Gujarat High Court strikes down part of RBI default note

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Sep 11 2014, 06:13am hrs
KingfisherKingfisher Airline?s directors, who have been declared as wilful defaulters by UBI, may get a reprieve. (Reuters)
Even as the Reserve Bank of India (RBI) looks to tighten rules relating to wilful defaulters, the Gujarat High Court on Wednesday struck down a part of the RBI circular that allows banks to declare all directors of a defaulting company wilful defaulters and bar them from banking services or other business ventures for five years.

While the judgment may not mean Kingfisher Airlines promoter Vijay Mallyas troubles are over, it is possible the airlines directors who have been declared as wilful defaulters by United Bank of India may get a reprieve.

A bench comprising justices Akil Kureshi and JB Pardiwala, while declaring a part of the RBIs July 1, 2013, circular as ultra vires and violative of of the Constitution, observed: ... (the) circular shatters the concept of the identity of a company different and distinct from its directors without providing any safeguards. It does not distinguish between a director who is involved in the day-to-day functioning of a company as against those who are not. The circular paints all directors with the same brush. Therefore, we have reached to a conclusion 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.

However, the court clarified that these observations will not apply to the promoters or entrepreneurs.

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 wilful defaulter is published in the list of wilful defaulters by the RBI, the HC said in its 162-page judgment delivered on Tuesday.

It also termed as arbitrary and unreasonable Punjab National Bank's three wilful defaulter show-cause notices to Ahmedabad-based Ionic Metalliks and Ionic Castings and their two directors. Saying they were bereft of basic details and material particulars, the HC added that a bank, before issuing show-cause notices, should disclose the source of information justifying its action. The lender, it noted, must show that despite adequate cash flow and good net worth, the borrower had failed to repay the loan.

The court refused to look into the show-cause notice issued by Standard Chartered Bank (SCB) to Aquafil Polymers and its two directors. Although it has been included as one of the Scheduled Banks in the Second Schedule to the RBI 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... It has its own Board of Directors. It works like any other private company in the banking business, the court said.

According to the judges, SCB has no duty towards the public and it's duty is towards its account holders, which may include the borrowers having availed of the loan facility. It has no power to take any action, or pass any order affecting the rights of the members of the public. The binding nature of its orders and actions is confined to its account holders and borrowers and to its employees. Its functions are also not akin to governmental functions, it added.

Point of order

Kingfisher Airlines directors, who have been declared as wilful defaulters by UBI, may get a reprieve.

However, the judgment may not mean Kingfisher Airlines promoter Vijay Mallyas troubles are over