Who is Wilful Defaulter?

Amruta Kadam

India in its long time quest has been trying to get rid of every possible threat that the nation’s economic condition may have from foreign elements. But wilful defaulters are one such pest to the economical condition to which government has been trying to get rid off since a long time.

These defaulters are rust to the country’s metal which if left unchecked may end up rotting the entire economy and financial stability of this nation. In simple words, the wilful defaulter is any person or entity which fails to pay his loan back despite their ability to pay.

One of the important requisites of the wilful defaulter, as the name suggests, is their ‘despite their ability to pay’ and on the other hand default itself speaks of failure to pay.

The problems concerning wilful default first came to be adequately addressed in the year 1999 when RBI and Central Vigilance Commission(CVC) gave directions to the financial institutions and banks to collect information on defaulters of INR 25,00,000 and above.

Since then with the rise in the number of non-performing assets(NPA), there were various precautions taken by the RBI and the CVC. In the current scenario to understand legal stand behind wilful defaulters, we need to refer master circular issued by the Reserve Bank of India (RBI)^[1] on 1st/July/2015.

The circular covers the wide arena of wilful defaulters by enlisiting various definition which are important while understanding the nature of this offence. It also throws light on the concepts of diversion and siphoning of funds.

As per the circular a wilful default would be deemed to have occurred if any of the following circumstances take place- 

1. The unit has defaulted in meeting its payment/repayment obligations to the lender even when it can honour the said obligations.
2. The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
3. The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
4. The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed of or removed the movable fixed assets or immovable property given to secure a term loan without the knowledge of the bank/lender.

But while defining wilful default RBI also states that the identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided based on isolated transactions/incidents .And for a default to be categorised as ‘WILFUL’ it should fulfil the following essentials of being-

· intentional

· deliberate 

· calculated  ^[2]

 

DECLARATION OF WILFUL DEFAULT 

Declaration of wilful default is done by a committee which is headed by an Executive Director or equivalent and two other senior members equal to the rank of General Manager or Deputy General Manager. Once the committee has established a default it issues a show-cause notice^[3]  to the borrower.

Concerning the rules of natural justice, it allows the borrower to place his say before the committee. Such a say can be oral or written in nature. The committee then after looking into the matter give their declaration based on facts and their reasons.

Such order, however, becomes final only when Chairman / Chairman & Managing Director or the Managing Director & Chief Executive Officer / CEOs and consisting, also, two independent directors / non-executive directors of the bank reviews the order. The autonomy given to these committees is restricted as their work is only to conduct an unbiased investigation.^[4] 

Besides in most of the cases, a non-promoter / non-whole time director should not be considered as a wilful defaulter until it is established that through proceedings recorded in the meeting of the board or a committee of the board they were unaware of the fact and yet haven’t recorded their objection.

The other possibility shall be when they gave their consent for wilful default. In case non-promoter / non-whole time director is found to be a wilful defaulter then a similar process shall be followed as has been laid down in the case of the whole-time director.  

CONSEQUENCES ONCE IDENTIFIED AS A WILFUL DEFAULTER- 

Once an individual or a company has been identified as a ‘wilful defaulter’, then no bank or financial institution shall provide any additional facilities to the wilful defaulters.

Once banks/ FI are identified for misrepresentation, siphoning of funds, fraudulent transactions or other such activities they would be debarred from institutional finance and floating new ventures for a period of five years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI.

 Also, section 29A of the Insolvency and Bankruptcy Code, 2016, discourages a wilful defaulter from being a resolution applicant. Wilful defaulters if found guilty then under section 477 and section 488 of The Company Act 2013 they can be punished and imprisoned for a minimum period of 6 month or maximum period of ten years, or with a prescribed fine or with both.

An identified wilful default also attracts section 403 and section 415 of the Indian Penal Code of 1860. Under which mostly financial institutions initiate criminal actions. Section 403 prescribes a punishment of imprisonment of either description for a term which may extend up to two years or fine or both for Dishonest misappropriation of property. 

In maximum cases, we come across defaulters fleeing out of the country. But now that seems impossible as the state empowers bank authorities to stop wilful defaulters from leaving the country.

