The Bombay High Court has emphasized that banks and financial institutions must provide reasoned orders before declaring an entity or individual as a wilful defaulter under the Reserve Bank of India’s Master Circular. In its order on March 4, a division bench comprising Justices B P Colabawalla and Somasekhar Sundaresan noted the significant consequences faced by wilful defaulters, such as being ostracized from the financial sector. Therefore, the discretion granted to banks under the circular should be exercised cautiously, as mandated by the RBI.
The court stated that banks and financial institutions invoking the Master Circular to declare wilful default must share the reasoned orders issued by their Identification Committee and Review Committee.
This ruling came during the hearing of a petition filed by Milind Patel, former joint managing director of IL&FS Financial Services Limited (IFIN), challenging a declaration made by Union Bank of India in February 2023, declaring IFIN and its promoters as wilful defaulters under the RBI’s 2015 Master Circular.
According to the plea, Union Bank issued a show cause notice to IFIN and Patel in July 2022, indicating a prima facie view that they deserved to be declared wilful defaulters. Subsequently, in February 2023, the bank’s review committee passed an order declaring the firm and its promoters as wilful defaulters.
The high court emphasized that once an entity or firm is declared a wilful defaulter, it faces severe penal consequences and is barred from accessing the financial sector for additional facilities. The court highlighted the importance of transparency and reasoned decision-making in such matters, in line with the RBI’s circular.
In response to the court’s suggestion, Union Bank expressed willingness to withdraw the order and continue proceedings from the stage of the show cause notice. The bank also committed to providing the petitioner full access to all relevant documents and material.
