Bombay High Court Delivers Landmark Ruling on Wilful Defaulters and Compromise Settlements
The Bombay High Court has issued a significant judgment clarifying the application of penalty measures under the Reserve Bank of India's (RBI) regulations concerning wilful defaulters. In a ruling that offers substantial relief to borrowers, the court held that when a compromise settlement is successfully entered with a lending bank and a non-performing account is settled, there is "no justification in continuing with the penalty measures further for a period of five years, unless it is established that the defaulter is guilty of fraud or that he has siphoned off funds."
Court Grants Relief to Company Directors, Orders Removal from Wilful Defaulters List
The High Court provided specific relief to two directors of a mineral trading company by lifting restrictions that had been imposed on them for availing new loans from banks and financial institutions. The court directed the removal of their names from the list of wilful defaulters, emphasizing that the degree of default varies in every case.
Justices Bharati Dangre and R N Laddha, in their judgment made available on Friday, observed that it would be "unreasonable to treat every such default on par, as once the defaulter paid the compromise amount, his name is allowed to be deleted from the list of wilful defaulters." The court disposed of a petition filed on March 25 by Ravi and Nakul Arya, directors of International Mineral Trading Pvt Ltd (IMTC).
Petition Challenges RBI Circular on Continued Penal Measures
The petitioners had approached the High Court seeking a declaration that continued penal measures under the RBI master circular on wilful defaulters from July 2015, which imposes a five-year bar on defaulters, are not applicable when there is a successful compromise settlement and consequent withdrawal of the wilful defaulter tag by the lender bank.
IMTC had originally taken a loan of Rs 115 crore in 2008 from Bank of Baroda and an additional Rs 90 crore from Union Bank. In July 2017, the company's placement was confirmed by a review committee of Union Bank on the list of wilful defaulters. However, the company argued in its petition that it had reached a successful settlement, based on which Bank of Baroda had dropped it from such a list; hence, it should not be banned from seeking further loans.
High Court Distinguishes Between Compromise Payments and Continued Defaults
Senior counsel Vikram Nankani, representing the Aryas, argued the case before the court. The High Court agreed with Nankani's plea to carve a distinction between those who close a non-performing asset (NPA) via a compromise payment and those who continue with the default.
After hearing advocates Prasad Shenoy with Parag Sharma for RBI, AR Bamne for Bank of Baroda, and Priyam Amin for Union Bank of India, the court noted that the RBI's master circular on wilful defaulters is intended to "put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institution so as to insure that further bank finance is not made available to them."
Court References New RBI Circulars and Compromise Settlement Clause
The High Court also noted a new 2024 circular by RBI that pertinently "diluted the bar imposed" on new additional credit facility to one year after a name is scratched off the wilful defaulters list but maintained a five-year bar for those seeking loans to float new ventures. The RBI in 2024 introduced a ‘compromise settlement' clause to enable the bank to remove a borrower's wilful defaulter tag on payment of such compromise amount.
"In the recent circulars of 2024 and 2025, we have found distinction being made, as regards the bar on additional credit facility and fresh credit facility for floating new ventures, the former being not allowed for a period of one year and the latter for a period of five years. However, if for unavoidable circumstances, the borrower is unable to repay the loan, in our opinion, the axe should not fall upon him, debarring him for five years," the HC held.
Final Ruling in Favor of Petitioners
Ruling in favor of the Aryas, the High Court declared, "We declare that as far as the case of the petitioner is concerned, in the wake of the compromise entered by International Mineral Trading Private Limited with the Bank, the restriction imposed for availing additional facility from any Bank/FI shall not be invoked against the petitioners in the peculiar circumstances."
This judgment underscores the court's view that penalty measures should be proportionate and not unduly punitive, especially when borrowers have made genuine efforts to settle their debts through compromise agreements with lending institutions.