Amendment in the circular by The Ministry of Corporate Affairs gives chairman, MD, CEOs of Public Sector Banks power to request the issuance of the lookout circular to the Ministry of Home Affairs. Such circulars are issued prior to respective FIRs. About the same concerns, recent committees have also recommended changes in Section 10 of The Passport Act 1967. It recommends treating defaulters of a loan above a certain limit as a financial and economic risk in the public interest

CUT OFF LIMITS-

While the penal measures as mentioned above would normally be attracted by all the borrowers identified as wilful defaulters or the promoters involved in diversion / siphoning of funds, keeping in view the present limit of Rs.25 lakh fixed by the Central Vigilance Commission for reporting of cases of wilful default by the banks / FIs to RBI, any wilful defaulter with an outstanding balance of Rs.25 lakh or more, would attract the penal measures.

This limit of Rs.25 lakh may also be applied for the purpose of taking cognisance of the instances of siphoning / diversion of funds.

It is also noteworthy to understand the Ministry of Corporate Affairs’s move of introducing the concept of a ‘Director Identification Number (DIN)’ with the insertion of Sections 266A to 266G in the Companies (Amendment) Act, 2006.

This move has been very helpful in order to avoid any discrepancies in the identification of directors and to avoid any misunderstanding between similar names of directors. Along with it on 24th February 2016, the Standing Committee on Finance (Members- Dr M Veerappa Moily)^[5] submitted its report as Presentation of the 27th Report of the Standing Committee on Finance on the Subject “Non-Performing Assets (NPAs) of Financial Institutions” of the Ministry of Finance (Department of Financial Services).

The report emphasises on enhancing the administration and recovery process of NPA. The report while mentioning wilful defaulters indicates 21% of the total NPAs constituted by the defaulters.

It advised banks to make a public list of top thirty wilful defaulters as this would act as a deterrent for other promoters against the wilful default. Followed by this it suggested amendments in the Reserve Bank of India Act 1934 and other such provisions to make way for such public disclosures.

AFFECTED INDIAN ECONOMY-

With widespread of coronavirus around the world, countries are suffering from huge economic loss and India is no exception to it. Wilful defaulters as stated above act as a slow poison killing the stability of our economy.

In fact, according to the data of the March quarter released by TransUnion Cibil, Lenders had filed 1,251 cases to recover Rs 24,765.5 crore. Wilful defaulters is a unique way of categorizing Non Performing assets, they widely affect the profitability of the banks and the credibility of the depositors.

One of the important reason for the rise of defaulters in the market is the presence of political interference. They hold the potentials of influencing borrowers to exploit the weak status of governance, leading to loan defaults. the presence of wilful defaulters can be seen in the affected debt serving ability of the institutions.

Loans granted to the politically associated firms are less influenced by profitability or tangibility. Political connections of Chief Executive Officers is a visible violation character in the debt market, causing banks to take sub-optimal lending decisions.

Obsession for extraordinary growth by building over capacities and acquiring firms via overleveraging with various innovative debt instruments, covered corporate structures are the reason for rising loan defaults. NPA’s, on the other hand, create a bigger threat for banks and financial institution especially when the economy is already on its downfall.

The NPA’s cannot be avoided completely because of the unpredictable business activities but they do need stringent regulation to ensure smooth flow of money in the market.  

CONCLUSION-

The country day after day is breaking its own records of a falling economy and this calls for a look through in our legislation system. It can be said that the power to label a borrower as a wilful defaulter lies in the hands of the lender.

Accordingly, if we notice RBI gives a huge autonomy in the hands of the lender, and with huge power as said comes huge corruption. There is always a chance of using this power for arbitrary use. The lender can be in most of the time very reluctant as far as accepting a flaw in the governance of loan agreements are in question. 

Further, there is quite an incentive to declare a defaulter as a wilful defaulter. The Wilful defaulter tag as much as acts as a deterrent it can also attract severe social stigmas around the person.

The senior authorities of the institution give their decision after due investigation but there lies no appellate board if the party is unsatisfied with the prior decision. This will have its own cons like delay in recovery but one or other way there needs to be an adequate regulation over this market. This will help people to invest their confidence in the regulator and the market.

While emphasising on the need for regulation we should not forget over-regulation may suppress the genuine risk appetite of the market. To sum up in few not more or not less but adequate and compatible with the need of the hour. 

1. Master Circular no. RBI/2015-16/100 DBR.No.CID.BC.22/20.16.003/2015-16 ↑

2. Cipla Ltd. V. Ripu Daman Bhanot (1999) 4 SCC 188 ↑

3. Gorkha Security Service V. State (NCT of Delhi) (2014)9 SCC 105 ↑

4. State Bank of India (SBI) v. Jah Developers Pvt Ltd ↑

5. Parliament of India Lok Sabha Digital libarary ↑