While refusing to interfere with the show cause notice issued by SREI Equipment Finance Limited (SEFL) against Kitply (petitioners) under the RBI Master Direction on Wilful Defaulters, the Calcutta High Court has clarified that pendency of a parallel arbitration proceeding concerning the validity, genuineness, and enforceability of the underlying loan transactions does not debar the lender from issuing a show cause notice under the RBI Master Direction.
The High Court asserted that the wilful defaulter proceeding has its source in statute and RBI guidelines and is substantially independent of the dispute which is the subject matter of the arbitration between the parties. Hence, issuance of a show cause notice alleging that the borrower has disposed of immovable or movable assets provided for securing the credit facility without the lender’s approval is squarely covered under the definition of wilful default in the RBI Master Direction.
Accordingly, the NCLT’s dismissal of the Section 7 insolvency petition on the ground that the disputes are already before the Arbitrator does not, by itself, immunise the borrower from a wilful defaulter proceeding under the RBI framework, added the Court.
A Single Judge Bench of Justice Krishna Rao observed that the definition of ‘wilful default’ and ‘wilful defaulter’ is contained in paragraphs 3(t) and 3(u) of the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, and that wilful default includes a situation where the borrower has disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender. The Court noted that SEFL had issued the show cause notice on the specific allegation that the petitioners had disposed of immovable and movable assets provided for securing the credit facility without the approval of SEFL, and that the description of properties/assets and documentary evidence had been disclosed to the petitioners.
The Court further observed that the issuance of the show cause notice by SEFL was squarely covered under paragraphs 3(t) and 3(i)(D) of the Master Directions, 2024. The Court placed reliance on the order of the Sole Arbitrator dated 13th July, 2026, which had categorically held that the proceeding for declaring the borrower as a wilful defaulter has its source in statute and the RBI guidelines, and is substantially independent of the dispute which is the subject matter of the arbitration. The Court also relied upon the judgment of the Coordinate Bench in Kaustuv Ray v. IDBI Bank [2023 SCC OnLine Cal 656], which held that against a mere issuance of a show cause notice, a Court should be reluctant to interfere, and that only after a reply is filed can the notice either be dropped or further inquiries be made.
The Court observed that no adjudicating proceedings must be stalled by Courts, that what is entertained at the stage of show cause notice is only a prima facie view, and that the determination comes only after a representation is preferred by the borrower. The Court further noted that even if the petitioner is branded as a wilful defaulter by the Wilful Defaulter Identification Committee, there is scope for further review by the Review Committee headed by the Chairman of the bank before the order becomes final. The Court observed that the petitioners had first attempted to obtain an interim order before the Sole Arbitrator with respect to the show cause notice but failed to succeed, and that pendency of the arbitration proceeding could not debar the issuance of the show cause notice.
Briefly, the petitioners, Kitply Industries Limited and others, had approached the Calcutta High Court challenging the Show Cause Notice dated 17th June 2026, issued by SREI Equipment Finance Limited (SEFL), the respondent no. 2, calling upon the petitioners to show cause as to why they should not be declared as Wilful Defaulters. The dispute traces back to two loan agreements dated 24th January 2019, entered between petitioner no. 1 and SEFL along with its parent company, SREI Infrastructure Finance Limited (SIFL), on the basis of which SEFL initiated a Section 7 proceeding under the Insolvency and Bankruptcy Code, 2016 before the NCLT, Guwahati Bench in May 2024 alleging default of Rs. 333.58 crores.
During the pendency of the insolvency petition, SEFL filed a Section 9 application under the Arbitration and Conciliation Act, before the Calcutta High Court, which resulted in an injunction over some immovable properties and equity shares of the petitioners. Subsequently, a Sole Arbitrator was appointed under Section 11 of the Arbitration Act, and by an order dated 17th December 2025, the Section 9 application was disposed of with a direction to the Sole Arbitrator to treat the same as an application under Section 17 of the Act. By an order dated 2nd June 2026, the NCLT, Guwahati Bench dismissed the insolvency petition of SEFL recording that SEFL itself had questioned the genuineness and legality of the transactions with Kitply and that arbitral proceedings were already underway to adjudicate the same disputes.
Immediately after dismissal of the insolvency petition, SEFL issued the impugned show cause notice on 17th June 2026, alleging wrongful sale or non-accountability of 256 hectares of land allegedly mortgaged with SEFL, based on a title search report obtained eight months earlier on 21st November 2025. The petitioners challenged the show cause notice before the Sole Arbitrator under Section 17 of the Arbitration Act, but the Arbitrator declined to grant a stay, observing that the issue of whether Kitply was a defaulter would remain open before the Arbitral Tribunal. By a letter dated 19th August 2026, SEFL rejected the petitioners’ request to defer further proceedings, threatening to declare them as wilful defaulters if no reply was filed within 21 days.
