How to identify a wilful defaulter?

[The identification of a ‘wilful defaulter’ is done on the basis of eventual conclusion that the default is intentional, deliberate and calculated. The process of categorizations of  the ‘wilful defaulter’ is required to be done thoughtfully on the basis of track record of the borrower/guarantor and not on the basis of an isolated transaction or incident. The article herein illustrates how the defaulter (borrower, promoters, directors and or guarantor) is identified as a wilful defaulter and consequences upon the borrower, being a declared as  willful defaulter]

When an entity (individual/juristic person or other business enterprise) defaults in discharging its liabilities or declines to fulfill payment commitments with the lenders (Banks/Financial Institutions) despite it has the sufficient repayment capacity, then such borrower entity is construed as wilful defaulter.   Further, an entity may be treated as wilful defaulter when the lender notices any of the following incidents;

(a).The finance received by the borrower for specific purposes is diverted and utilized those funds for other purposes.

(b).The finance made from the lender/s is utilized for the purposes un-related to operation of the borrower, and no funds available with the borrower in the form of other assets.

(c).The movable/immovable assets which are offered as security to the lender for the purpose of availing term loans are disposed-off by the borrower without the knowledge of the lender.

(d).Assets financed either not been purchased or been sold and proceeds have been misutilised by the borrower.

(e). the borrower misrepresented or produced false records or done fraudulent transactions with the bank/FIs to receive the finance.

How a guarantor becomes wilful defaulter?

When repayment is not forthcoming from the principal debtor for any reason, then the lender has the right to call upon the guarantor/surety to repay the money financed by him. The lender at his choice may invoke the guarantee and demand payment from the guarantor with or without exhausting the remedies against the borrower. The lender may also initiate legal proceedings against the guarantor/s, in case the guarantor fails to fulfill the commitments under the contract of guarantee. The guarantor may also be reckoned as willful defaulter if the guarantor fails to fulfill the demands made by the lender, for the payment of dues, despite having sufficient means to make payment of dues.

Upon invoking the letter of comfort and or the guarantee furnished by a group company which refuses to honour the demands made by the lender, then the other units within such group shall also be considered as wilful defaulters along with the defaulted company. However, this rule is applicable prospectively from July 1, 2014 and not for the guarantees furnished before that date.

Consequences of declaring an entity as willful defaulter:

According to various RBI circulars updated till January 07, 2015, no additional facilities should be granted by any bank/FI to the wilful defaulters appearing in the list published by the RBI along with their promoters and directors. However, non-promoter/non-whole time directors (nominee and independent directors) in the management of a company’s debt contract shall be excluded from the willful defaulters list in view of their limited role, except in the rarest circumstances.  The legal proceedings including criminal proceedings against wilful defaulters should be accelerated. In the loan agreement a covenant should be incorporated by the banks and FIs to the effect that the borrowing company should not induct in its board a person whose name is appearing in the defaulter’s list published by RBI. Further, if such a person is already in the board, the company shall take effective step to promptly remove such person from its board.

A statement from Market regulator SEBI on March 12, 2016 said that the wilful loan defaulters along with their promoters and directors are debarred from accessing stock and bond markets for raising funds. The new regulation also prohibits such defaulters taking position in the board of listed firms or taking over another listed company. SEBI communiqué said that the new regulation comes into force shortly as the same is being notified by it.