Wilful defaulter circular upheld in principle, but blanket treatment of all directors and vague notices failed constitutional scrutiny.

The Master Circular on wilful defaulters was upheld as valid delegated legislation traceable to RBI's statutory banking powers and aimed at protecting banking discipline, but it was struck down in part for treating all directors alike without distinguishing those involved in management from those who were not, making that blanket classification arbitrary and unconstitutional under Article 19(1)(g). The show-cause notices were quashed because they lacked sufficient particulars to meet natural justice requirements for a wilful defaulter allegation. A writ was also held not to lie against a private scheduled bank for the proposed action under the circular absent a public duty.

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Issues: (i) Whether the Reserve Bank of India had power to issue the Master Circular on wilful defaulters and whether the circular was valid delegated legislation; (ii) whether the circular was unconstitutional for imposing an unreasonable restriction and for treating all directors alike; (iii) whether the show-cause notices issued to the borrowers were vitiated for want of particulars and natural justice; and (iv) whether a writ could lie against a private scheduled bank in relation to the proposed action under the circular.

Issue (i): Whether the Reserve Bank of India had power to issue the Master Circular on wilful defaulters and whether the circular was valid delegated legislation.

Analysis: The power of the Reserve Bank of India to regulate banking policy and issue directions to banks was traced to the statutory scheme under the banking enactments. The circular was issued to curb wilful default, protect the banking system, and ensure transparency in lending discipline. The Court held that the source of power was traceable, and the absence of an express recital of source or public interest in the circular did not invalidate it. The circular was found to be within the permissible scope of delegated legislation and not inconsistent with the parent enactments.

Conclusion: The Reserve Bank of India was competent to issue the circular and the circular was not invalid on the ground of lack of power or impermissible delegation.

Issue (ii): Whether the circular was unconstitutional for imposing an unreasonable restriction and for treating all directors alike.

Analysis: The Court accepted that the object of discouraging wilful default and preventing misuse of bank finance was legitimate and that the restriction on promoters and entrepreneurs was justified in public interest. However, the circular was held to be arbitrary to the extent that it placed all directors in the same category without distinguishing between those actually involved in the management of the company and those who were not. That part of the circular was held to be violative of Article 19(1)(g) because it imposed an unreasonable and unfair restriction without adequate safeguards.

Conclusion: The circular was valid generally, but the part applying it to all directors alike was struck down as arbitrary and unconstitutional; the challenge failed as to promoters and entrepreneurs.

Issue (iii): Whether the show-cause notices issued to the borrowers were vitiated for want of particulars and natural justice.

Analysis: The notices did not disclose sufficient material particulars to enable an effective reply. Mere default in repayment was not enough to sustain a wilful defaulter action, and the bank was required to disclose the factual basis for alleging diversion or siphoning of funds and other ingredients of wilful default. In the absence of such particulars, the notice was held to be vague and unfair, offending the requirements of natural justice.

Conclusion: The notices issued to the borrowers were quashed for being vague and for violating natural justice.

Issue (iv): Whether a writ could lie against a private scheduled bank in relation to the proposed action under the circular.

Analysis: A private scheduled bank, though subject to regulatory control of the Reserve Bank of India, was held not to be an instrumentality of the State and not to discharge a public duty in the sense required for writ jurisdiction in the present context. The Court distinguished cases where a private body discharges a public function or is under a statutory duty, and held that the proposed action of the private bank in classifying borrowers as wilful defaulters did not by itself make it amenable to writ jurisdiction.

Conclusion: No writ lay against the private bank in respect of the impugned notice.

Final Conclusion: The challenge to the circular succeeded only in part, limited to its blanket treatment of all directors, while the circular was otherwise upheld; the borrowers' notices were quashed, but the claim against the private bank's notice could not be entertained in writ jurisdiction.

Ratio Decidendi: A banking regulator may validly issue binding directions to protect banking discipline and curb wilful default, but a circular becomes unconstitutional when it imposes an arbitrary, blanket disability without rational distinction or safeguards, and a private bank acting under such regulatory directions is not automatically amenable to writ jurisdiction absent a public duty.

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