 "Guj HC strikes down a section in RBI's wilful defaulter circular")
The Gujarat High court has held that in case company defaults on a loan payment, not all of its directors can be declared as 'wilful defaulters' and be deprived of facilities of finance or restricted from floating new ventures.
The court has declared a section relating to this restriction in the master circular of Reserve Bank of India (RBI) as unconstitutional and set it aside.
A division bench of Justice Akil Kureshi and Justice J B Pardiwala has declared as unconstitutional the provision in RBI's master circular date July 2, 2012, prohibiting additional loan facilities for all directors of the company in case the company is declared as 'wilful defaulter'.
"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, we declare that part of the Master Circular as ultra vires the powers of the Reserve Bank of India and is violative of Article 19(1)(g) of the Constitution of India," the court said its recent order.
"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," it further observed. However, the court clarified that these observations will not be applicable to promoters of the company.
The court has clearly stated that said that RBI's Master Circular does not impose an unreasonable restriction upon promoters and entrepreneurs (wilful defaulters) by blocking facilities to them for five years.
The court was hearing the case of one proprietor firm Iconic Metalliks and its directors who had approached the High Court after receiving showcause notice from Punjab National Bank last year. The company had defaulted on a loan with total outstanding of Rs 10.27 crore and hence their loan account was declared non-performing asset (NPA).
The bank had issued notices to the promoters and its directors asking them to reply why they should not be declared wilful defaulters. The company and its directors had challenged this showcause notice by the bank citing the RBI notification of July 2012 in the high court terming it as illegal and unconstitutional.
The court has declared a section relating to this restriction in the master circular of Reserve Bank of India (RBI) as unconstitutional and set it aside.
A division bench of Justice Akil Kureshi and Justice J B Pardiwala has declared as unconstitutional the provision in RBI's master circular date July 2, 2012, prohibiting additional loan facilities for all directors of the company in case the company is declared as 'wilful defaulter'.
More From This Section
According to RBI circular financial institutions (FI) and other banks are prohibited from offering loans to promoters and directors of the company that has wilfully defaulted.
"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, we declare that part of the Master Circular as ultra vires the powers of the Reserve Bank of India and is violative of Article 19(1)(g) of the Constitution of India," the court said its recent order.
"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," it further observed. However, the court clarified that these observations will not be applicable to promoters of the company.
The court has clearly stated that said that RBI's Master Circular does not impose an unreasonable restriction upon promoters and entrepreneurs (wilful defaulters) by blocking facilities to them for five years.
The court was hearing the case of one proprietor firm Iconic Metalliks and its directors who had approached the High Court after receiving showcause notice from Punjab National Bank last year. The company had defaulted on a loan with total outstanding of Rs 10.27 crore and hence their loan account was declared non-performing asset (NPA).
The bank had issued notices to the promoters and its directors asking them to reply why they should not be declared wilful defaulters. The company and its directors had challenged this showcause notice by the bank citing the RBI notification of July 2012 in the high court terming it as illegal and unconstitutional.