Scourge of being identified as wilful defaulter, and the remedies

Being identified as a wilful defaulter has serious consequences for the borrower, both tangible and intangible. Ami Jain (in pic), a Mumbai-based advocate practicing in insolvency law and wilful defaulter matters, writes on how to get rid of that tag.

The concept of wilful defaulter was introduced by the Reserve Bank of India (RBI) to protect the interests of the banks, financial institutions and depositors, and to ensure that borrowers who have the ability to repay the loan do not misuse the banking system to their unfair advantage. The system is so designed so as to ensure the prevention of misuse, misappropriation and misapplication of public funds by unscrupulous borrowers.

A wilful defaulter is a borrower who has the ability to repay the loan but deliberately defaults on the payment obligation. By its Master Circular dated 1st July, 2015, RBI revised the definition of wilful defaulter to curb the rising incidence of non-performing assets (NPAs) in the Indian banking system.

The last two years have seen a rise of 38.50 per cent, or Rs 94,000 crore, in wilful defaults in the last two years, with 15,778 wilful default accounts involving an amount of Rs 340,570 crore as of December 2022.

Identification of Wilful Defaulters

The process of identifying a wilful defaulter is initiated by the banks themselves. Banks are required to classify a unit – individuals (including guarantors), juristic persons and all other forms of business enterprises – as a wilful defaulter if the unit has defaulted in meeting its payment obligations to the lender

– even when it has the capacity to pay;

– by diverting the for purposes other than those for which the loan was sanctioned

– by siphoning off the funds or not using the funds for the purpose for which the loan was sanctioned

– by disposing of assets or property without the knowledge of the bank

For the default to be categorised as wilful, it must be intentional, deliberate and calculated.

The cut-off limit for reporting such cases by banks / FIs to RBI is Rs 25 lakhs Mechanism

Step 1: An Identification Committee headed by an Executive Director or equivalent and two other senior officers such as General Manager / Deputy General Manager will examine the evidence relating to wilful default.

Once it concludes that the wilful default has occurred, the Identification Committee shall issue a show-cause notice to the concerned borrower / promoter / whole-time director, requiring them to make their submissions.

Step 2: Borrower has to be provided with all documents relied upon by Identification Committee to enable him to make effective representations. [Bombay HC in re: Kailash Shahara v/s IDBI Bank].

Step 3: On receipt of the representations, the Identification Committee proceeds to issue a reasoned order [Delhi High Court in re: Frost International Limited v. Punjab National Bank (2021 SCC OnLine Del 3683)] on the fact of the wilful default. At this stage, the Committee ought to grant an opportunity of hearing to the borrower.

Step 4: The borrower must be provided with an opportunity to make representations within a period of 15 days against the said order to the Review Committee, which is another layer of screening, headed by the Chairman / Chairman & Managing Director or the Managing Director & Chief Executive Officer / CEOs as also two independent directors/non-executive directors of the bank.

Step 5: The Identification Committee should consider the representations made by the borrower and pass a reasoned order thereafter [Bombay HC in re: Kanchan Motors v/s Bank of India & Ors]

Step 6: The system provides for a redressal mechanism by facilitating review of the order passed by the Identification Committee by a Review Committee headed by the Chairman & Managing Director of the Bank. The order of the Identification Committee shall attain finality only on confirmation by the said Review Committee. The said order must be communicated to the borrower and its director(s), etc. [Supreme Court in re: State Bank of India v. Jah Developers Private Limited and Ors(2019)6 SCC 787 (Jah Developers].

Repercussions of being Identified as a Wilful Defaulter

Being identified as a wilful defaulter has serious consequences for the borrower, both tangible and intangible. Reporting the borrower’s name to the Credit Information Bureau (India) Limited (CIBIL) not only tarnishes the image and reputation of the borrower but also dents the borrower’s creditworthiness severely.

Penal measures include:

– initiation of criminal action under the provisions of Sections 403 and 415 of the Indian Penal Code, 1860, if warranted

– lack of access to funding

– barring wilful defaulters from institutional finance from banks, financial institutions, NBFCs for floating new ventures for a period of five years from the date of removal of the defaulter’s name from the list published by RBI / Credit Information Companies.

– possible initiation for a change in the management of the defaulting borrower unit.

– initiation of legal action against borrowers for recovery of dues

– removal of a wilful defaulter from the Board of Directors of a company and bar on future induction on the board of any borrowing company

– bar on taking part in the insolvency resolution process of a company u/s 29A of the Insolvency and Bankruptcy Code, 2016

Steps to Remove the Wilful Defaulter Tag

If a borrower has been declared as a wilful defaulter, he can take the following steps to remove the tag:

– Pay the outstanding dues along with the interest and penalties

– Present a convincing argument before the Identification Committee or Review Committee, as the case may be, explaining the reasons

• for the default

• why the borrower ought not to be held responsible for such default

• the steps taken to remedy the situation

• as to how criterions specified by RBI for declaration as a wilful defaulter is not satisfied

• as to why order passed by Identification Committee cannot be legally sustained; and

• with respect to any other case-specific issue

– Meaningful and well-reasoned arguments backed by facts and evidence are of paramount importance and hold the potential to reverse adverse decisions

– File a writ petition before the concerned High Court, challenging the declaration of wilful defaulter. The principles of natural justice are a sine qua non for banks and financial institutions [Delhi HC in re: Shantanu Prakash v/s Union Bank of India], given the harsh consequences of being declared a wilful defaulter and the impact it has on an individual’s fundamental rights. It is now well settled that the principles of natural justice are applicable to administrative decisions as well. Reference may be made for this purpose to the decisions of the Supreme Court in Canara Bank vs. Debasis Das (2003) 4 SCC 557 (paragraph 19) and Manohar vs. State of Maharashtra (2012) 13 SCC 14 (paragraph 17).

Conclusion

While it is absolutely essential that RBI and banks / FIs continue to meet the funding requirements of borrowers, they need to be extremely agile in monitoring the end-use of funds. Borrowers, too, must be aware of their rights and not surrender to the irrational decisions of banks / FIs in cases where genuine facts and circumstances could not have warranted such a tag. What needs to change is the integrity with which one does their work.

Also Read: Wilful defaulters owe over Rs 3.11 lakh crore to banks as on 30 June 2022