bearing
on the credit system and credit policy in respect of which
G
the RBI has regulatory powers under the 1934 Act and
Banking
Regulation Act, 1949. Such derivative
transactions may not involve a lender-borrower
relationship between the bank and its constituent, but
dues by a constituent remaining unpaid to a bank may
H
702
SUPREME COURT REPORTS
(2012) 13 S.C.R.
A affect the credit policy and the credit system of the
country. Information relating to defaulters of dues under
derivative transactions who intend to take additional
finance from the bank obviously will come within the
meaning of credit information u/s. 45A(c)(v) of the 1934
B Act. [Para 36] [734-B-G]
10. Information relating to a party, who has defaulted
in payment of its dues under derivative transactions
being credit information may be called for from the
banking company by the RBI under sub-section (1) of
C Section 45C of the 1934 Act. Sub-section {2)(a) of Section
45E clearly provides that nothing in Section 45E shall
apply to the disclosure by any banking company, with the
previous permission of the RBI, of any information
furnished to the RBI under Section 45C. Thus,
D confidentiality of any credit information either by virtue
of any other law or by virtue of any agreement between
the bank and its constituent cannot be a bar for disclosure
of such credit information including information relating
to a derivative transaction of the RBI under sub-section
E (1) of Section 45C. [Para 37] [736-F; 737-C-D]
11. It is not correct to say that the Master Circular has
penal consequences and, therefore, has to be literally and
strictly construed. Clause 4.3 of the Master Circular states
that there is scope even under the exiting legislations to
F initiate criminal action against wilful defaulters depending
upon the facts and circumstances of the case under the
provisions of Sections 403 and 415 of the IPC and the
banks and financial institutions are strictly advised to
seriously and promptly consider initiating criminal action
G based on the facts and circumstances of each case
under the above provisions of the IPC. Thus, the Master
Circular by itself does not have penal consequences,
whereas Sections 403 and 415 of the IPC have penal
consequences. The provisions of Sections 403 and 415
H of the IPC obviously have to be strictly construed as
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
703
NATIONAL GLASS & IND. LTD.
these are penal provisions and will get attracted
A
depending on the facts and circumstances of each case,
but the provisions of the Master Circular need not be
strictly construed. [Para 38) [737-E; 738-C-E]
Commissioner of Sales Tax, M.P. v. Jaswant Singh
8
Charan Singh 1967 (2) SCR 720; Bombay Steam Navigation
Co. (1953) Private Ltd. v. C.I. T., Bombay 1965 (1) SCR 770;
C.I. T., Lucknow v. Bazpur Co-operative Sugar Ltd. 1989 Supp.
(2) SCC 240: 1989 (2) SCR 840; Ram Ratan Gupta v.
Director of Enforcement, Foreign Exchange Regulation and C
Anr. 1966 (1) SCR 651; Bhuwalka Steel Industries Ltd. v.
Bombay Iron & Steel Labour Board and Anr. (2010) 2 SCC
273: 2009 (16) SCR 618; /CIC/ Bank Ltd. v. Official Liquidator
of APS Star Industries Ltd. (2010) 10 SCC 1: 2010 (12) SCR
644; Tolaram Relumal and Anr. v. State of Bombay 1955 (1)
SCR 158; Chandigarh Housing Board v. Major General D
Devinder Singh and Anr. (2007) 9 SCC 67: 2007 (3) SCR
1049; Delhi Airtech Services Private Limited and Anr.v. State
of Uttar Pradesh and Anr. (2011) 9 sec 354: 2012 (12) SCR
191; Shah and Co., Bombay v. State of Maharashtra and Anr.
1967 (3) SCR 466; Rajshree Sugars and Chemicals Ltd. v.
E
Axis Bank Ltd. (2008) 8 MLJ 261; Desh Bandhu Gupta and
Co. and Ors. v. Delhi Stock Exchange Association Ltd. (1979)
4 SCC 565: 1979 (3) SCR 373; Peerless General Finance
and Investment Co. Ltd and Anr. v. Reserve Bank of India
(1992) 2 SCC 343: 1992 (1) SCR 406; Ganesh Bank of F
Kurundwad Ltd. and Ors. v. Union of lndiaand Ors. (2006) 10
SCC
645:
2006 (5) Suppl. SCR 437;
Joseph
KuruvillaVel/ukunnel v. Reserve Bank of India 1962 Supp (3)
SCR 632; Common Cause (A Registered Society) v. Union
of India and Anr. (2010) 11 SCC 528: 2010 (10) SCR 124;
G
Securities and Exchange Board of India v. Ajay Agarwal
(2010) 3 SCC 765: 2010 (3) SCR 70; Executive Engineer,
Southern Electricity Supply Company of Orissa Ltd.
