Willful Delinquents and Court Interventions: Should There Be a Lakshman Rekha? – Finance and banking


Willful Delinquents and Court Interventions: Should There Be a Lakshman Rekha?

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1 Introduction

The November 25, 2021 Business Standard reported that the outstanding amount that willful defaulters owe to the Indian banking system has risen to a staggering amount of Rs. 62,970 since the pandemic began. The share of public sector banks accounted for nearly 77.4% of the total outstanding amount of Rs. 5.3 trillion owed to banks by willful default debtors. The elephant in the room must be clearly addressed. The RBI Master Circular on willful insolvent (Circular for willful defaulters) obliges banks, borrowers and project sponsors / managing directors to classify as deliberate refusal to pay if the criteria for deliberate insolvency are met, d. The classification according to the Willful Defaulter Circular is exclusively a commercial decision of the banks. However, recently we have seen some legal activism that seems to thwart the purpose of the RBI circular – which is definitely to improve India’s credit culture. This article analyzes the challenges banks face as a result of regular judicial interventions based on natural principles.

2. Natural justice

The Supreme Court in State Bank of India v Jah Developers Private Limited and Ors. took a benevolent view and concluded that classifying a person as willful negligence is enormous and consequently invites principles of natural justice into decision-making. The court also ruled that a bank’s willful default committee (formed under the Willful Defaulter Circular) must issue a reasoned order. Since then (and even before) the high courts and civil courts appear to have generously interpreted the scope and scope of the principles of natural justice, often going beyond the mandate of the Circular for Willful Neglect, which appears to adequately protect a person’s rights by providing it for the representation and personal hearing of the debtors by 2 separate lender committees.

For example, in July 2021, the Delhi Supreme Court found in Frost International Limited v Punjab National Bank1 that the willful default committee’s order did not provide sufficient grounds for its decision and is therefore not a reasoned order. Courts have also routinely dismissed orders from willful defaulters on the grounds that sufficient opportunity for representation was not given prior to the decision – although the willful defaulters refuse to avail themselves of the safeguards and procedures provided for in the Willful Defaulter Circular. This clearly seems to offer undue protection to a person who is in default and who owes money to the public, not just the banks.

3. Commercial wisdom must be respected

The Willful Defaulter Circular obliges banks to use their commercial wisdom to distinguish between a real debtor (who due to factors beyond its control such as the country’s entire credit system. This is because banks are best placed to make a Appreciating commercial transaction and seeing through the mischief. With due respect, the courts lack the commercial expertise to make such a differentiation, which can sometimes be challenging. Compare this situation to a decision by a committee of creditors (CoC) under the Insolvency and Bankruptcy Act of 2016, which the law (and thanks to the Supreme Court) now states that the CoC’s decision, which is commercial in nature, is not subject to judicial review. This means that the CoC is best suited for the job and courts should simply ensure that the CoC does not violate any law when approving a plan. This applies directly to cases of willful default in payment, in which the identification committee and the review committee, as instructed by the RBI, have the correct economic suitability to classify a debtor as an intentional default in payment. Such a decision is based on a myriad of commercial considerations which, if judicially reviewed, can weigh heavily on the entire commercial market.

4. Conclusion

It is not the case that a person is deliberately defaulted without being given adequate opportunity to defend himself. It is imperative to protect a debtor as the consequences are undoubtedly enormous and have social and economic implications. However, we are of the opinion that the Willful Defaulter circular offers RBI sufficient protection and that the courts should not go beyond the requirements of the circular. It takes effort and determination to improve a country’s credit culture – the courts and the executive have an equal role to play. An authoritative Supreme Court ruling on the scope of the principles of natural justice and the finality of business decisions by banks on this issue will help clarify the current flowing case law.


1. 2021 SCC Online from 3683

The above analysis is a general analysis and should not be viewed as a substitute for specific advice based on the facts of a client’s goals and the specific business arrangements made. Please contact us if you have any questions at [email protected]

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