The Bombay High Court now requires banks to follow strict rules when labeling borrowers as wilful defaulters under the RBI’s guidelines. They must be transparent and fair, providing all necessary documents to accused parties, as shown in the IL&FS Financial Services Ltd case.
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MUMBAI: Recently, The Bombay High Court has set a new benchmark for financial institutions aiming to classify borrowers as wilful defaulters under the Reserve Bank of India’s (RBI) directives. The detailed judgment by Justice BP Colabawalla and Somasekhar Sundaresan mandates that banks must adhere to a stringent process, ensuring that all actions are well-documented, transparent, and justified, particularly when invoking the RBI’s Master Circular on wilful defaulters.
Milind Patel, the erstwhile managing director of IL&FS Financial Services Ltd (IFIN), who contested the Union Bank of India’s decision to label IFIN and its promoters as wilful defaulters. This legal battle brought to light the essential need for banks to furnish all pertinent materials to the accused parties, ensuring a balanced and fair opportunity to contest the allegations, thereby upholding the principles of natural justice.
The justices stated:
“The 2015 Master Circular conferred upon financial institutions the ability to impose severe civil consequences on borrowers.”
They further emphasized that the RBI’s intention behind these measures was to ensure transparency, which entails
“Providing evidence supporting the invocation of the circular against the borrower”
“sharing information on the composition of identification and review committees that pass orders declaring that an entity is a wilful defaulter,”and
“Ensuring committees provide clear and reasoned orders.”
The High Court clarified the necessity for borrowers to have access to the materials based on which the RBI circular is invoked against them. This principle was underscored by referring to the Supreme Court’s judgment in the T Takano v. SEBI (2022) case, where it was established that
“Accessing such records constitutes a crucial aspect of adhering to the principles of natural justice.”
– the High Court noted.
In the specific instance of Milind Patel and IFIN, the court scrutinized the procedural integrity of the Union Bank of India’s actions. Patel was served with a show cause notice which he claimed did not detail his individual involvement in the default, leading to a significant legal contention. Despite his repeated requests, Patel highlighted that he was not provided with the requisite documents to adequately respond to the allegations.
The court observed that the final order confirming Patel’s identification as a wilful defaulter was “Essentially, it replicates the contents of the show cause notice “lacking in substantive analysis or evidence.
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This, according to the court, was a deviation from the principles of law and justice, as it stated:
“Fair and transparent symmetrical access to information necessitates providing access not only to incriminating material but also to exculpatory material, as all such information is relevant for discerning the truth.”
Following the court’s intervention, the Union Bank agreed to retract its previous orders against Patel, with the court allowing the bank to initiate fresh proceedings, ensuring this time that Patel was granted full access to all relevant documents.
This landmark judgment not only provides a reprieve to Milind Patel but also serves as a crucial precedent for the banking sector at large. It underscores the imperative for financial institutions to adhere to the highest standards of fairness and transparency, especially when dealing with severe allegations such as wilful default.
Advocates Rohaan Cama, Pheroze F Mehta (representing Patel), Advocate Jamshed Ansari (representing the Union Bank of India), and Advocates Prasad Shenoy and Vijay Salokhe (representing the RBI).
