All You Want To Know About Law On Willful Defaulters

The case of Willful Defaulters was taken up by the Central Vigilance Commission back in 1999. It gave instructions for the collection of information on willful defaults of Rs.25 lakhs and above. Pursuant to these instructions, Banks and notified Financial Institutions were required to submit information on willful defaulters to RBI. The RBI, on 1.07.2015 (Revised) issued a Master Circular which consolidated instructions on how all the commercial banks and notified financial institutions are to deal with willful defaulters. The circular provides cut off limits, the mechanism for identification of willful defaulters, diversion and siphoning of funds, penal measures, etc. CONCEPT OF WILLFUL DEFAULTER When a "unit", fails to repay the loaned amount, it is termed as a defaulter. When this defaulter siphons off/diverse away the funds or tries to dispose of/remove the loaned security or doesn't pay the loaned amount back despite its ability to repay it, the unit is termed as a willful defaulter. The Reserve Bank of India has list down the following four events, the occurrence of which would result in willful default: The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honor the said obligations. 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. 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. 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 for the purpose of securing a term loan without the knowledge of the bank/lender.[i] It is important to understand the meaning of the terms "diversion and siphoning of funds" before moving ahead with the mechanism for the identification of wilful defaulters. SIPHONING OFF FUNDS 'Siphon off funds' is draining off of money from business without having legitimate authority. Conversely, if the transfer of funds is duly recorded in the books of accounts with legitimate narration and that narration is a rightful explanation which is not found to be fabricated or untruthful then no court of law shall hold such legitimate transfer of money as illicit siphoning of funds. [ii] The siphoning off funds refers to a situation wherein a "unit" fails to meet its payment/repayment commitments to the lender bank or utilizes the funds for a purpose different from what it was supposed to use it for. Furthermore, the unit fails to show that the financed funds are available in any other form of assets with the unit. The Calcutta High Court in the case of Indranil Mukherjee. v. Jayeeta Mukherjee (Nee Bhattacherjee) & Ors.[iii] passed an injunction order and thereby restrained 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 or from withdrawing any money lying in the fixed deposit or savings bank account in the name of the defendant alone. MEANING OF SIPHONING AS PER RBI "Siphoning off funds should be construed to occur if any funds borrowed from banks / FIs are utilized for purposes unrelated 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 a particular instance amounts to siphoning of funds would have to be a judgment of the lenders based on objective facts and circumstances of the case. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorized as wilful must be intentional, deliberate and calculated."[iv] DIVERSION OF FUNDS The Supreme Court in the recent case of Bikram Chatterji v. U.O.I[v] has termed diversion of funds as a serious fraud. Diversion of funds implies utilization of funds for a purpose for which it was originally not sanctioned. Following occurrences construe diversion of funds as per RBI: When the unit employs short term working capital funds for long term goals, which is not in conformity with the sanctioned terms.When the unit deploys borrowed funds for purposes antithetical to the sanctioned ones.When the unit assigns borrowed funds to its subsidiaries or group companies or other corporates.When the unit routes...

All You Want To Know About Law On Willful Defaulters

Siddhi Kochar & Aditya Singh

Tags