Who is a ‘Willful Defaulter’

• A general meaning of the word 'default' is failure to repay loans availed by a borrower from a bank and/or financial institution(s).

संक्षेप में, विलफुल डिफ़ॉल्ट एक बैंकिंग धोखाधड़ी है बैंक और / या वित्तीय संस्थान से उधारकर्ता द्वारा लिए गए ऋण को चुकाने में विफलता

• A willful defaulter is an entity (legal/natural) who has not repaid the loan amount despite its financial ability to repay it.

• एक विलफुल डिफॉल्टर कानूनी  इकाई   है जिसने वित्तीय क्षमता के बावजूद ऋण राशि नहीं चुकाई है।

• The Reserve Bank of India ("RBI") has defined the 'willful default' as a 'unit' (individual/company) which has defaulted in meeting its payment obligations or not utilized the finance from the lender for  the specific purposes for which finance was availed or has siphoned off the funds.

उन विशेष उद्देश्यों के लिए ऋणदाता से वित्त का उपयोग नहीं किया गया है जिसके लिए वित्त का लाभ उठाया गया था या उसने धनराशि को छीना है।

• RBI on July 01, 2015 issued a master circular providing directions to the banks/financial institutions on identifying and dealing with 'willful defaulters'.

RBI’s Definition of ‘Willful Defaulter’

Definition of willful default

• The term ‘lender’ appearing in the circular covers all banks/FIs to which any amount is due, provided it is arising on account of any banking transaction, including off balance sheet transactions such as derivatives, guarantee and Letter of Credit.
• The term ‘unit’ appearing therein must be taken to include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks/FIs may also report (in the Director column) the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise.
• The term "willful default" has been redefined in supersession of the earlier definition as under:
• A "willful default" would be deemed to have occurred if any of the following events is noted: -

(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honor the said obligations.

(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) 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 utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.

RBI’s Definition of ‘Willful Default’ by Diversion or Siphoning the Funds

Diversion of funds, may include any one of the undernoted occurrences:

(a) utilization of short-term working capital funds for long-term purposes not in conformity with the terms of sanction.

(b) deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned.

(c) transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities.

(d) routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender.

(e) investment in other companies by way of acquiring equities / debt instruments without approval of lenders.

(f) shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.

Siphoning of funds, refers to the below actions:

• If any funds borrowed from banks / FIs are utilized for purposes un-related to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether an instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case.

Factor Effecting the Identification of Willful Default

• The identification of the willful default should be made keeping in view the track record of the borrower

Penal Measures to Prevent Willful Defaulters to Access Capital Market

Penal actions include sending of a list of willful defaulters (suit filed accounts) to SEBI by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively.

RBI guidelines to banks to undertake following measures for Willful Defaulters

a) No additional facilities should be granted by any bank / FI to the listed willful defaulters.

• In addition, the entrepreneurs / promoters of companies where banks / FIs have identified siphoning / diversion of funds,
• misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the willful defaulter is published in the list of willful defaulters by the RBI.

b) The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues

• should be initiated expeditiously. The lenders may initiate criminal proceedings against willful defaulters, wherever necessary.

c) Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the willfully

• defaulting borrower unit.

d) A covenant in the loan agreements with the companies in which the banks/FIs have significant stake,

• should be incorporated by the banks/FIs to the effect that the borrowing company should not induct on its board a person whose name
• appears in the list of Willful Defaulters and that in case, such a person is found to be on its board,
• it would take expeditious and effective steps for removal of the person from its board.
• It would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal
• provisions are not misused, and the scope of such discretionary powers are kept to the barest minimum.
• It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.

JPC Recommendation

RBI in consultation with Standing Technical Advisory Committee on Financial Regulations, on the need of initiating criminal action against concerned borrowers are :     

1. It is essential that offences of breach of trust or cheating construed to have been committed in the case of loans should be clearly defined under the existing statutes governing the banks, providing for criminal action in all cases where the borrowers divert the funds with malafide intentions.
2. It is essential that banks closely monitor the end-use of funds and obtain certificates from the borrowers certifying that the funds have been used for the purpose for which these were obtained.
3. Wrong certification attracts criminal action against the borrower.

