WILFUL DEFAULTER Flashcards
Concept of Wilful Default
Wilful default occurs when a borrower intentionally defaults on repayment obligations despite having the capacity to
pay or when funds are diverted or siphoned off. The revised guidelines expand the definition to include failures by
promoters to infuse equity despite commitments and unauthorized disposal of assets.
The concept of wilful defaulter was introduced by the RBI in response to the instructions of the Central Vigilance
Commission for collecting information on wilful defaults of INR 25 lakhs and above and disseminating it to reporting
banks and financial institutions (FIs).
M/S Chordia Automobiles vs S. Moosa & Ors
The Supreme Court had explained the meaning of the term “’wilful default’, “Wilfulness” to imply an act done intentionally and designedly; a conscious failure to observe care; conscious; knowing; done with stubborn purpose, but not with malice. The word reckless as applied to negligence, is the legal equivalent of wilful or wanton. Thus, a consensus of the meaning of the words wilful default appears to indicate that default in order to be wilful must be intentional, deliberate, calculated and conscious, with full knowledge of legal
consequences flowing therefrom.”
For a default to be considered wilful,
it must be intentional, deliberate, calculated, and conscious, with the borrower fully aware of the legal consequences of their actions.
The Court emphasized that recklessness in negligence is legally equivalent to being wilful or wanton. In the financial system, this concept is critical because wilful defaults are not due to natural business downturns or unforeseen hardships but are deliberate acts where the borrower has the capacity to repay but chooses not to. This understanding ensures that banks can differentiate between genuine financial distress and intentional misconduct, allowing them to take appropriate legal and recovery actions or remedial actions as may be required in the light of facts and circumstance of the case.
Punjab National Bank Vs Kingfisher Airlines,
Punjab National Bank Vs Kingfisher Airlines, has highlighted the concern about the issue of declaration and consequence of declaration of a wilful defaulter. It has also touched upon the requirements necessary to follow the due process by observing that
“The ramifications of a person being labelled as a wilful defaulter are wide and drastic. Such declaration sounds the commercial death knell of the borrower in the sense that credit facilities would no longer be available to such borrower. Not only would such a borrower be deprived of credit facilities from banks and financial institutions but is likely to be also deprived of credit from any other person with whom
it may be having financial / commercial dealings.
The suppliers of goods and raw materials to such borrowers would stop supplying goods and raw materials on credit and would insist upon delivery against payment. Not only so, such declaration as a wilful defaulter, which is put in public domain, is also injurious to commercial goodwill and reputation of the borrower, likely to make anyone weary of dealing with the borrower. All this is likely to lead to cessation of the
business of such a borrower.”
Kotak Mahindra Bank Ltd. Vs. Hindustan National Glass and Ind. Ltd
Kotak Mahindra Bank Ltd. Vs. Hindustan National Glass and Ind. Ltd has highlighted
that the purpose of the RBI Master Circular on wilful defaulters, is to caution banks and financial institutions from giving any bank finance to a wilful defaulter. It was held that credit information could not be confined to only wilful defaults made by existing borrowers of the bank but would also cover constituents of banks who had defaulted in their dues under banking transactions with other banks and who intended to avail further finance from the banks. Non- funded facilities such as guarantees were held to be covered by a Master Circular.
It was further held that confidentiality of any credit information, either by virtue of any other law or by virtue of any agreement between the banks and its constituent,
cannot be a bar for disclosure of credit information under Section 45C(1) of the Reserve Bank of India Act, 1934.
State Bank of India v. Jah Developers Private Limited and Others
where it emphasized that being declared a wilful defaulter has an immediate and direct impact on the fundamental right to carry
on business, necessitating a due process that includes the borrower’s right to make representations before a Review Committee and for this Committee to issue a reasoned final order.
the Hon’ble Supreme Court in the case of State Bank of India v. Jah Developers ((2019) 6 SCC 787) had held that a borrower does not have the right to be represented by a lawyer during in-house proceedings envisaged in the Master Circular.
T. Takano
v. Securities and Exchange Board of India (2021)
ruled that all relevant materials must be disclosed if they influence the adjudication process, a principle that applies to wilful defaulter proceedings. The Bombay High Court, drawing from these precedents, stated that ensuring transparency requires banks to supply all relevant material to the notice.
Publishing of Photographs of Wilful Defaulters
Lenders must formulate a non-discriminatory, board-approved
policy for publishing the photographs of persons classified as wilful defaulters. This policy should clearly define the criteria for publication, ensuring transparency and fairness. This requirement is based on the RBI’s circular dated September 29, 2016.
Reporting of Wilful Defaulters and Large Defaulters:
All entities regulated by the Reserve Bank, regardless of whether they fall under the definition of ‘lender’ as provided in these Directions, must comply with the following
reporting requirements:
− Monthly Reporting to CICs: Entities must submit information to all Credit Information Companies (CICs) in Annex I format attached to the Master Circular, at monthly intervals, covering:
o List of suit-filed accounts of large defaulters.
o List of non-suit filed accounts of large defaulters classified as doubtful or loss.
Responsibility of Lenders for reporting
Lenders bear the primary responsibility for reporting accurate information and
ensuring the accuracy of all facts and figures related to credit information. This responsibility is critical to
maintaining the integrity of financial data and ensuring that all reports submitted to Credit Information Companies (CICs) are reliable and correct.
When furnishing information to CICs, lenders must ensure the accuracy of the
particulars of the directors of borrowing entities. Wherever possible, lenders should cross-check this information with the database maintained by the Registrar of Companies to prevent errors and misreporting.
Entities regulated by the Reserve Bank of India, including lenders, are required to
report details of guarantors who have failed to honour their commitments when invoked. Such guarantors should be classified as either large defaulters or wilful defaulters, as applicable.
DETAILED STEPS FOR INSTITUTIONS AND
BANKS/REGULATED ENTITIES
▪ Preliminary Screening: Review all NPA accounts with outstanding amounts of INR 25 lakh and above for wilful default aspects.
▪ Issuance of Show-Cause Notice: The Identification Committee issues a show-cause notice, including all relevant
materials.
▪ Borrower Representation: Allow 21 days for the borrower/guarantor to submit their representation.
▪ Identification Committee Decision: After considering the representation, the Identification Committee proposes
classification as a wilful defaulter.
▪ Review Committee Review: The Review Committee reviews the proposal and representation, providing a personal
hearing opportunity.
▪ Final Order: The Review Committee issues a reasoned final order, communicated to the borrower/guarantor.
