Reference
Recently the Bombay High Court invalidated a clause of the Central Government memorandum which had allowed public sector banks to issue Look Out Circulars (LOC) for willful defaulters.
related facts
- the court has Viraj Chetan Shah vs Union of India in this matter Held that this provision violates the fundamental rights of life (Article 21) and equality (Article 14).
About willful defaulter
- Definition: Willful default occurs when a borrower deliberately fails to repay the loan despite having the means.
- Big Defaulter: This is a borrower with a balance of Rs 1 crore or more. Whose account has been marked as doubtful or loss.
- Misappropriation of funds: A type of intentional default is when the borrower uses the borrowed funds for purposes other than their intended use.
- Asset Disposal): Willful default also includes all situations where the borrower sells or disposes of the property pledged as collateral for the loan.
- Penalty Threshold: Any borrower with an outstanding amount of Rs 25 lakh or more is classified as a willful defaulter, who is subject to penal provisions.
- Threshold Application: A limit of Rs 25 lakh also applies in case of misuse of funds.
Prohibitions and Rules for Willful Defaulters in India
in India willful defaulter The concept of 'essentially blacklisting borrowers from financial opportunities' is important. Here are the main points:
- Designation Authority: commercial lenders like banks and NBFCs to borrowers willful defaulters Has been given the power to designate as.
- Results: This designation comes with serious consequences, restricting access to:
- Additional credit facilities from designated lender.
- to give any credit to new ventures
- Issuance of equity shares (listed companies).
- Launching an initial public offering (IPO).
- Submission of a resolution plan under the Insolvency and Bankruptcy Code.
- Development of institutional arrangements for willful defaulters
- There have been significant institutional changes over time in the identification of willful defaulters by commercial lenders.
- Central Vigilance Commission Directive of the year 1998: It initiated the primary institutional design in the year 1998.
- It directed the Reserve Bank of India (RBI) to collect information on willful default of more than Rs 25 lakh.
- Recommendations of the Parliamentary Standing Committee (2000): This committee dealt with institutional finance and equity markets. willful defaulters It is recommended to be blacklisted.
- However, it did not offer adequate procedural safeguards.
- Punitive Measures: RBI circular in the year 2002 introduced punitive measures, which were updated over time due to judicial intervention.
- RBI kept updating these through circulars mainly due to judicial intervention.
- Insolvency and Bankruptcy Code (IBC) of 2016: It allowed creditors to take over a defaulting company, regardless of whether the default was intentional or not.
- Procedural Safeguards: These safeguards were prioritized in 2019, when a Supreme Court decision emphasized the need for due processes before deliberating anyone.
- Natural Justice: Borrowers should be provided access to relevant investigative materials before being declared willful defaulters.
- Right to Respond: This is consistent with the concept of allowing inspection of documents in securities law enforcement proceedings.
- Rights of Willful Defaulters: In September 2023, the RBI provided an initial guidance proposing changes in procedures aimed at better protecting the rights of willful defaulters and those with significant defaults.
- Central Vigilance Commission Directive of the year 1998: It initiated the primary institutional design in the year 1998.
- There have been significant institutional changes over time in the identification of willful defaulters by commercial lenders.
Reasons for criticism of lenders classifying willful defaulters
in India willful defaulter Designation The current system faces criticism due to potential conflict of interest:
- Lender as Judge: Banks and NBFCs, which are parties to the loan agreement, are responsible for classifying borrowers as willful defaulters. This raises concerns about fairness.
- Transferring the blame: A poor initial credit assessment from a lender may lead to default.
- However, the system encourages the lender to classify the borrower as knowingly delinquent.
- No impact on lender: Willful defaulter designation does not affect the financial obligations of the lender, raising further questions about their impartiality.
- This structure violates the principle of natural justice i.e.Nemo Judex in causa sua' (Nemo Judex in Causa Sua)- According to this, no one can be the judge of his own case.