(SouthCo) and Anr. vs. Sri Seetaram Rice Mill (2012) 2 SCC
108: 2011 (15) SCR 211; Rattan Chand Hira Chand v. Askar H
704
SUPREME COURT REPORTS
[2012) 13 S.C.R.
A Nawaz Jung (Dead) by L.Rs and Ors. (1991) 3 SCC 67: 1991
(1) SCR 327 - cited.
Lord Loreburn in Macbeth v. Chislett (1910) A.C. 220,
224; Tournier v. National Provincial and Union Bank of
B England (1924) 1 KB 461- cited.
Case Law Reference:
1967 (2) SCR 720
Cited
Para 11
c
(1910) A.C. 220, 224
Cited
Para 11
1965 (1) SCR 770
Cited
Para 11
1989 (2) SCR 840
Cited
Para 11
1966 (1) SCR 651
Cited
Para 11
D
2009 (16) SCR 618
Cited
Para 11
2010 (12) SCR 644
Cited
Para 12, 21
1955 (1) SCR 158
Cited
Para 12
E
2007 (3) SCR 1049
Cited
Para 12
2012 (12) SCR 191
Cited
Para 12
1967 (3) SCR 466
Cited
Para 12
F
(2008) 8 MLJ 261
Cited
Para 13
1979 (3) SCR 373
Cited
Para 14, 21
1992 (1) SCR 406
Cited
Para 14, 21
(1924) 1 KB 461
Cited
Para 18
G
2006 (5) Suppl. SCR 437 Cited
Para 21
1962 Supp (3) SCR 632
Cited
Para 21
2010 (10) SCR 124
Cited
Para 21
'
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
705
NATIONAL GLASS & IND. LTD.
2010 (3) SCR 70
Cited
Para 25
A
2011 (15) SCR 211
1991 (1) SCR 327
Cited
Cited
Para 25
Para 26
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
B
8916 of 2012.
From the Judgment & Order dated 01.09.2009 of the High
Court of Calcutta in Writ Petition No. 7729 (w) of 2009.
WITH
C.A. Nos. 8917 & 8918 of 2012.
C.A. Sundram, Soli J. Sorabjee, Chander Uday Singh, Dr.
c
Abhishek Manu Singhvi, Jaideep Gupta, Bhaskar P. Gupta,
Dushyant Dave, S. Ganesh, Ashok H. Desai, Dhavram Juneja,
Rohini Musa, Tanuj, Krishnan Dev, Sony Bhatt, Kirat Nagra,
D
Senthil Jagadeesan, Shyel Trehan, Hitesh Jain, Diya Kapur,
Pooja Tidka, Nikhil Pillai, Arjun Puri, Vikas Mehta, Amit
Bhandari, Manik Joshi, Chelan Kapadia, R.N. Karanjawala,
Manik Karanjawala, Ruby Singh Ahuja, Ruchira Gupta, Jatin
Mongia, Deepti Sarin, Siddhant Kochhar (for Karanjawala &
E
Co.), Pritesh Kapur, Mehernaz Mehta, Arjun Singh Puri, lshan
Gaur, Kuldeep S. Parihar, H.S. Parihar, Ratnakar Banerjee,
Snehal Kakrania, Sanjeev Kapoor (for Khaitan & Co.), Sumeet
Lall, Abhishek Khare, Bharat Sangal, Vikram Trivedi, Sachin
Chandrana, Srijana Sana, Ramandeep Kaur, L.K. Bhushan,
F
Anirudh Arun Kumar, Hoshedar Wadia, Fraser Alexander (for
Dua Associates} for the appearing parties.
The Judgment of the Court was delivered by
A.K. PATNAIK, J.
G
CIVIL APPEAL No. 8916 OF 2012
(Arising out of SLP (C) N_O. 29599 of 2009)
1. Leave granted.
2. This is an appeal against the order dated 01.09.2009
H
706
SUPREME COURT REPORTS
[2012) 13 S.C.R.
