In this article, Satyam Singla of Symbiosis Law School, Noida discusses Legal Framework and Regulations on Wilful Defaulters.

Concept of wilful default

Proper and a judicious use of financial support or help, outline the success of a company. A situation may sometimes arise when the person who has taken the help is not able to return or repay the same. Financial help is provided mostly in the form of loans and not in form of grants.

The person who becomes incapable of paying the loan amount back is commonly known as a defaulter and is said to default on the payment. But here comes a distinction which one must make which is between a defaulter and a wilful defaulter.

RBI circular dated July 1, 2014 clearly stated that “Wilful Defaulter would be deemed to have occurred if the unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.”

The amount owed by wilful defaulters in the financial year 2015-16 was INR 76685 crores. In 2016-17 the same amount grew to INR 92376 crores. This clearly implies that there has been increased to 20.1% in the value owed by wilful defaulters from the financial year 2015-16 to financial year 2016-17.

At the end of the financial year 2016-17 i.e. on March 31, 2017, 21 banks of the country together have taken action against 5949 wilful defaulters. The action so bought by the banks was under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, also known as SARFAESI Act. However, the same act has been amended by “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016”, which was passed by Lok Sabha on 2 August 2016. Act and the same has been passed by Rajya Sabha by voice vote on August 10, 2016.

Section 13 of SARFAESI Act 2002 essentially states that a borrower of financial assistance or support if proved defaulted in repayment of the amount so taken as loan or any instalment of the same, his/her account, in that case, will be classified as NPA i.e. non-performing asset.

Here comes an interesting point which should be noticed. The country’s largest lender State Bank of India has alone 22.6% of the total lending to the wilful defaulters on its credit. This clearly means that rest of 20 banks have contributed the rest of the share i.e. of 77.4% to the amount to lend to the wilful defaulters.

One of the best and most suited examples of a wilful defaulter is Vijay Mallya. Owner of Kingfisher is declared wilful defaulter by SBI. Other examples of wilful defaulters include Moser Bear, Varun Industries and the list of wilful defaulters in India is so goes on.

The bad loan ratio of the state banks is about 4.5 percent which is more than the double that for private sector lenders.

Regulatory regime on wilful default in India

Particularly India has not any dedicated legislation for the wilful default and wilful defaulters yet.

According to critics, wilful default is nothing else but is only a loose culture of credit that keeps the companies of Asia’s third largest economy underperformed and thus the firms can’t perform according to the potential they have.

However, an interesting point comes up here. Guarantor, the person giving the guarantee for other person while the later is taking any financial help can also be tagged as wilful defaulters. The central bank, in a 9 September notification, stated that a guarantor can also be tagged as a wilful defaulter if he/she refuses to pay the amount demanded by the lender as per the amount taken by the person for whom he/she has given guarantee despite having sufficient means to pay the dues[1].

Reserve Bank of India examined the issue of wilful default in consultation with the Standing Technical Advisory Committee on Financial Regulation.

According to RBI, it is essential providing for criminal action in all such cases that borrowers divert the funds with malafide intentions.

Banks are also directed to have a close watch on end use of funds. The committee also advised that a certificate from the borrowers certifying that the funds have been used for the purpose for which these were obtained should be obtained

To declare a wilful default, banks are directed to set up a committee which would hear the story and justification of the person so accused of wilful default. If it then determines the default is wilful it informs the central bank, which circulates a list of wilful Defaulter.

Once a financial institution determines that one is a wilful defaulter, the next course of action for the banks should be to send a notice to that person in the regard of the same. A time period of fifteen days should be given to the person to respond to the notice via a grievance redressal committee. The committee should also give a hearing if the borrower wants to clarify her stand. Only after considering the committee’s view a person or a company finally declared a wilful defaulter.[2]

The person so declared would not be able to access any kind of financial help or service or any facility from any of the bank or financial institution for a period of five years. He would also be debarred from participating and investing in capital market. And to prevent the same i.e. to prevent the access to capital markets, a copy of the list of wilful defaulters is sent to the Securities and Exchange Board of India by the RBI and the Credit Information Bureau (India) Ltd.

On February 24, 2016, the parliamentary standing committee on finance presented a report recommending that as a measure of public accountability, each bank must make names of wilful defaulters public. Relevant laws and regulations should be amended to enable banks to make the names public. Banks are not only provided with the freedom to disclose the name of the wilful defaulters but also bank is empowered to publish the name along with the photograph of the person so defaulted on the payment in the newspaper or in media.

As per the RBI regulations, willful default covers several broad areas including deliberate non-payment of the dues despite having adequate cash flows and good net-worth, misrepresentation/ falsification of records, disposal/ removal of securities without bank’s knowledge and also fraudulent transactions by the borrower.

If one is found guilty on any of these accounts, various provisions of IPC 1980 and Companies Act 2013 shall be imposed on the very person. Also wherever possible, the banks and financial institutions will adopt a proactive approach for a change of management of the wilfully defaulting borrower unit.

For example, if one is proven guilty, all the provisions pertaining to fraud and punishment for fraud under sections 447 and 448 of the Companies Act would be applicable[3]. Criminal action against wilful defaulters under the existing legislation can be initiated by financial institutions under the provision of IPC 1980. When a person commits the offence either under section 403 of IPC 1980 or under section 405 or under section 415 or under section 418 of the same act is liable to face the criminal proceedings in appropriate court of law and all these sections are to be read together for the prosecution of the offender in the case of wilful default

According to section 447 of the Act, if one is found guilty of a fraud, the director is punishable with imprisonment of six months which can extend up to ten years, or with a fine of amount three times more than the involved in the fraud or with both. Similarly, under section 447, those guilty of non-repayment of debt are punishable with imprisonment of six months which can further extend up to ten years or with a fine of up to the amount thrice the actual amount involved in the fraud.

Section 403 of IPC essentially deals with dishonest misappropriation of property which also states the one person who has been held liable for this offence shall be punished with imprisonment for a term which may extend to two years or with fine or with both. Similarly, section 405 and section 415 respectively talks about criminal breach of trust and cheating. Provision of imprisonment for a term which may extend up to three years is there under sections 403 and 418 of IPC.

Also, the Insolvency and Bankruptcy Code 2016, will reinforce the banks’ efforts to recover bad loans from wilful defaulters

According to the same code, a wilful defaulter could also face a jail term which can extend up to the tenure of five years. Besides, bankrupt individuals could be barred from contesting elections or hold public office.

It also has some provisions to address the problem of cross-border insolvency. The problem is addressed by signing bilateral agreements with other countries.

Conclusion

Country like India, where industries have a very great potential to perform in the competitive world can perform so if and only if the rules and regulations for the loans so taken by the industries are reinforced and particularly India needs a dedicated legislation or law for wilful defaulter so as to set an example for the people like Mallya and firms like Moser Bear so that one should think thrice before defaulting on the payment wilfully.

[1] http://www.livemint.com/Money/dpGiWJbwQzAapvDQYlwmkI/DYK-A-guarantor-can-also-be-tagged-as-a-wilful-defaulter.html

[2] https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9907

[3]http://smartinvestor.business-standard.com/market/Marketnews-264289-Marketnewsdet-wilful_defaulters_and _the_Companies_Act_2013.htm