1. Introduction

The Business Standard on 25 November 2021 reported that the outstanding amount owed by willful defaulters to the Indian Banking system increased to a staggering amount of Rs. 62,970 since the beginning of the pandemic. The share of public sector banks accounted for almost 77.4% of the total outstanding amount of Rs. 5.3 trillion owed to the banks by willful defaulters. Clearly, the elephant in the room needs to be addressed. The RBI's Master Circular on Wilful Defaulters (Wilful Defaulter Circular) imposes obligation on banks to classify borrowers and promoters/directors as willful defaulters on satisfaction of willful defaulter criteria therein i.e. diversion and siphoning of funds, failure to repay the loan despite having ability to do so, and others. The classification under the Wilful Defaulter Circular is entirely a commercial decision of banks. Lately, however, we have witnessed a certain degree of judicial activism which appears to defeat the purpose of the RBI circular – which definitely is to improve the credit culture of India. This article analyses on the challenges faced by banks owing to regular judicial intervention on account of principles of nature justice. 

2. Natural Justice

The Supreme Court in State Bank of India v. Jah Developers Private Limited and Ors. took a sympathetic view in concluding that the implication of classifying a person as a willful defaulter is enormous and consequently, this invites principles of nature justice in the decision making. The court also ruled that the willful defaulter committee (formed in accordance with the Wilful Defaulter Circular)  of a bank must pass a reasoned order. Since then (and even prior), the high courts and civil courts seems to have liberally interpreted the scope and extent of natural justice principles often going beyond the mandate of the Wilful Defaulter Circular- which seems to sufficiently protect the rights of a person by providing for representation and personal hearing of debtors by 2 separate committee of lender.

For instance, very recently in July 2021, the Delhi High Court in Frost International Limited v. Punjab National Bank1 observed that the order of the willful defaulter committee did not provide adequate reasons for its decision and consequently, fails to be a reasoned order. Courts have also routinely dismissed willful defaulter orders on the ground that sufficient opportunity of representation was not provided before taking the decision – despite the willful defaulters refusing to take benefit of the safeguard and process provided in the Wilful Defaulter Circular. This clearly seems to overly protect a person, who is in default and owes money to the public and not merely to banks. 

3. Commercial Wisdom Must be Respected

The Wilful Defaulter Circular puts obligation on the banks to use their commercial wisdom to differentiate between a genuine debtor (who on account of factors beyond his control i.e. wrong business decision or bad investment failed to pay debt) and a willful defaulter, who poses threat to the entire credit system of the country. This is because banks are best suited to appreciate a commercial transaction and see-through the mischief. Courts, with due respect, lack the level of commercial expertise required for such differentiation, which at times can be challenging. Compare this situation with the decision of a committee of creditors (CoC) under the Insolvency and Bankruptcy Code, 2016, wherein the law (and thanks to the Supreme Court) now is well settled that the decision of the CoC, being commercial in nature, is not open for judicial review. This is to say that the CoC is best suited for the job and courts should simply ensure that no law is violated by CoC while approving a plan. This applies squarely to willful defaulter cases wherein the identification committee and review committee, as mandated by the RBI, have the right commercial aptitude to classify a debtor as willful defaulter. Such decision is based on myriad commercial considerations which if judicially reviewed can bring enormous strain to the entire commercial market.   

4. Conclusion

It is no body's case that a person should be declared willful defaulter without providing sufficient opportunity to defend his case. A debtor definitely needs protection as consequences are undoubtedly huge and have social and economic repercussions. It is, however, our view that RBI's Wilful Defaulter Circular provides sufficient safeguard and the courts should not venture beyond the requirements of the circular. It takes effort and will to improve credit culture of a country – both courts and executive need to play equal role in that. An authoritative pronouncement by the Supreme Court on the extent of natural justice principles and finality of commercial decision of banks on this issue will be helpful in settling the jurisprudence which is in flux at present.


1. 2021 SCC OnLine Del 3683

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.