A of the Calcutta High Court in Writ Petition No. 7729(W) of 2009.
3. The facts very briefly are that the appellant-bank
sanctioned Derivatives/Forward Contracts facility to respondent
no.1 upto a limit of Rs.2,00,00,000/- (rupees two crores) only
for the purpose of hedging foreign currency exposures by its
B letter dated 10.01.2006. On behalf of the respondent no.1company, its Joint Managing Director acknowledged the receipt
of the sanction letter dated 10.01.2006 of the appellant and
accepted and agreed to be bound by the terms and conditions
of the sanction letter as well as the annexures thereto being
C authorized by the resolution of the Board of Directors of the
respondent no.1-company. Thereafter, on 17 .01.2006 the
appellant and the respondent no.1 entered into the International
Swaps and Derivatives Association (ISDA) Master Agreement.
Between January, 2006 to January, 2007 the appellant
D executed nine derivative transactions with the respondent no.1.
On the request of the respondent no.1, the appellant enhanced
the limit of Derivatives/Forward Contracts facility of the
respondent no.1 to Rs. 10,00,00,000/- (rupees ten crores) only
for the purpose of hedging adverse foreign exchange
E fluctuations and to enter into derivative transactions by letter
dated 31.01.2007. During January, 2007 to August, 2007, the
appellant executed various derivatives transactions with
respondent no.1. In August, 2007, on the request of respondent
no.1, the appellant once again increased the limit for
F Derivatives/Forward Contracts facility to Rs.20,00,00,000/-
(rupees twenty crores) only for the purpose of hedging adverse
foreign exchange fluctuations and entering into derivative
transactions by letter dated 09.08.2007. On 06.09.2007, the
appellant entered into derivative transactions FXOPT 20536,
20540 and 20544. Thereafter, on 05.03.2008 and 12.03.2008
G the appellant informed the respondent no.1 that a sum of
Rs.2,43, 12,000/- (rupees two crores forty three lacs and twelve
thousand) only had become due and payable on 10.03.2008
by the respondent no.1. The respondent no.1, however, did not
pay the sum. On 01.07.2008 the Reserve Bank of India (for
H short 'the RBI') issued the Master Circular on Wilful Defaulters.
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
707
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
4. The Master Circular on Wilful Defaulters (for short "the
A
Master Circular") contained instructions of the RBI to banks and
financial institutions regarding reporting of wilful defaulters to
other banks and financial institutions and the measures to be
imposed on wilful defaulters by such banks and financial
institutions. By letter dated 22.10.2008, the appellant intimated
B
the respondent no.1 that it had classified the respondent no.1
as a wilful defaulter as it had defaulted to pay an amount of
Rs.2, 76,01,908. 79 and interest thereon totalling to
Rs.14,62,61, 186.69 and respondent no.1 by its replies dated
04.11.2008 and 21.11.2008 through its Advocate contended c
that neither the appellant was a "lender'' nor the respondent
no.1 was a "borrower'' within the meaning of "wilful default" in
the Master Circular and, therefore, action under the Master
Circular cannot be taken against the respondent no.1. By letter
dated 02.02.2009, the appellant informed the respondent no.1
D
that the replies dated 04.11.2008 and 21.11.2008 of the
respondent no.1 have been referred to the Grievance
Redressal Committee of the appellant-bank for consideration
and the Grievance Redressal Committee has fixed a meeting
on 25.02.2009 at 10.00 A.M. at the office of the bank at
E
Nariman Point, Mumbai, and that the respondent no.1 can
represent its case in the hearing before the Grievance
Redressal Committee. The respondent no.1 then made a
representation dated 06.03.2009 before the Grievance
Redressal Committee of the appellant-bank contending that the
Master Circular does not apply to foreign exchange derivative
transactions and was restricted only to the acts of lending by
F
the bank and borrowing by the bank's constituents and as there
was no lending by the appellant-bank to the respondent no.1
in any manner from the appellant-bank, the entire proceedings
against the respondent no.1 under the Master Circular should
G
be dropped. While the matter was pending before the
Grievance Redressal Committee, the respondent no.1 filed Writ
Petition No.269 of 2009 before the Calcutta High Court and by
order dated 27.03.2009 the Calcutta High Court dismissed the
writ petition taking a view that the matter was pending before
H
708
SUPREME COURT REPORTS
(2012] 13 S.C.R.
A the Grievance Redressal Committee. Thereafter, on
07.04.2009, the Grievance Redressal Committee of the
appellant-bank after hearing the respondent no.1, declared the
respondent no.1 as a wilful defaulter under the Master Circular
and further resolved that the respondent no.1-company and its
B directors be reported to the Credit Information Bureau (India}
Ltd., RBI or such other institution/agency as may be required
by RBI in terms of its Master Circular. The appellant accordingly
intimated the aforesaid decision of the Grievance Redressal
Committee of the appellant-bank to the respondent no.1 and
c the RBI by two separate letters dated 07.04.2008. Aggrieved,
the respondent no.1 filed Writ Petition No. 7729 0N) of 2009 in
the Calcutta High Court and by the impugned judgment, the
Calcutta High Court held that the Master Circular applied only
to lending transactions of a bank or financial institution and as
0
in the foreign exchange derivative transactions between the
appellant and respondent no.1, there was no such lending
transactions and the appellant was not the lender and the
respondent no.1 was not the borrower, the respondent no.1
could not be declared as a wilful defaulter in terms of the Master
E Circular and accordingly no action could be taken against the
respondent no.1 under the Master Circular. By the impugned
judgment, the Calcutta High Court, therefore, set aside the
decision dated 07.04.2009 of the appellant-bank and allowed
the writ petition of the respondent no.1. Aggrieved, the appellant
has filed this appeal.
F
5. Mr. C.A. Sundaram, learned senior counsel appearing
for the appellant, submitted that the High Court has not correctly
interpreted the Master Circular. He referred to the counter
affidavit filed on behalf of the RBI before the High Court to show
G that the Master Circular had been issued by the RBI inter alia
in exercise of its powers under the Banking Regulation Act,
1949 (for short 'the 1949 Act') and that Sections 21 and 35A
of the 1949 Act make it clear that the directions/guidelines
issued by the RBI are mandatory and binding on the clients.
H He argued that Paragraph 2.1 of the Master Circular defines
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
709
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
the term "Wilful Default" as a default by a unit in meeting its
A
payment/repayment obligations to the lender, but the word
"lender" has not been defined in the Master Circular. He
submitted that the RBI, which has issued the Master Circular,
has in its counter affidavit before the High Court stated that the
intention of the RBI while issuing the Master Circular was to
B
cover all eventualities where "payment/repayment obligations"
exist and therefore the Master Circular would cover all banking
transactions including off balance-sheets transactions, such as,
derivatives, guarantees, Letters of Credit, etc. He referred to
Sections 45U of the Reserve Bank of India Act, 1934 (for short c
'the 1934 Act'), which defines in Clause (a) the word "derivative"
and also to Section 45V of the 1934 Act which is titled
"Transactions in derivatives" and submitted that the derivative
transactions with banks had been declared to be valid by law.
He submitted that the word "borrower'' has been defined in
D
Clause (b) of Section 45A of the 1934 Act to mean any person
to whom any credit limit has been sanctioned by any banking
company and has been still more widely defined in Clause (b)
of Section 2 of the Credit Information Companies (Regulation)
Act, 2005 (for short 'the 2005 Act') to mean not only a person
who has been granted loan or any other credit facility by the
credit institution, but also a client of a credit institution. He
referred to the definition of "Client" in Clause (c) of Section 2
of the 2005 Act to show that "Client" includes a person who
has not only obtained or seeks to obtain financial assistance
from a credit institution, but also obtains assistance in any other
form or manner. He submitted that Clause (d) of Section 2 of
E
F
the 2005 Act defines the expression "credit information" more
widely to include not only loans but any other non-funding based
facility granted to all its borrowers as well as any other matter
which the RBI may consider necessary for inclusion in the credit
G
information to be collected. He submitted that the Foreign
Exchange Management (Foreign Exchange Derivative
Contracts) Regulations, 2000 (for short 'the FEMA Regulations')
had been made by the RBI under Section 47 of the Foreign
Exchange Management Act, 1999 (for short "the FEMA") and
H
710
SUPREME COURT REPORTS
[2012) 13 S.C.R.
