Gujarat High Court strikes down part of RBI default note-Financial Express-11.09.2014
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 Mallya’s troubles are over, it is possible the airline’s 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 RBI’s 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 Airline’s directors, who have been declared as wilful defaulters by UBI, may get a reprieve.
However, the judgment may not mean Kingfisher Airlines promoter Vijay Mallya’s troubles are over
Link Financial Express
RBI: Guarantor can also be declared wilful defaulter-Financial Express 09.09.2014
The Reserve Bank of India (RBI) has clarified that entities that provide guarantee or surety for a loan are also liable to be tagged as wilful defaulters in cases where they refuse to make payment to the bank when the principal borrower has defaulted.
In a notice on Tuesday, the central bank said that not just companies but even individuals who manage companies and other companies within the group can be tagged as wilful defaulter by banks. “In cases where guarantees furnished by the companies within the group on behalf of the wilfully defaulting units are not honoured when invoked by the banks /FIs, such group companies should also be reckoned as wilful defaulters,” it said.
Further, the RBI said that in case of a default on a loan by a borrower, the onus of repayment falls on the guarantor immediately. In cases where the guarantor refuses to pay despite having sufficient funds, such guarantors can also be declared as wilful defaulter by the bank.
“As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter,” the RBI said.
However, this would apply to only prospective cases and not those that have already emerged, the central bank said. Indian banks are in a bitter battle with Kingfisher Airlines and promoter Vijay Mallya over a loan default by the latter. United Bank of India declared Mallya and three other directors of the company as wilful defaulters recently.
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