Non-Executive Woman Director Quits “Willful Defaulter” Tag for Lack of Notice: Natural Justice Prevails High Court quashes declaration of "willful defaulter" against Non-Executive Woman Director citing violation of natural justice.

Case Note & Summary

1. Introduction (Paras 1-3)

The Petitioner, a Non-Executive Woman Director of PSL Limited, challenged a letter dated 16 July 2018 that declared her a "willful defaulter." The court issued a Rule, heard arguments, and proceeded to deliver its judgment.

2. Show Cause Notice: Not Issued to the Petitioner (Paras 4-6) A show-cause notice was issued solely to PSL Limited, not to the Petitioner. The Master Circular dated 1 July 2015 (Clause 3(b)) mandates a notice and hearing for individuals deemed "willful defaulters." 3. Safeguards for Non-Executive Directors (Paras 6-8) Clause 3(d) of the Circular specifies conditions under which non-whole-time directors can be declared willful defaulters, including explicit awareness of willful default or connivance. Petitioner was not alleged to meet these conditions. 4. Breach of Natural Justice (Paras 9-10) The impugned letter was issued without adherence to the procedural safeguards outlined in the Master Circular. In State Bank of India vs. Jah Developers Pvt. Ltd. (2019), the Supreme Court emphasized due process and natural justice in such cases. 5. Quashing the Impugned Letter (Paras 11-13) The Court quashed the impugned letter, citing non-compliance with natural justice principles and procedural lapses. Respondents were granted liberty to issue a fresh notice, if necessary, and proceed in accordance with the law. 6. Limitations on Relief (Paras 14-16) Relief was restricted to the Petitioner, and other aggrieved individuals were allowed to challenge the letter separately. The petition was disposed of without costs. Acts and Sections Discussed Master Circular on Wilful Defaulters (1 July 2015): Clause 3(b): Notice and hearing requirement for declaring willful default. Clause 3(d): Safeguards for non-promoter and non-whole-time directors. Companies Act, 2013: Section 2(60): Definition of "officer in default." Constitution of India: Article 19(1)(g): Protection of the right to carry on business. Insolvency and Bankruptcy Code, 2016: Section 29-A: Restriction on resolution applicants who are willful defaulters. Ratio Decidendi

The Court held that:

A declaration of "willful defaulter" requires strict adherence to procedural safeguards, including issuing notices to affected parties. Non-executive and non-promoter directors cannot be declared willful defaulters unless clear complicity or awareness is established. Violation of principles of natural justice renders such declarations invalid. Subjects: Banking and Finance Law, Corporate Governance, Natural Justice #WillfulDefaulter #NaturalJustice #CorporateGovernance #NonExecutiveDirector #BankingLaw