A
Regulation 2(v) of the FEMA Regulations defines "foreign
exchange derivative contract" to mean a financial transaction
or an arrangement in whatever form and by whatever name
called, whose value is derived from price movement in one or
more underlying assets. He referred to Schedule-I of the FEMA
B Regulations to show that foreign exchange derivative contract
was permissible for a person resident in India. Mr. Sundaram
vehemently argued that as the purpose of the Master Circular
is to ensure that the clients of the banks who had defaulted in
their payment/repayment obligations of the dues to the banks
c are not given additional finance, a client of the bank who had
defaulted in not paying its dues to the bank under a foreign
exchange derivative transaction would also be covered under
the Master Circular. He submitted that as the respondent no.1
had defaulted in making payment of Rs.1,56,08,084. 70 as on
0 29.12.2008 on account of foreign exchange derivative
transactions, the appellant was required by the instructions of
the RBI in the Master Circular to report the case to the RBI as
well as other banks and financial institutions as a wilful defaulter.
He submitted that the High Court was, therefore, not right in
E setting aside the decision dated 07.04.2009 of the appellantbank and allowing the writ petition of the respondent no.1.
6. Mr. Bhaskar P. Gupta, learned senior counsel for the
respondent no.1, on the other hand, submitted that under the
Master Circular a wilful default can arise only out of a lender -
F borrower relationship between the bank and its constituent and,
therefore, unless the bank has given a loan or an advance to
its constituent, the question of wilful default under the Master
Circular does not arise. He submitted that a reading of the
Master Circular would show that a declaration of a wilful
G defaulter has severe consequences for the party declared as
a wilful defaulter, such as squeezing of credit under clause
2.5(a) of the Master Circular and criminal liability under clause
4.3 of the Master Circular. He argued that considering the
severe consequences that follow a declaration of wilful defaulter,
the definition of "wilful default" in the Master Circu1a·r which
H
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
711
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
refers to defaults in repayment obligations to a "lender" has to
A
be strictly construed. He cited the decisions of this Court in
Bijaya Kumar Agarwala v. State of Orissa [(1996) 5 SCC 1]
and Sakshi v. Union of India & Ors. [(2004) 5 SCC 518] for
the proposition that a statute enacting an offence or imposing
a penalty is to be strictly construed. He submitted that a
B
derivative transaction does not involve lending of funds by way
of a loan or an advance by the bank to its constituent and,
therefore, the dues under a derivative transaction will not fall in
any of the sub-clauses (a) to (d) of clause 2, which defines a
wilful defaulter for the purpose of the Master Circular. He argued c
that there is a fundamental difference between a loan/advance
and a derivative transaction and the fundamental difference is
that in the case of a derivative transaction, either party could
be required to effect payment depending on the change in
interest rate, foreign exchange rate credit rating or credit index,
D
price of securities as will be clear from Section 45U of the 1934
Act, whereas in the case of a loan or an advance, it is the
borrower alone which has to effect payment. He submitted that
in none other circulars issued after the Master Circular of
01.07.2008 there is any change in the definition of 'wilful
E
defaulter' so as to bring in defaulters of payment of dues under
the derivative transactions within the meaning of 'wilful
defaulters'. In this context, he referred to the Master Circulars
dated 01.07.2009, 01.07.2010, 01.07.2011 and 01.07.2012.
He vehemently argued that if the RBI intended to include
defaulters of dues under the derivative transactions within the
meaning of the expression "wilful defaulter'', the RBI.could have
changed the definition of "wilful defaulter'' in the subsequent
Master Circulars.
F
7. Mr. Bhaskar P. Gupta next submitted that the stand of G
the RBI before the High Court in the affidavits filed on its behalf
was that the question as to whether there was a lenderborrower relationship between the appellant and the respondent
no.1 under the contract between them and whether there was
a legally enforceable obligation between the appellant and the
H
712
SUPREME COURT REPORTS
[2012] 13 S.C.R.
