Wilful default in India captured the attention of RBI for nearly three decades now but the statistics governing wilful default in India are alarming. As of 31st May, 2022, the amount owed by wilful defaulters to Indian Banks stands at INR 2.4 Lakh Crore, accounting for nearly 12000 such defaults.1 Interestingly, this figure is incomparable with any other country, since India is the only country to have created a distinction between “wilful” defaulters and other defaulters, both in terms of legislative mechanism and in terms of credit reporting. Though the regulatory framework governing “wilful defaulters” has continuously evolved in past three decades, yet, there remains considerable number of unaddressed issues and lacunas. Thus, this Article intends to trace these issues in the current framework by analysing its legislative and jurisprudential evolution.

The evolution of Regulations governing Wilful Defaulters can be categorised into three phases, based upon significant developments in disclosure norms, definition, penal measures and grievance redressal mechanism. Phase 1 began towards the late 1980s when there was a rapid increase in institutional lending, thereby causing increase in defaults too, either due to genuine business losses or due to malpractices like fraud, siphoning of funds etc. These concerns highlighted the issue of information asymmetry amongst various lenders, wherein the errant borrowers approached different lenders, despite having already defaulted on debt raised from another lender. Though, the 1986 Guidelines fell short of coining the term “wilful default,”2 the RBI defined the phrase “wilful default” as “defaults other than those caused by genuine factors beyond the control of the borrowers” in its 1990 Guidelines wherein, the disclosure requirements, by the Commercial Banks, were annual in nature initially.3 However, with raising concerns on increase in quantum of wilful default, the frequency of reporting was changed from annual to halfyearly. Thereafter, the RBI had framed a Scheme of Disclosure of Information on Defaulting Borrowers of Banks and Financial Institutions (FIs) for circulating the names of defaulting borrowers above a threshold limit,4 in order to alert the banks and financial institutions and put them on guard against the borrowers who had defaulted in their dues or other lending institutions. However, significant development took place when the Central Vigilance Commission (CVC), issued directions upon the Reserve Bank to submit the details of wilful defaulters for “Improving vigilance administration in Banks” since it was felt that there was “lack of communication between the Banks”.5 Pursuant to the directions received from the CVC, the RBI introduced a scheme under which Commercial Banks and All India Financial Institutions were required to submit to the RBI the details of wilful defaulters with outstanding of Rs.25 lakhs and above.6

Even though Phase I was successful in solving the problem of information asymmetry, to an extent, yet the Regulations did not create any deterring effect on the errant borrowers. Thus, the Second phase marked a shift in the focus from the problem of information asymmetry to introduction of penal measures, as recommended by the Parliament’s Standing Committee on Financial Institutions in its 8th Report (2000)7 and by the Working Group on Wilful Defaulters (WGWD) in its Report (2001). Taking into consideration these recommendations, the Reserve Bank revised its earlier circular in the year 2002, wherein the penal provisions were incorporated and the definition of “wilful defaulters” was further enlarged.8 However, the move to introduce penal measures saw limited success insofar as the current provisions under IPC (particularly section 405 and 415) proved ineffective to prosecute and hold the errant borrowers guilty as observed by the Joint Parliamentary Committee (JPC) on Stock Market Scam in its report.9 Though there has been no progress in making legislative efforts to introduce specific penal provisions, the RBI, in its 2004 Circular, advised the Banks to take criminal action in all cases where the borrowers diverge the funds with mala fide intentions, to closely monitor the end-use of funds and to obtain certificates from the borrowers certifying that the funds have been used for the purpose for which these were obtained, and in cases of wrong certification should attract criminal action against the borrowers.10

In order to develop the Regulations governing wilful defaults, the Phase-III began with consolidating the regulations by way of Master Circulars since 2006, and have been routinely revised in the year 2007, 2013, 2014 and 2015.11 According to the latest Master Circular dated 01.07.2015,12 ‘wilful default’ would be deemed to have occurred if the unit has defaulted in its obligations to the lender, despite having capacity to honor it or utilise it for purposes other than the agreed purpose or the funds have been siphoned off. Additionally, if any encumbered asset is disposed of or removed without the knowledge of the bank / lender, it shall also be covered within the ambit of “wilful default”. However, even though the scope of “wilful default” has significantly increased over the period of time, much less attention has been paid to strengthen the mechanism to identify such defaults but concerns relating to abuse of the process are still left unaddressed. This has compelled the Hon’ble Supreme Court and various High Courts to strengthen the process and to prevent its abuse, especially with respect to violation of principles of natural justice and vicarious liability of the directors of the defaulting companies.

The need to adhere to the principles of natural justice while classifying a borrower as a “wilful defaulter” has been highlighted by the Hon’ble SC in the matter of SBI versus Jah Developers Pvt Ltd (2019) 6 SCC 787. However, in the said judgment it was also clarified that that there is no right to being represented by a Lawyer in the in-house proceedings before the Committee.13 Furthermore, the Hon’ble SC, in Jah Developers (supra) has also added certain checks and balances to bolster the fairness in the process of identifying such defaulters.

Another issue which has received considerable attention is the liability of directors in case a Company is declared to be a wilful defaulter. In Case of a Company being a “wilful defaulter”, there is an automatic presumption that the individuals (Promoters/Wholetime Directors) who are in charge and responsible for managing the affairs of the company shall also be held guilty. This sweeping provision has been a matter of concern in several cases and in the matter of Ramesh Kumar Sareen versus Union of India, 2016 SCC OnLine Del 3374, the Hon’ble Delhi HC has held that it cannot be the intention of the Circular to include every director associated with the Company. Therefore, it was clarified that such presumption is limited to only such promoters/wholetime directors who were/are associated with the company within a period of 90 days prior to the time the company account was classified as non-performing asset.

However, the Circular is cognisant of the fact that a Non-Executive Director shall not be considered a Wilful Defaulter except in cases where it is conclusively established that such a non-whole-time director was aware of the fact of wilful default by the borrower.14

The aforesaid safeguards and ensures mandatory adherence to the principles of Natural Justice as sine qua non in light of the fact that being declared a “wilful defaulter” has severe and farreaching consequences for the Borrower, not only under 2015 Master Circular but also under other statutes. Some of these consequences are discussed below: