A non-promoter/non-whole-time director cannot be declared a willful defaulter without a prior notice and opportunity for hearing, as mandated by the Master Circular.

JUDGMENT :

1. Heard learned counsel for the parties.

2. Rule. The Rule is made returnable immediately at the request of and with the consent of the learned counsel for the parties.

3. The Petitioner, a Non-Executive Woman Director of PSL Limited, challenges the impugned letter dated 16 July 2018 declaring her a “willful defaulter.”

4. 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.

5. At the personal hearing held on 15 February 2017, the Managing Director of PCL Limited pointed out that Non-Executive Women Directors like the Petitioner could not be declared willful defaulters. The Managing Director reiterated this position in his communication dated 17 February 2017 addressed to the Committee of Executives on willful defaulters, Bank of Baroda. In this communication, the petitioner was explicitly mentioned under the caption of Woman Director.

6. The Master Circular dated 1 July 2015, under which the impugned order is purported to be made, provides in clause 3(b) that if the Committee concludes that an event of willful default has occurred, it shall issue a show cause notice to the concerned borrower and a promoter / whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of willful default and the reasons for the same. An opportunity for a hearing is also contemplated if the Committee feels such an opportunity is necessary. As noted earlier, no notice was issued to the Petitioner as contemplated by clause 3(b) of the Master Circular.

7. Clause 3(d) of the Master Circular also provides that certain safeguards must be adopted before a non-promoter or non-whole-time director can be regarded as an officer in default. Clause 3(d) of the Master Circular dated 1 July 2015 is transcribed below for the convenience of reference: -

“(d) As regard a non-promoter / non-whole time director, it should be kept in mind that Section 2(60) of the Companies Act, 2013 defines an officer who is in default to mean only the following categories of directors:

(i) whole-time director (ii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(ii) every director, in respect of a contravention of any of the provisions of Companies Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings and who has not objected to the same, or where such contravention had taken place with his consent or connivance.

Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that:

i. he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the minutes of meeting of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes; or,

ii. the wilful default had taken place with his consent or connivance. The above exception will however not apply to a promoter director even if not a whole time director.

(iv) As a one-time measure, Banks / Fls, while reporting details of wilful defaulters to the Credit Information Companies may thus remove the names of non-whole time directors (nominee directors / independent directors) in respect of whom they already do not have information about their complicity in the default / wilful default of the borrowing company. However, the names of promoter directors, even if not whole time directors, on the board of the wilful defaulting companies cannot be removed from the existing list of wilful defaulters.

8. The above-quoted clause also contemplates a not