The Bombay High Court has held that the embargo under paragraph 2.5(a) of the RBI Master Circular dated July 1, 2015 cannot be mechanically continued for five years after removal of the borrower’s name from the list of wilful defaulters in a case where the account has been successfully settled by compromise and the compromise amount has been fully paid, unless the case involves siphoning/diversion of funds, misrepresentation, falsification of accounts, or fraudulent transactions.
Applying this principle to the peculiar facts before it, the Court read down the five-year embargo and declared that, in view of the compromise entered into by IMTC with Bank of Baroda, the restriction on availing additional facility from any bank or financial institution would not be invoked against the petitioners.
The Division Bench comprising Justice Bharati Dangre and Justice R.N. Laddha noted that the purpose of the Master Circular was to disseminate credit information pertaining to wilful defaulters so as to caution banks and financial institutions and ensure that further bank finance is not made available to them. It extracted the definition of “wilful default” under clause 2.1.3 and emphasized that identification of wilful default must be made keeping in view the borrower’s track record, that it should not be decided on isolated incidents, and that the default categorised as wilful must be intentional, deliberate and calculated.
The Bench examined clause 2.5(a) of the 2015 Master Circular, which provided that no additional facilities should be granted to listed wilful defaulters and that companies and their promoters, where siphoning/diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions had been identified, should be debarred from institutional finance for floating new ventures for five years from removal of their names from the list of wilful defaulters. The Bench observed that the controversy centred on whether this five-year embargo could continue even after compromise settlement and removal of the borrower’s name from the wilful defaulters list.
The Bench placed weight on the subsequent RBI Directions of 2024 and 2025, which expressly dealt with treatment of compromise settlements. It noted that under the 2024 Directions, an account included in the List of Wilful Defaulters would be removed when the borrower had fully paid the compromise amount, and that the revised regime also distinguished between the bar on additional credit facility, which would operate for one year after removal of the name, and the bar on credit for floating new ventures, which would continue for five years.
The Bench also referred to RBI’s FAQ on the June 8, 2023 framework for compromise settlements and technical write-offs, which clarified that compromise settlement with borrowers categorised as wilful defaulters was not a new regulatory instruction and that the penal measures applicable to wilful defaulters would continue to apply. At the same time, the Bench noted that RBI itself had, in later policy, given due weightage to compromise settlement and permitted removal of the borrower’s name from the wilful defaulters list upon full payment of the compromise amount.
The Bench found merit in the petitioners’ contention that a party which attempts compromise and settles the NPA account cannot be placed on the same footing as a party which continues in default without settlement. It observed that once the compromise amount is paid and the name is deleted from the list of wilful defaulters, continuation of the five-year penalty is unjustified unless it is established that the defaulter is guilty of fraud or has siphoned off funds. The Bench further observed that wilful default may arise in different factual degrees and it would be unreasonable to treat every such default alike.
Briefly, the petitioners, Ravi Arya and Nakul Arya, who were directors of International Mineral Trading Private Limited (IMTC), filed the petition seeking a declaration that the continued penal measure under paragraph 2.5(a) of the RBI Master Circular on Wilful Defaulters dated July 1, 2015 would not apply where there had been a successful compromise settlement and consequent recall/withdrawal of the wilful defaulter declaration by the lender bank. They also challenged the order of the Committee of Executives dated May 16, 2017 and the decision of the Review Committee dated July 19, 2017 confirming their inclusion in the list of wilful defaulters.
IMTC had availed credit facilities from Bank of Baroda, including a term loan of Rs.115 crores sanctioned on December 22, 2008 and an additional credit facility of Rs.90 crores, with the earlier term loan reviewed to Rs.205 crores. IMTC executed security documents in favour of the bank, and the petitioners, along with other directors/promoters, executed guarantees securing repayment of the amounts due under the credit facilities.
Upon default, Bank of Baroda classified IMTC’s account as a non-performing asset and initiated proceedings under the SARFAESI Act, 2002, along with proceedings to declare the petitioners as wilful defaulters. During the pendency of such proceedings, a one-time settlement was arrived at between Bank of Baroda and IMTC and/or its directors/promoters, pursuant to which the entire outstanding dues were paid in full and a “No Due Certificate” was issued in favour of IMTC.
After closure of the account, when the petitioners approached Union Bank of India for financial assistance, they apprehended that paragraph 2.5(a) of the 2015 Master Circular would disentitle them from obtaining institutional finance for five years. Their case was that despite compromise settlement and removal of their names from the wilful defaulters list, the embargo under paragraph 2.5(a) was still being treated as applicable.
Appearances:
Senior Advocate Vikram Nankani, along with Advocates Jas Sanghavi and Durgaprasad Poojary, for the Petitioners
Advocates Prasad Shenoy, Aditi Phatak, Paricher Zaiwalla, Ishita Desai, Parag Sharma, Megha More and Juhi Bhayani, for the Reserve Bank of India, respondent no.9
Advocate A.R. Bamne, for respondent no.2
Advocate Priyam Amin, for respondent no.3
