Willful Defaulter Tag Based on Undisclosed Forensic Audit Unsustainable Against Non-Executive Director Without Proof of Knowledge or Connivance: Madras HC

The Madras High Court has held that the willful defaulter tag based on undisclosed forensic audit is unsustainable against non-executive directors without proof of knowledge or connivance. The bench of Justice N.Sathish Kumar has quashed the declaration of a non-whole time director as a “willful defaulter” and held that penal measures cannot be continued in the absence of conclusive evidence of awareness, consent, or connivance in the alleged default. The petitioner, Kambala Bapiraju, served as a non-executive, non-whole time director of Sai Regency Power Corporation Private Limited (SRPCPL), a power generation company that later entered liquidation under the Insolvency and Bankruptcy Code (IBC). Indian Overseas Bank (IOB) had extended credit facilities to the company, which subsequently defaulted. Following a forensic audit conducted for the period 2013–2018, IOB alleged diversion and siphoning of funds and initiated proceedings to classify the company and its directors as willful defaulters under the RBI’s Master Circular on Willful Defaulters. Despite the petitioner asserting that he had no role in the day-to-day management of SRPCPL, the bank passed an order dated 29 September 2021 declaring him a willful defaulter. The petitioner argued that he was a non-executive director with no involvement in management or financial decisions. He held no shares, received no remuneration, and attended only two board meetings during his tenure. The impugned order relied on an undisclosed forensic audit report, denying him an opportunity to rebut its findings. The action violated RBI guidelines, which exempt non-whole time directors from being classified as willful defaulters except in rare cases where complicity is conclusively established. IOB contended that adequate opportunity was given to the petitioner, including personal hearings, which he did not attend. The bank further submitted that although the petitioner’s name was removed from the list of willful defaulters following the RBI’s July 30, 2024 Directions—after the company’s unit was sold as a going concern in liquidation—penal measures against erstwhile directors could continue. The RBI, however, fairly conceded that as per its circulars, non-whole time directors should not ordinarily be treated as willful defaulters unless there is clear evidence of knowledge or involvement in the default. The Court underscored that classification as a willful defaulter carries serious civil consequences, including denial of credit and restrictions on business activities. For non-whole time directors, such classification is permissible only in “very rare cases,” and only if it is conclusively established that the director was aware of the willful default or that it occurred with his consent or connivance. Merely holding the position of director, without evidence of participation in management or board decisions leading to default, is insufficient. The Court noted that documentary evidence, including annual returns (Form MGT-7) and statutory filings, clearly showed that the petitioner had no managerial role, shareholding, or remuneration, and did not participate in key decisions. Despite this, the identification and review committees failed to consider these materials. The High Court held that once the petitioner’s name had been removed from the list of willful defaulters, penal measures could not survive in the absence of conclusive proof of his complicity. Continuing such measures solely on the basis of his designation as director was held to be arbitrary and contrary to RBI guidelines. Case Details Case Title: Kambala Bapiraju Versus The Indian Overseas Bank Case No.: W.P.No.13676 of 2025 Date: 11.12.2025 Counsel For Petitioner: R.Sankaranarayanan, SC Counsel For Respondent: V.Rajeswari, Standing Counsel Click Here To Read Order Read More: Union Budget 2026 Expectations

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