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Devesh Juvekar and Dikshat Mehra
Guidelines on wilful defaulters were introduced by the Reserve Bank of India (“RBI“) over a decade ago, by way of a scheme which came into effect from April, 1999. The scheme required banks and financial institutions to report all cases of wilful defaults of 25,00,000 lakhs and above to the RBI on a quarterly basis.
The RBI, from time to time, issued a number of circulars to banks and financial institutions, containing instructions on matters relating to wilful defaulters. To enable the banks to have all the existing instructions at one place, a Master Circular dated July 1, 2013, (“2013 Circular“) incorporating all the guidelines issued on cases of wilful default, were issued.
The purpose was, to put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and other financial institutions so as to ensure that further bank finance is not made available to them.
The 2013 Circular, inter alia provided for submission by banks / financial institutions of data of wilful defaulters to RBI on a quarterly basis and communication thereof to the Securities Exchange Board of India and to Credit Information Bureau (India) Ltd.
When a wilful default would be deemed to have occurred
The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets, or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.
The Grievance Redressal Mechanism which was adopted by Banks/FIs for identifying and reporting instances of wilful default as under the 2013 Circular
Mechanism for identification of Wilful Defaulters under the 2015 Circular
Major Consequences of Being Declared as A Wilful Defaulter
Incorporation of certain guidelines by SC in their verdict of State Bank of India (SBI) v. Jah Developers Pvt Ltd, qua circular dated July 2015, w.r.t the in-house committee procedure and personal hearing
The Apex Court in Jah Developers had an opportunity to deal with the much-debated issue as to whether, a person who is to be declared as a wilful defaulter under the RBI guidelines/circulars is entitled to be represented by a lawyer of his choice before such a declaration is made? The SLP had arisen from a Delhi High Court’s order
The Apex Court held that in-house Committees are neither a tribunal, nor are vested with any judicial powers. Their powers are only administrative in nature. The duty of such in house-committees is to only gather facts and then arrive at a result. The Apex Court further held that since, such Committees formed are also not persons legally authorised to take evidence by statute, or subordinate legislation, no lawyer would have any right to appear before such committees.
Under the 2013 Circular, the borrower was given two opportunities to present his case. One, when Committee informs the borrower the proposal to classify him as a wilful defaulter, when borrower would be given fifteen days to make his defence. This reply would then be submitted before a Grievance Redressal Committee. Second instance was when the Grievance Redressal Committee was also required to give the borrower an opportunity to be heard before declaring a wilful defaulter.
The 2015 Circular, however deviated from the 2013 Circular and only entitled the borrower to one opportunity to present his case before the First Committee which would issue him a show cause notice, if they proposed to declare him a wilful defaulter. The borrower may then make his submissions upon such notice being served and had no right thereafter to be appear and/or make submissions.
The Apex Court in Jah Developers felt that, since harsh consequences that follow declaration of a borrower as a wilful defaulter, and the fact that Article 19(1)(g) was attracted in facts of the case, the moment a person is sought to be declared as a wilful defaulter, the fundamental right to carry on business is direct and immediate, the Court held that 2015 Circular must be construed reasonably and directed the incorporation of certain features of the 2013 Circular, qua the Grievance Redressal Mechanism (in-house proceedings) so that a borrower can defend himself before he is declared a wilful defaulter.
The Court has further gone ahead and held that once the First in-house Committee, declares a borrower a wilful defaulter it shall serve a copy of such an order to the borrower. Thereafter, borrower must be given an opportunity to make his representation within fifteen days before the Review Committee, after which the Committee is expected to pass a reasoned order with evidence relied upon in the matter. This reasoned order of the Review committee must also be then served on the borrower.
Impact of a lawyer’s appointment in such a case and how it could affect the in-house proceedings positively or negatively
The events of wilful default consist of borrower’s version of facts; hence a lawyer was not necessarily required at such hearings as no complicated questions of law were to be presented before the in-house Committees. One of the possible objections the banks had over the years were that with lawyers appearing it may unnecessarily delay the process of declaration of a borrower as a wilful defaulter with their prolonging arguments. By the Apex Courts’ verdict now in Jah Developers, one can now positively expect a fast track in-house proceeding initiated by banks, or financial institutions to declare a person as a wilful defaulter.
About the authors: The authors are lawyers working at Rajani Associates. Devesh Juvekar is a Partner at the firm, whereas Dikshat Mehra is a Senior Associate with the firm’s Dispute Resolution Team.