Saturday, September 13, 2014

All directors other than promoters can't be deemed as willful defaulters; RBI's master circular is arbitrary-HC


a)The notices were issued by the respective banks, calling upon the all the petitioners-directors of Company to show-cause as to why they should not be declared as willful defaulters in terms of the RBI’s Master Circular DBOD No. CID-BC 1/20.16.2003/2011-12, dated 2-7-2012.

b)Thus, the instant writ was filed to challenge the legality and validity of a Master Circular dated July 2, 2012 issued by the RBI in respect of 'willful defaulter'.

The High Court held as under:

1)Having regard to object with which RBI had issued Master Circular to declare promoters of company as wilful defaulters, it could not be said that same was an unreasonable restriction violating Article 19(1)(g) of Constitution of India.

2)All directors could not be held liable due to default in repayment of loan by a company which might have been for varied reasons even beyond the control of such directors. Therefore, some element of arbitrariness was found in policy of RBI.

3)A director of a company (other than promoter or a direct borrower of loan from bank) could also be a director who had a limited role to play and he was not directly or indirectly responsible for company going in a debt. Such directors could not be restrained from approaching a bank for financial assistance, if they wanted to start a business or a new venture.

4)Apart from a social stigma, it was a direct infringement on right of such a director to carry on trade or business under Article 19(1)(g) of Constitution of India. Thus, Master Circular, so far as it was sought to be made applicable to all directors of company, was arbitrary and unreasonable.

5)Thus, that part of Master Circular was declared as ultra vires powers of RBI and was violative of Article 19(1)(g) of Constitution of India. Master Circular sought to paint all directors with same brush.

6)Provisions in circular shattered concept of identity of a company being different and distinct from its directors without providing any safeguards. Therefore, Show cause notice issued by bank to petitioner-directors for declaring them as wilful defaulters on basis of RBI’s Master Circular was bad – IONIC METALLIKS V. UNION OF INDIA [2014] 49 TAXMANN.COM 222 (GUJARAT)