The process to be followed for declaring a non-wholetime non-promoter director as a ‘Wilful Defaulter’ on account of defaults committed by a borrower company, was discussed recently by a Division bench of High Court of Bombay in the matter of Kailash Shahra vs. IDBI Bank Limited [WP No. 1630 of 2019, decided on October 16, 2019].
Brief Facts of the Case:
In the present case, the petitioner, a non-wholetime non-promoter director in Ruchi Soya (borrower) had received a show cause notice issued by the respondent bank as to why the name of the petitioner would not be reported to the Reserve Bank of India as ‘Wilful Defaulter’ for defaults committed by the borrower, to which the petitioner was also a guarantor.
In reply to the show cause notice the petitioner had stated that he had only been a nominee director of the board of directors of the borrower company from 2001, and was neither involved in day to day business of the company nor was he aware of the defaults with respect to the repayment of loans by the borrower company. He had further highlighted the lack of copy of the Identification Committee report and the Review Committee report of the bank, which were withheld basis the argument that such orders were private and confidential document.
Judgment:
Re: If a non-wholetime non-promoter director can be identified as Wilful Defaulter
The Court observed that for a non-wholetime non-promoter director to be identified as a Wilful Defaulter, there has to be a clear default attributable to the Director. If he is not a whole-time Director, then, there is a requirement in the definition itself of alleging, establishing and proving his consent by not raising any objection and by active participation in deliberations and discussions of the Board of Directors of that particular company. For instance, a non-whole time Director may be considered as a wilful defaulter if it is conclusively established that he was aware of the fact of wilful default by the borrower company by virtue of any proceedings recorded in the minutes of the meeting of the Board or a committee of the Board and has not recorded his objection to the same in the minutes or, the wilful default had taken place with his consent or connivanceIn the event there is a case made out of collusion, then, details, particulars of the same are required to be referred to and thereafter, the allegations should be established and proved with cogent and satisfactory materials (Paragraph 37 and 40).
The aforesaid exception will not apply to a Promoter Director even if not a whole time Director if he is covered by sub-clause (iv) of clause (b) of para 3 of the Master Circular. (Paragraph 37)
Re: Importance of following principles of Natural Justice
The Court held that a non-whole director may be declared to be a ‘wilful defaulter’, in the event there is evidence and there ought to be established and proven acts attributable to each, before such drastic step is taken. Therefore, some of the documents and records may be relevant to for enabling the non-whole time director to effectively defend himself. Accordingly, the Court held that following principles would have to be followed before establishing a non-wholetime non-promoter director as a Wilful Defaulter:
This update has been contributed by Arka Majumdar (Partner) and Juhi Roy (Associate).
Download Pdf
7A, 7th Floor, Tower C, Max House,
Okhla Industrial Area, Phase 3,
New Delhi – 110020
The rules of the Bar Council of India do not permit advocates to solicit work or advertise in any manner. This website has been created only for informational purposes and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work in any manner. By clicking on 'Agree' below, you acknowledge and confirm the following:
a) there has been no solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
b) you are desirous of obtaining further information about us on your own accord and for your use;
c) no information or material provided on this website is to be construed as a legal opinion and use of this website will not create any lawyer-client relationship;
d) while reasonable care has been taken in ensuring the accuracy of the contents of the website, Argus Partners shall not be responsible for the results of any actions taken on the basis of information provided in this website or for any error or omission in the website; and
e) in cases where the user has any legal issues, the user must seek independent legal advice.