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Reserve Bank of India (‘RBI’), the Apex Bank of the country is bestowed with the power to regulate the banks as well as financial institutions (FIs) of the Country. From time-to-time RBI issues numerous circulars laying down its instructions and guidelines which all the subordinate banks are bound to follow. Among several circulars, the most remarkable circular introduced by RBI is pertaining to Wilful Default, which initially was brought into light on 1st July, 2013 which later on, underwent certain major changes and accordingly a Master Circular was introduced on 1st July, 2015.
The rationale of RBI to have such a circular is to put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them. In recent time the lending business is deemed as a threat for several banks due to rise in the non-performing assets which have put the future of several Banks and FIs in jeopardy. However, one must understand that even though the RBI Circular is made to aid the banks, it can in no manner be prejudicial to the borrowers being categorised as Wilful Defaulters.
Wilful Defaulters are such borrowers who intentionally by abusing the banking system avoided to pay back the debts. The intent of Master Circular is to ensure that the borrowers, its directors/promoters make the default good or else face the harsh penalties, being detrimental to the borrower/ promoter/ director’s name, reputation and dignity in the industry.
The 2015 Circular details out a mechanism to be followed by the Banks/FIs in order to identify and report instances of wilful default. The whole mechanism can be stated out in three broad stages, which are as follows:
First and foremost, a three-member committee is constituted by the Banks/FIs i.e., the Identification Committee, which examines the evidences of wilful default on part of the Borrowing Company and its promoter/whole-time director at the relevant time.
Secondly, if the Identification Committee concludes that a wilful default has occurred, it shall issue a Show Cause Notice to the concerned Borrower and call for their submissions. After considering such submissions of the Borrower, an order is issued recording the fact of wilful default and the reasons therein. Thereafter, the Borrower is given an opportunity for a personal hearing, if the Identification Committee feels such an opportunity is necessary.
Ultimately, a Review Committee is set-up to review the order of the Identification Committee and only upon the confirmation from the Review Committee the order attains its finality.
From the mechanism, it is certain that the declaration of wilful defaulter is a regulatory right of the Lenders, enshrined under the RBI Master Circular. However, the right to be heard pertaining to the Borrowers have also been taken care off under the circular and in no way, the same can be undermined or compromised.
The Hon’ble Supreme Court in one of its landmark judgments i.e., State Bank of India vs. Jah Developers Private Limited and Ors., [Civil Appeal No.4776 of 2019], has categorically highlighted that, when a person is identified as a wilful defaulter, it has serious ramifications since a direct impact is on the person’s fundamental right under Article 19(1)(g), wherein, the right to carry on business is affected almost immediately. Further, a borrower classified as wilful defaulter also loses a chance to enjoy facilities that are granted by the Banks/FIs. Such entrepreneurs/promoters are further barred from institutional finance for five years. The Banks and other FIs may even change the management of the wilful defaulter and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Even, under section 29A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter fails to qualify as a resolution applicant as well. Thus, the Master Circular being in public interest, must be construed reasonably.
The RBI Circular has well encouraged the principle of Audi Alteram Partem by allowing the Borrower and the promoter/whole-time director to make their respective submissions/representations before the Committee. Thereby, this basic rule of natural justice should be welcomed in the decision-making process by the Banks/FIs from the initial stage of the mechanism. As the principle of Audi Alteram Partem in its fullest amplitude means that a person against whom an order to his prejudice may be passed should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses who are to give evidence against him examined in his presence and have the right to cross-examine them and to lead his own evidence, both oral and documentary, in his defence. Thereby, the Hon’ble Apex Court in series of cases have decided the requirements of Audi Alteram Partem and very recently, reiterated in matter of State Bank of India & Ors. vs. Rajesh Agarwal & Ors. [Civil Appeal No.7300 of 2022] the importance of the said principle even in those statutes and notification which did not expressly prescribe the observance of right to be heard in their scope and ambit.
Therefore, it is the law of land to play fair and that too when the situation is so intense that, a person might lose out on his fundamental right, then an opportunity of hearing is a must.
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