A respondent no.1 are issues which can be determined by a civil
court in a properly instituted suit in accordance with law and it
is not possible for the RBI to interpret the contract between the
appellant and the respondent no.1 and express any opinion in
that regard and that determination of such issues arising under
B a contract cannot be done in a proceeding under Article 226
of the Constitution and hence the writ petition of the respondent
no.1 was liable to be dismissed. He submitted that the RBI
cannot now take a stand before this Court in this appeal that
the respondent no.1 was a wilful defaulter covered by the
c Master Circular inasmuch as it had not paid its dues to the
appellant under the derivative transactions. He submitted that
if the RBI was aggrieved by the finding in the impugned
judgment of the Calcutta High Court that the Master Circular did
not apply to dues under a derivative transaction, it could have
D filed a Special Leave Petition under Article 136 of the
Constitution against the impugned judgment of the Calcutta
High Court, but the RBI has not done so. According to him,
therefore, the impugned judgment of the Calcutta High Court
should be sustained by this Court in this appeal.
E CIVIL APPEAL No. 8917 OF 2012
(Arising out of SLP (C) NO. 27730 of 2011)
8. Leave granted.
9. This is an appeal against the judgment dated 23/
F 24.08.2011 of the Bombay High Court in Writ Petition (Lodg.)
No. 204 of 2011.
10. The facts very briefly are that the appellant no.1, a
pharmaceutical company, agreed to enter into foreign exchange
derivative transactions with respondent no.1-bank to hedge its
G foreign currency risks arising out of export of its products and
for this purpose executed an International Swaps and Derivative
Association (ISDA) Master Agreement on 29.08.2005. During
2006-2008, the appellant and respondent no.1-bank entered
into nine foreign exchange derivative transactions, out of which
H four were foreign currency swap transactions and five were
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
713
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
·foreign currency option transactions. On 01.07:2010, the
A
Reserve Bank of India (for short 'the RBI') issued a Master
Circular on Wilful Defaulters (for short 'the Master Circular'). The
Master Circular contained instructions of the RBI to banks and
financial institutions regarding reporting of wilful defaulters to
other banks and financial institutions and the measures to be
B
imposed on wilful defaulters by such banks and financial
institutions. Respondent no.1 issued a notice dated 15.10.2010
to the appellant no.1 to show-cause why the respondent no.1
should not classify the appellant no.1 as a wilful defaulter under
the Master Circular, as the appellant no.1 had not paid the dues c
to the tune of of Rs.2.92 Crores under three of the derivative
transactions. In the said show- cause notice, the appellant no.1
was also informed that it can make a representation against
the decision of the respondent no.1 to classify the appellant
no.1 as wilful defaulter to the Grievance Redressal Committee
0
of the respondent no.1-bank. The appellant no.1 submitted its
reply dated 20.11.201 O to the respondent no.1-bank
contending that the Master Circular was applicable to dues
arising out of a lender-borrower relationship and as the alleged
dues arise under the derivative transactions and not against a
E
credit facility sanctioned by the bank, there was no lenderborrower relationship between the respondent no.1-bank and
the appellant and, therefore, the Master Circular was not
applicable to the case of the appellant. The Grievance
Redressal Committee of the respondent no.1-bank considered
the reply of the appellant no.1 and by its decision dated
28.01.2011 held that the appellant no.1 was a wilful defaulter
covered by the Master Circular as it had defaulted in its
obligations to the bank towards the derivative transactions. The
appellant no.1 filed Writ Petition No. 204 of 2011 challenging
F
the decision dated 28.01.2011 of the Grievance Redressal
G
Committee of the respondent no.1-bank and by order dated
24.08.2011, the Bombay High Court quashed the order dated
28.01.2011 of the Grievance Redressal Committee of the
respondent no.1-bank on the ground that the order was passed
in breach of principles of natural justice inasmuch as the
H
714
SUPREME COURT REPORTS
[2012) 13 S.C.R.
A appellant no.1 was not heard before the order was passed. The
Bombay High Court, however, held in the impugned judgment
dated 24.08.2011 that the Master Circular covered default by
a party in complying with the payment obligations under
derivative transactions and observed that it will be open to the
B Grievance Redressal Committee to pass fresh orders in
accordance with law after complying with the principles of
natural justice. Aggrieved by the finding of the Bombay High
Court in the impugned judgment that the Master Circular covers
defaults in complying with the payment obligations under
c derivative transactions, the appellants have filed this appeal.
