“A word is not a crystal transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used. Shorn of the context, the words by themselves are “slippery customers”- Justice Holmes

In the present decision of Hon’ble Supreme Court, three appeals one from Calcutta and two from Bombay High Courts were preferred. The common theme and the question under all the appeals was whether a wilful default in meeting payment obligations to a bank under a derivative transaction will be covered under the Master Circular of RBI. And the Hon’ble Court while contextually interpreting the RBI’s Master Circular held that ‘wilful defaults of parties of dues under a derivative transaction with a bank are covered by the Master Circular’.

The Facts in short are that somewhere in 2006-2007, derivatives/forward contracts facility was availed from various banks by various corporates. Over a period of time, various derivative transactions were executed by them. On their requests, the banks enhanced the limit of derivatives/forward contracts facility from time to time. On certain date(s), the appellant/respondent (as the case may be) entered into derivative transactions. On being informed that sums in crores of rupees had become due and payable by the banks, they defaulted. Meanwhile, on 01.07.2008 the Reserve Bank of India (RBI) issued the Master Circular on wilful defaulters. The Master Circular on wilful defaulters contained instructions of the RBI to banks and financial institutions regarding reporting of wilful defaulters to other banks and financial institutions and the measures to be imposed on wilful defaulters by such banks and financial institutions.

Pursuant thereto, the banks informed their clients that they had classified the appellant/respondents (as the case may be) as wilful defaulters as they had defaulted to pay the amount due and the interest thereon. Grievance Redressal Committee of the banks also decided in favour of the banks.

Hence, aggrieving the corporates moved, respective High Courts claimed that the nature of their relationship with the banks was different, as they were not covered under the definition of a wilful defaulter in the Master Circular. The clause 2.1 of the Master Circular dated 01.07.2008, contained the definition as follows:

“2.1 Definition of wilful default The term “wilful default” has been redefined in supersession of the earlier definition as under: A “wilful default” would be deemed to have occurred if any of the following events is noted:-

• The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
• The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
• The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
• The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed of or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.”

As may be seen from the definition, all the clauses start with the condition that if the ‘unit has defaulted in meeting its payment/repayment obligations to the lender’. So it was argued by the corporate that since they were not in a lenderborrower relationship with the banks, they cannot be classified as wilful defaulters.