Debarring director-defaulters from banks unconstitutional, says Gujarat High Court
In what could be a major blow to the 17-member consortium of banks trying to recover over Rs 8,000 crore loans doled out to Vijay Mallya promoted Kingfisher Airlines, the Gujarat High Court in a sweeping judgment on Tuesday termed the ‘wilful defaulter’ circular of central bank, so far as it applies to the directors and debarring their access to loans from any financial institutions, ‘ultra vires’.
However, the petitioners argument that RBI’s ‘master circular’, signed by an official in the rank of chief general manager has no power, authority and any standing under Sections 21 and 35A of the Banking Regulation Act, 1949, was disallowed by the high court. The petitioners had argued that the said circular was against the RBI Act or the Banking Regulations Act 1949 and gives sweeping powers to banks through “the circular that confers uncanalised, unbridled and untrammeled power upon the banks to decide the future of any borrower and makes the bank a judge in its own cause and also the decision whether the other banks should lend money to the borrower declared as a wilful defaulter”.
“The judgment opens up a debate on defining the role of a company director versus that of entrepreneurs or promoters and Vijay Mallya will surely take cover under the law,” said a legal expert.
Most legal experts were in favour of the judgment in curtailing RBI’s powers, especially when it comes to directors.
According to legal experts, banks have been abusing the powers vested on to them for declaring any borrower ‘wilful’ defaulter even before the court or tribunal makes a judgment.
Banks have acted in a high-handed manner to guard their balance sheets and categorised even genuine borrowers with good track record as wilful defaulters to hasten recoveries, said a senior advocate. “The RBI circular is contradictory, when it comes to independent directors and directors,” he said.
The petitioners argued: “The RBI circular is required to have the phrase “in public interest” or “in interest of depositors” or “in interest of banking policy” and should indicate relevant materials and reasons that the circular was being issued after considering the interest mentioned. Besides, according to the high court, so far as the RBI circular applies to directors –not promoters and entrepreneurs – is arbitrary and unreasonable.
The judgment focussed on constitutional rights of the citizens, more specifically directors, to practice any profession or business. The high court concluded: “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.”
“As rightly pointed out by the judgment, it violates Article 19 (1) of the Constitution of India, 1949, which guarantees the citizen of India to practice any profession, or occupation or to trade and do Business,” said activist Shailesh Mehta.
The RBI master circular has hence been declared partially ultra vires, meaning beyond its powers or jurisdiction. The 162-page judgment comes in the wake of Ionic Castings Pvt Ltd versus Union of India (Special Civil Application no 645 of 2014) and was made available Wednesday. However, As per the judgment, the circular so far as it applies to directors is unconstitutional while it shall continue to apply on promoters and entrepreneurs.
“It’s a path-breaking judgment. It vindicates the rights of directors to take a loan which is not otherwise expressly prohibited by any law in vogue,” said advocate Masoom Shah, who represented Ionic Castings. “The judgment will enlighten those in the financial sector about the interpretation of RBI’s master circular,” he said.