11. Mr. Soli J. Sorabjee, learned counsel for the appellant,
submitted that the High Court has not correctly interpreted the
Master Circular and has erroneously recorded a finding that
wilful default covers defaults in complying with payment
o obligations under derivative transactions by relying on circulars
issued by the RBI on 08.08.2008, 13.10.2008, 29.10.2008,
09.04.2009 and 01.07 .2010 which do not relate to wilful defaults
but relate to prudential norms, assets classification as nonperforming assets, etc. He submitted that it is a settled principle
E of statutory interpretation that a definition in one Act should not
be imported into another Act and referred to the decision of
this Court in Commissioner of Sales Tax, M.P. v. Jaswant
Singh Charan Singh [1967 (2) SCR 720) in which a reference
to other Acts to construe an Act has been critically commented
F by Lord Loreburn in Macbeth v. Chislett [(1910) AC. 220, 224)
as a "new terror in the construction of Acts". He vehemently
submitted that the Master Circular should be construed on its
own terms and language and so construed, it will be clear that
the basic postulate and the underlying assumption of the Master
G Circular is existence of a lender-borrower relationship and that
the Master Circular does not contemplate nor cover a creditor
and debtor relationship. He relied on the decisions of this Court
in Bombay Steam Navigation Co. (1953) Private Ltd. v. C.I. T.,
Bombay [1965 (1) SCR 770], C./. T., Lucknow v. Bazpur Cooperative Sugar Ltd. [1989 Supp. (2) SCC 240] and Ram
H Ratan Gupta v. Director of Enforcement, Foreign Exchange
KOTAK MAHINDRA BANK LTD. v. HINDUSTAN
715
NATIONAL GLASS & IND. LTD. [A.K. PATNAIK, J.]
Regulation & Anr. [1966 (1) SCR 651] in which the distinction
A
between a loan and a debt has been judicially brought out to
say that whereas a loan of a money results in a debt, every debt
is not a loan. He submitted that in a loan transaction, therefore,
there is a lender and a borrower, but in a transaction which is
not a loan there is no lender and no borrower, but there may
B
be a creditor and a debtor. He submitted that in a derivative
transaction the dues payable by a party to the bank may be a
debt and the bank may be a creditor and such party may be a
debtor, but the bank in a derivative transaction is not a lender
and such party from whom the dues are payable to the bank is c
not a borrower. He further submitted that the interpretation given
by the RBI to the Master Circular cannot be accepted by the
Court by recourse to the doctrine of contemporanea expositio
as this doctrine was applicable to ancient statutes and has no
application to modern statutes as has been noted in Principles
D
of Statutory Interpretation (12th Edn. 2010) by Justice G.P.
Singh at pages 341-349. He further submitted that if the
doctrine of contemporanea expositio is applicable, the
interpretation given by the RBI in the Master Circular may have
some weight, but cannot be decisive as interpretation of the
Master Circular, in the facts of the present case, is a judicial
E
function. to be performed by the Court. In support of this
proposition, he relied on Bhuwalka Steel Industries Ltd. v.
Bombay Iron & Steel Labour Board & Anr. [(2010) 2 SCC
273]. He submitted that the RBI could have issued a Circular
or a Press Note and made a public declaration that a defaulter
F
of payment obligations under a derivative transaction to the
bank is also covered by the Master Circular before the matter
reached the Court. He submitted that after the matter reaches
the Court, the RBI cannot file affidavits taking a stand that
defaulters of dues under derivative transactions to the bank are
G
covered by the Master Circular.
12. Mr. Sorabjee referred to Section 6 of the 1949 Act to
show that a bank can engage in several businesses other than
lending such as deal in derivatives and such business will not
H
'
716
SUPREME COURT REPORTS
[2012] 13 S.C.R.
A fall within the core banking business of the bank under clauses
(a) to (o) of Section 6 of the 1949 Act and it will also not
constitute lending. He referred to the decision in /CIC/ Bank
Ltd. v. Official Liquidator of APS Star Industries Ltd. [(2010)
10 SCC 1) in which this Court has broadly categorised the
B functions of the banking company into two parts, namely, core
banking of accepting deposits and lending and miscellaneous
functions and services. Accordingly to him, derivative is a part
of the miscellaneous parts of functions and services provided
by the bank and do not create a lender-borrower relationship.
c He submitted that the Master Circular contemplates grave
consequences affecting the right of a person under Article
19(1 )(g) of the Constitution of India to carry on any trade,
business or occupation and should be strictly construed as
otherwise it will be exposed to the challenge of
0 unconstitutionality. In support of this argument, he relied on the
decisions of this Court in Tolaram Relumal & Anr. v.