Case Note & Summary
The petitioner, Manjula Bhatia, a non-executive woman director of PSL Limited, challenged the letter dated 16 July 2018 issued by Bank of Baroda declaring her a 'willful defaulter'. The bank had issued a show-cause notice only to the company, not to the petitioner individually. At a personal hearing on 15 February 2017, the Managing Director of PSL Limited pointed out that non-executive women directors could not be declared willful defaulters, and reiterated this in a communication dated 17 February 2017. Despite this, the bank issued the impugned order without issuing any notice to the petitioner and without considering the safeguards under clause 3(d) of the RBI Master Circular dated 1 July 2015. The court found that the impugned order was non-speaking and violated principles of natural justice. The court quashed the impugned letter, holding that a show-cause notice must be issued to the director individually and that the safeguards under clause 3(d) must be complied with before declaring a non-whole-time director as a willful defaulter. The court relied on the Supreme Court's decision in State Bank of India vs. Jah Developers Private Limited & Ors. to emphasize the importance of procedural fairness.
Headnote
A) Administrative Law - Natural Justice - Show-Cause Notice - RBI Master Circular dated 1 July 2015, clauses 3(b) and 3(d) - The court held that before declaring a non-whole-time director as a willful defaulter, a show-cause notice must be issued to the director individually, and the safeguards under clause 3(d) must be complied with, including establishing awareness or consent/connivance. Failure to do so violates principles of natural justice. (Paras 4-9)
B) Banking Law - Willful Defaulter - Non-Executive Woman Director - RBI Master Circular dated 1 July 2015, clause 3(d) - The court held that a non-whole-time director should not be considered a willful defaulter except in rare cases where it is conclusively established that the director was aware of the default and did not object, or the default occurred with consent/connivance. The impugned order was quashed as it did not contain any such finding. (Paras 7-9)
C) Company Law - Officer in Default - Definition - Companies Act, 2013, Section 2(60) - The court referred to the definition of 'officer who is in default' under Section 2(60) of the Companies Act, 2013, which primarily covers whole-time directors and certain specified directors, and held that non-whole-time directors cannot be automatically treated as officers in default. (Para 7)
Issue of Consideration
Whether a non-executive woman director can be declared a willful defaulter without issuance of a show-cause notice and without compliance with the safeguards under clause 3(d) of the RBI Master Circular dated 1 July 2015.
Final Decision
The court quashed the impugned letter dated 16 July 2018 declaring the petitioner a willful defaulter. Rule is made absolute. No order as to costs.
Law Points
- Natural justice
- show-cause notice
- willful defaulter
- non-executive director
- non-whole-time director
- RBI Master Circular
- clause 3(b)
- clause 3(d)
- Companies Act
- 2013
- Section 2(60)
- officer in default
Case Details
2024 LawText (BOM) (11) 145
WRIT PETITION NO.3254 OF 2018
M. S. Sonak, Jitendra Jain
Mr. Amir Arsiwala a/w Ms. Radha Naik and Ms. Shivani Kumbhojkar i/b. The Law Point for Petitioner, Mr. Harsh Sheth i/b. MDP Legal for Respondent No.1, Ms. Tanya Srivastava i/b. MLS Vani & Associates for Respondent No.3, Mr. Mithilesh Challu i/b. I.V. Merchant & Co. for Respondent No.5
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Nature of Litigation
Writ petition challenging the declaration of the petitioner as a willful defaulter by Bank of Baroda.
Remedy Sought
Quashing of the impugned letter dated 16 July 2018 declaring the petitioner a willful defaulter.
Filing Reason
The petitioner, a non-executive woman director of PSL Limited, was declared a willful defaulter without issuance of a show-cause notice and without compliance with the safeguards under the RBI Master Circular.
Issues
Whether the impugned order declaring the petitioner a willful defaulter is violative of principles of natural justice for want of a show-cause notice.
Whether the safeguards under clause 3(d) of the RBI Master Circular dated 1 July 2015 were complied with before declaring the petitioner, a non-whole-time director, as a willful defaulter.
Submissions/Arguments
The petitioner argued that no show-cause notice was issued to her individually, and the impugned order was passed in violation of natural justice and the RBI Master Circular.
The respondents argued that the show-cause notice issued to the company was sufficient, and the petitioner was aware of the proceedings.
Ratio Decidendi
Before declaring a non-whole-time director as a willful defaulter, a show-cause notice must be issued to the director individually, and the safeguards under clause 3(d) of the RBI Master Circular dated 1 July 2015 must be complied with, including establishing that the director was aware of the default and did not object, or that the default occurred with consent or connivance. Failure to do so violates principles of natural justice.
Judgment Excerpts
The Petitioner, a Non-Executive Woman Director of PSL Limited, challenges the impugned letter dated 16 July 2018 declaring her a 'willful defaulter.'
The record shows that a show-cause notice dated 22 November 2016 was issued only to the Company, M/s PSL Limited, of which the Petitioner was a Non-Executive Woman Director. Admittedly, no separate notice was issued to the Petitioner.
Despite the above, Respondent No.1 issued the impugned order dated 16 July 2018, declaring the Petitioner a willful defaulter without issuing any notice. The impugned letter is almost non-speaking and does not consider the circumstance that no notice was issued to the Petitioner.
These are sufficient grounds to quash the impugned letter dated 16 July 2018.
Procedural History
The petitioner filed a writ petition in the High Court of Judicature at Bombay challenging the letter dated 16 July 2018 issued by Bank of Baroda declaring her a willful defaulter. The court heard the parties and delivered judgment on 14 November 2024.
Acts & Sections
- Companies Act, 2013: Section 2(60)
- RBI Master Circular dated 1 July 2015: Clause 3(b), Clause 3(d)
