Thursday, September 11, 2014

Wilful default: HC relief for firms' officials

In a big relief for company directors, Gujarat high court (HC) has ruled that in case of wilful default, all the directors of a company cannot be deprived of the facilities of finances and restricted from floating new ventures, as a Master Circular by the Reserve Bank of India says.

HC has declared the provision of RBI's circular prohibiting additional loan facilities for all directors of the company in case of wilful default as unconstitutional and quashed this section from the circular as violation of Article 19(1) (g) of the Constitution. However, the HC has upheld the rest of the circular and said that the RBI was well within its powers to set out such norms in the Master Circular for the treatment that should be meted out to wilful defaulters, said advocate Masoom Shah.

The RBI guidelines prohibit other banks and financial institutions (FI) from offering loans to promoters and directors of the company that has wilfully defaulted. Besides, a covenant in the loan agreements, with the companies in which the banks/notified FIs have a significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the board of a company which has been identified as a wilful defaulter, said the circular.

HC said that the Master Circular does not impose an unreasonable restriction upon promoters and entrepreneurs by blocking facilities to them for five years. But it cannot "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."

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