2019 (8) TMI 1593 - HC - Companies Law

Calling of records relating to the letter of the third respondent - declassification of petitioner from the List of Wilful Defaulters - HELD THAT - Section 149(6) prescribes the qualification of the Independent Director of a Company and it further distinguishes the Independent Director from the Managing Director or Whole-time Director or a Nominee Director of a Company. Section 149(12) deals with the responsibility and liability of the Independent Director. Clause 2.5 of the Master Circular of Reserve Bank of India, dated 01.07.2015, refers to penal measures to be initiated by the banks and financial institutions, after a person is declared as a 'wilful defaulter'. Clause 3, prescribes, mechanism for identification of Wilful Defaulters - Section 149 (12) of the Act makes it very clear that an Independent Director shall be held responsible only in respect of such acts of commission or omission by a Company which occurred with his knowledge, consent or connivance, but in the matter on hand, it is apposite to note that no materials have been brought on record to show that the petitioner actively participated in the day-to-day affairs of the Company or in the Board Meeting and the commissions and omissions alleged against the Company had taken place with the knowledge, consent or connivance of the petitioner to satisfy the ingredients of Section 149(12) of the Act. It is to be seen that the persons identified as wilful defaulter have to meet the consequence of the subsequent proceedings to be initiated by the Banks and Financial Institutions in tune with the Master Circular 2.5. Therefore, unless the allegations are supported by material documents, no one can be declared as a 'wilful defaulter'. It is settled position of law that the penal provisions requires strict proof and it cannot be permitted to be exercised in a casual manner - It is to be further seen that the Wilful Defaulter Identification Committee of the State Bank of India, after perusing the entire records came to the conclusion that they are not sufficient to declare the petitioner as a 'wilful defaulter'. In the case on hand, there is absolutely no evidence available to declare the petitioner as a 'wilful defaulter'. Moreover, the explanation offered by the petitioner was not considered and the decision was taken against the provisions of the Act and Clause 3 of the Master Circular issued by the Reserve Bank of India. Petition allowed.

Issues Involved:
1. Whether the petitioner, a Non-Executive Independent Director, can be classified as a 'wilful defaulter'.
2. The applicability and interpretation of Sections 149(6) and 149(12) of the Companies Act, 2013.
3. Compliance with the Master Circular issued by the Reserve Bank of India regarding the identification and penal measures for 'wilful defaulters'.

Issue-wise Detailed Analysis:

1. Classification of the Petitioner as a 'Wilful Defaulter':
The petitioner, a retired IAS Officer, was invited to join the Board of the fourth respondent-Company as a Non-Executive Independent Director in 2012. The company was engaged in leasing, hire purchase, and financing. During the Reserve Bank of India's (RBI) inspection in 2013, accounting malpractices were found, leading to the appointment of a forensic audit team. The audit revealed that the Managing Director, Mr. Farouk Irani, was responsible for the misdeeds. The petitioner attended only four Board meetings during his tenure and claimed no involvement in the company’s day-to-day operations or knowledge of the fraudulent activities. The State Bank of Mysore, one of the creditors, declared the company’s assets non-performing and included the petitioner’s name in the list of wilful defaulters. Despite the petitioner’s representations and explanations, the bank maintained its stance, which led to the filing of this writ petition.

2. Applicability and Interpretation of Sections 149(6) and 149(12) of the Companies Act, 2013:
Sections 149(6) and 149(12) of the Companies Act, 2013, were pivotal in determining the liability of the petitioner. Section 149(6) defines the qualifications of an Independent Director, distinguishing them from Managing Directors or Whole-time Directors. Section 149(12) limits the liability of Independent Directors to acts of omission or commission by the company that occurred with their knowledge, consent, or connivance. The court noted that no material evidence was presented to show the petitioner’s active participation or knowledge of the company’s fraudulent activities, fulfilling the criteria of Section 149(12).

3. Compliance with the Master Circular Issued by the Reserve Bank of India:
The Master Circular issued by the RBI outlines the penal measures and mechanisms for identifying wilful defaulters. Clause 2.5 specifies the consequences for wilful defaulters, including the denial of additional facilities and potential criminal proceedings. Clause 3 details the identification process, requiring evidence of wilful default to be examined by a committee and providing an opportunity for the accused to present their case. The court observed that the Wilful Defaulter Identification Committee of the State Bank of India, after reviewing the records, decided not to include the petitioner’s name in the list of wilful defaulters. The court emphasized that penal provisions require strict proof and cannot be exercised casually. The decision to classify the petitioner as a wilful defaulter lacked supporting evidence and did not comply with the procedural requirements outlined in the Master Circular.

Conclusion:
The court concluded that the petitioner, as an Independent Non-Executive Director, could not be held liable for the company’s fraudulent activities without evidence of his knowledge, consent, or connivance. The classification of the petitioner as a wilful defaulter was not supported by material evidence and violated the provisions of the Companies Act and the RBI’s Master Circular. Consequently, the court set aside the impugned order and allowed the writ petition.

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