Bombay High Court Delivers Landmark Ruling on Wilful Defaulters and Compromise Settlements
The Bombay High Court has issued a significant judgment clarifying the treatment of wilful defaulters under Reserve Bank of India (RBI) regulations. The court held that when a borrower enters into a compromise settlement with a lending bank and settles a Non-Performing Account (NPA), there is no justification for continuing penalty measures for five years, unless it is proven that the defaulter engaged in fraud or siphoning of funds.
Court Grants Relief to Company Directors, Orders Removal from Defaulter List
In a ruling made available on Friday, the High Court provided relief to two directors of a mineral trading company by lifting restrictions that barred them from 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 each case.
Justices Bharati Dangre and RN Laddha observed that it would be unreasonable to treat every default equally. Once a defaulter pays the compromise amount, their name should be deleted from the wilful defaulter list. The court disposed of a petition filed on March 25 by Ravi and Nakul Arya, directors of International Mineral Trading Private Limited (IMTC).
Petition Challenges RBI Circular on Continued Penal Measures
The Aryas had approached the High Court seeking a declaration that continued penal measures under the RBI master circular on Wilful Defaulters from July 2015 are not applicable when a successful compromise settlement is reached and the wilful defaulter tag is withdrawn by the lender bank. The circular imposes a five-year bar on defaulters.
IMTC had 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 was placed on the list of wilful defaulters by a review committee of Union Bank. However, the company argued in its petition that it had reached a successful settlement, based on which Bank of Baroda had dropped it from the list, and therefore it should not be banned from seeking further loans.
High Court Distinguishes Between Compromise Payments and Ongoing Defaults
Senior counsel Vikram Nankani, representing the Aryas, argued for a distinction between borrowers who close an NPA via a compromise payment and those who continue with the default. The High Court agreed with this plea, noting that the RBI's master circular aims to disseminate credit information about wilful defaulters to caution banks and financial institutions, ensuring further finance is not made available to them.
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 highlighted a new 2024 circular by the RBI. This circular diluted the bar imposed on new additional credit facilities to one year after a name is removed from the wilful defaulters list, but maintained a five-year bar for those seeking loans to float new ventures.
RBI's 2024 Circular Introduces Compromise Settlement Clause
The RBI in 2024 introduced a 'compromise settlement' clause, enabling banks to remove a borrower's wilful defaulter tag upon payment of a compromise amount. The High Court noted that in recent circulars of 2024 and 2025, a distinction is made between the bar on additional credit facilities and fresh credit facilities for floating new ventures.
The former is not allowed for one year, while the latter is barred for five years. However, the court held that if a borrower is unable to repay the loan due to unavoidable circumstances, they should not be debarred for five years.
Court Rules in Favor of Petitioners, Declares Restrictions Inapplicable
Ruling in favor of the Aryas, the High Court declared that in the wake of the compromise entered by International Mineral Trading Private Limited with the bank, the restriction imposed for availing additional facilities from any bank or financial institution shall not be invoked against the petitioners in these peculiar circumstances.
This judgment underscores the importance of fair treatment for borrowers who settle their debts through compromise, providing a pathway for financial rehabilitation while maintaining safeguards against fraudulent activities.
