RBI Circular on Willful Defaulter partly quashed - Not to apply to Directors - HC
RECENTLY Vijay Mallya had been struck with a ‘willful defaulter' notice from some banks. As per an RBI Master Circular wilfull defaulters are barred from any new funding from banks and financial Institutions for existing businesses and also for floating new ventures for a period of five years.
In a similar case, recently the Gujarat High Court held that the master circular as far as it relates to Directors of the Companies was illegal and so was struck down.
The challenge in the writ applications is to the legality and validity of the Master Circular dated 2nd July 2012 issued by the Reserve Bank of India in respect of 'willful defaulter' and the notices issued by the banks, calling upon the petitioners to show-cause as to why they should not be declared as willful defaulters in terms of the Reserve Bank of India's Master Circular.
The petitioners availed of a loan facility from the respondent Punjab National Bank. The respondent Bank noticed that the loan account of the petitioners was a Non-Performing Asset (NPA) since 30th June 2012 with the outstanding of Rs.1027 lac (as on the date of the NPA) including the interest at the applicable rate.
Despite regular reminders from the bank for payment of the dues, no steps were taken by the petitioners in that regard. Therefore, the respondent Bank issued a show-cause notice dated 19th February 2013 followed by a second show cause notice dated 14th May 2013 and a final notice dated 8th January 2014 on the premise that the petitioners had defaulted in repayment of the loan amount and the funds borrowed from the Bank were siphoned off and not used for the purpose for which the amount of the loan was disbursed, for which the petitioners were called upon to show-cause as to why they should not be declared as 'willful defaulters' in terms of the RBI Master Circular.
The High Court held that the Master Circular, so far as it is sought to be made applicable to all the directors of the company, is arbitrary and unreasonable. To this limited extent, that part of the Master Circular is held as ultra vires the powers of the Reserve Bank of India and is violative of Article 19(1)(g) of the Constitution of India.
In a judgement running into more than 160 pages, the High Court dwelt on several issues of jurisprudence and concluded that:
(1) The Reserve Bank of India was within its powers to issue the Master Circular relating to the willful default and willful defaulters.
(2) The Master Circular has been issued by the Reserve Bank of India in public interest. Although it has not been stated in so many words to have been issued in public interest and also the source of power, yet if the source of power is traceable, exercise of such power cannot be setaside merely because the same has not been disclosed.
(3) The Master Circular does not suffer from the vice of impermissible delegation of a legislative power. It confirms exactly to the power granted.
(4) The Master Circular has the force of law and could be termed as a statutory circular.
(5) On mere apprehension of misuse of a provision, an otherwise valid statute, should not be struck down or condemned. A mere possibility or likelihood of abuse of power does not make the provision ultra vires or bad in law.
(6) The Master Circular does not impose an unreasonable restriction upon the promoters/entrepreneurs, being violative of the Article 19(1)(g) of the Constitution of India as it has the effect of debarring them from availing of any additional facilities for floating a new venture for a period of five years from the date the name of the willful defaulter is published in the list of “willful defaulters” by the Reserve Bank of India.
(7) The Master Circular, so far as it is sought to be made applicable to all the directors of the company, is arbitrary and unreasonable.
(8) The Master Circular seeks to paint all the directors with the same brush. The provisions in the circular shatter the concept of identity of a company being different and distinct from its directors without providing any safeguards.
(9) The show-cause notice issued to the petitioners of Special Civil Application No.645 of 2014 is held to be bad as it is bereft of the basic details and material particulars.
(10) The Standard Chartered Bank although has been included as one of the Scheduled Banks in the Second Schedule to the Reserve Bank of India Act, 1934, yet, being a private bank, is not amenable to the writ jurisdiction of this Court. Merely because a company is carrying on the banking business, it cannot per se become a public authority nor can be considered as discharging public functions.
You can read the full text of this classic judgement in