Criminal Actions by Banks

Even under the existing legislation, there is ample scope of initiating criminal law procedures against willful defaulter, depending upon the facts and circumstances

1. Provisions under Sections 403 and 415 of the Indian Penal Code (IPC) 1860.
2. Banks / FIs are, therefore, advised to seriously and promptly consider initiating criminal action against willful defaulters or wrong certification by borrowers,
3.  wherever considered necessary, based on the facts and circumstances of each case under the above provisions of the IPC to comply with RBI instructions and the recommendations of JPC.

RBI’ caution: It should also be ensured that the penal provisions are used effectively and determinedly but after careful consideration and due caution.

Towards this end, banks / FIs are advised to put in place a transparent mechanism, with the approval of their Board, for initiating criminal proceedings based on the facts of individual case.

Supreme Court’s Keynote Action on “Siphoning Off Funds” – Considering it as Serious Fraud

• • The Supreme Court in the recent case of Bikram Chatterji v. UOI5 has dealt with 'siphoning of funds' and has termed it as a 'serious fraud'. The Apex Court has further listed the following circumstances which shall construe as 'siphoning of funds' which are as below:

• • • Utilization of short-term working capital funds for long-term purposes, which is not in conformity with the terms of sanction of the loan availed;
    • deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned.
    • transferring borrowed funds to the subsidiaries / group companies or other corporates by whatever modalities.
    • routing of funds through any bank/financial institution, other than the lender or members of consortium without prior permission of the lender;
    • investment in other companies by way of acquiring equities / debt instruments without prior approval of the lender(s);
  • shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.

Calcutta High court Keynote Action:

Below is a keynote action taken by Hon’ble High Court that can act as a major reference as a legal deterrent for siphoning off the money. It’s a major legal recourse in preventing willful default .

In the case of Indranil Mukherjee v. Jayeeta Mukherjee & Ors.6, the Calcutta High Court demonstrated that the court has power to pass an injunction order and thereby restraining the defendants from withdrawing and/or siphoning any amount of money lying in the various deposits of different descriptions either in the joint name of the plaintiff and his wife (defendant) or from withdrawing any money lying in the fixed deposit or savings bank account in the name of the defendant alone.

 Consequences to be Faced by an Individual or Company on Being Declared a Willful Defaulter

• • No bank/financial institution shall provide any additional facilities to the willful defaulters.
  • The entrepreneurs /promoters of the companies where banks/financial institutions have identified siphoning of funds, fraudulent transactions, misrepresentation and falsification of accounts can be debarred from institutional finance. Such persons are also debarred from floating new ventures for a period of five years from the date the name of the willful defaulter is published in the list of willful defaulters list by the RBI.
  • The lenders may initiate criminal proceedings against willful defaulters, wherever necessary. The banks and financial institutions may adopt a pro-active approach for a change of management of the willfully defaulting borrower unit.
  • Further under section 29A of the Insolvency and Bankruptcy Code, 2016, a willful defaulter shall not be allowed to be a resolution applicant.

Lawyer Assistance

• • Lawyer Assistance during Initial Stages of Identifying Willful Defaulter doesn’t allow lawyer representation of the accused individuals.
  • The Apex Court in the case State Bank of India (SBI) v. Jah Developers Pvt Ltd, dated July 2015 had dealt this subject of representing a person
  • / company by a lawyer.
  • The court has summarized that such inhouse committees are neither a tribunal nor a body having vested legal powers, and such committees are not a statute or subordinate legislation legally authorized to take evidence.
  • Considering this, NO LAWYER WOULD HAVE ANY RIGHT TO APPEAR BEFORE SUCH COMMITTEES