V. Selvaraj Vs Reserve Bank of India (Madras High Court)
In a significant ruling, the Madras High Court has set aside the classification of V. Selvaraj, a retired IAS officer, as a ‘wilful defaulter’ by State Bank of Mysore (now merged with State Bank of India). The court’s decision, delivered in a writ petition filed by Selvaraj, hinged on the lack of concrete evidence establishing his knowledge or involvement in the alleged financial irregularities of the company where he served as an Independent Non-Executive Director.
The case, V. Selvaraj Vs. Reserve Bank of India and Others, challenged the letter dated May 10, 2016, which classified the petitioner as a wilful defaulter and sought his declassification from the list.
Selvaraj, a retired IAS officer of the 1964 batch with a distinguished career in government and international organizations, joined the Board of the fourth respondent company, a public limited company engaged in leasing, hire purchase, and financing, as a Non-Executive Independent Director on August 14, 2012. He stated that the company’s affairs were under the absolute control of its Founder Member and Managing Director, Mr. Farouk Irani.
Issues arose after the Reserve Bank of India (RBI) conducted an annual inspection in 2013 and discovered accounting malpractices within the company. This led to various audits, including a Forensic Audit by Dr. R. K. Raghavan, former Director, CBI, and a Special Audit by M/s. N. C. Rajagopal & Company, Chartered Accountants, appointed by the RBI. A separate audit was also conducted by M/s. Maharaj, N. R. Suresh & Co., appointed by the consortium of bankers.
The Forensic Audit report, submitted in July 2014, specifically identified the Managing Director for the misdeeds and recommended criminal action against him and his team.
Selvaraj contended that during the period of alleged irregularities (April 1, 2002, to February 28, 2013), he was an Independent Director for only about seven months (August 14, 2012, to March 31, 2013), during which he attended only four board meetings. He asserted that the financial results presented by the Managing Director and certified by the statutory auditors showed a positive picture, giving him no reason to suspect any wrongdoing. The accounting malpractices and fabrication of accounts by the Managing Director and his team only came to light after the special audits.
He maintained that he had no role in verifying or maintaining the company’s accounts and was unaware of the fabrication or window dressing.
Following the classification of the company’s assets as non-performing by State Bank of Mysore, the bank initiated proceedings to include the company and its directors/guarantors in the list of wilful defaulters maintained by the RBI and Credit Information Bureau of India Limited (CIBIL). Selvaraj made detailed representations to the bank, explaining his position as a Non-Executive Independent Director and his lack of involvement in the company’s day-to-day affairs or the alleged illegalities.
Despite his explanations and participation in an enquiry, he was classified as a wilful defaulter on April 25, 2016, through a letter dated May 10, 2016.
Senior Counsel representing Selvaraj argued that under Section 149(6) and 149(12) of the Companies Act, 2013, an Independent Director is liable only for acts of omission or commission that occurred with their knowledge, consent, or connivance, or where they failed to act diligently. It was submitted that no material indicated his involvement or awareness of the fraudulent activities. The RBI’s Master Circular dated July 1, 2015, on wilful defaulters was also cited in support of the petitioner’s claim, particularly Clause 3(d), which outlines the criteria for identifying a non-promoter/non-whole-time director as a wilful defaulter.
The counsel highlighted the serious consequences and social stigma associated with being declared a wilful defaulter. Notably, State Bank of India, into which State Bank of Mysore was later merged, had decided against including Selvaraj’s name in the wilful defaulters list based on the same set of materials. This, the petitioner argued, demonstrated the mechanical manner in which the impugned order was passed without considering relevant facts and legal provisions.
Counsel for the RBI submitted that the Master Circular is a statutory notification upheld by the Supreme Court. The third respondent’s counsel informed the court that due to the merger and non-convening of a committee, a final decision on the petitioner’s representation had not been taken.
The High Court, after reviewing the submissions and available records, including the Companies Act, 2013 provisions (Sections 149(6) and 149(12)) and Clauses 2.5 and 3 of the RBI Master Circular dated July 1, 2015, found that Section 149(12) clearly limits the liability of an Independent Director.
The court observed that the check period for the alleged defaults spanned over 11 years, while the petitioner served as an Independent Director for only seven months. Crucially, the court noted the absence of any material to suggest that Selvaraj actively participated in the company’s daily operations or that the alleged commissions and omissions occurred with his knowledge, consent, or connivance, as required by Section 149(12). The investigation report by Dr. R. K. Raghavan also supported the petitioner’s assertion that the misdeeds were attributable to the Managing Director and his team.
Referring to Clause 3 of the RBI Master Circular, the court emphasized that a non-promoter/non-whole-time director should not be considered a wilful defaulter unless it is conclusively established that they were aware of the default through board proceedings and did not object, or the default happened with their consent or connivance. The court found no such conclusive evidence against Selvaraj.
The judgment highlighted that penal provisions, such as classifying a person as a wilful defaulter, require strict proof and cannot be applied casually. The court also took note of the State Bank of India’s decision not to classify the petitioner as a wilful defaulter on the same facts, reinforcing the lack of sufficient evidence.
Concluding that the explanation offered by the petitioner was not adequately considered and the decision was contrary to the provisions of the Companies Act and the RBI Master Circular, the Madras High Court set aside the impugned order classifying V. Selvaraj as a wilful defaulter. The court allowed the writ petition, granting the relief sought by the petitioner.
Judicial Precedents Referenced:
