Wilful Defaulters and its Consequences on the Borrowal Co. and the Banks

Lenders in tight spot over Winsome's default; banks want to shame company's director’s

MUMBAI: In the summer of 2013, Winsome Group, an almost forgotten name now, had rattled the Indian bullion and diamond markets after it defaulted with 14 banks. Low-profile and less flashy than Vijay Mallya, two Winsome Group companies left a hole of Rs 6,800 crore in the books of local lenders — making the diamond house the country's second-largest wilful defaulter after Kingfisher Airlines.

Now with the Central Bureau of Investigation snapping at banks' heels, desperate lenders are threatening to name and shame some of the former and present independent directors of Winsome Diamonds & Jewellery and another group company, Forever, to salvage their money.

In a rare and harsh move, Punjab National Bank, with exposure of Rs 1,800 crore — the highest in the consortium — has shot off letters to three persons asking them to help in arranging repayment, failing which the bank would declare them 'wilful defaulters' and even publish their names and photographs in newspapers. They are Harimohan Namdev, a practising company secretary; Madan Khurjekar, a former banker; and Urvashi Saxena, who was a senior official with the income-tax department. Among them, Namdev is still on the board of Winsome.
All of them said that in their replies to the PNB chairman as well as to the manager of the bank's Cuffe Parade branch in Mumbai, it has been pointed out that as per Reserve Bank of India rules independent directors cannot be declared 'wilful defaulters' for a company's failure to repay loans.

With PSBs such as SBI and PNB having a harrowing time recovering Rs 9,000-crore dues from Kingfisher Airlines and its promoter Vijay Mallya, the term 'wilful defaulter' has become the darling of prime time news. Last year, the government had said wilful defaulters owe Rs 64,300 crore to state-owned banks.

Mechanism for Wilful Defaulter as per RBI is as follows:

Quote “Mechanism for identification of Wilful Defaulters:

The mechanism referred to in paragraph 2.5 above should generally include the following:

(a) The evidence of wilful default on the part of the borrowing company and its promoter / whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM / DGM.

(b) If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter / whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter / whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.

(c) The Order of the Committee should be reviewed by another Committee headed by the Chairman / Chairman & Managing Director or the Managing Director & Chief Executive Officer / CEOs and consisting, in addition, to two independent directors / non-executive directors of the bank and the Order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an Order declaring a borrower as a wilful defaulter, then the Review Committee need not be set up to review such decisions.

(d) As regard a non-promoter / non-whole time director, it should be kept in mind that Section 2(60) of the Companies Act, 2013 defines an officer who is in default to mean only the following categories of directors:

(i) whole-time director

(ii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iii) every director, in respect of a contravention of any of the provisions of Companies Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings and who has not objected to the same, or where such contravention had taken place with his consent or connivance.

Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that:

I. he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the minutes of meeting of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes; or,

II. the wilful default had taken place with his consent or connivance.

The above exception will however not apply to a promoter director even if not a whole time director.

(iv) As a one-time measure, Banks / FIs, while reporting details of wilful defaulters to the Credit Information Companies may thus remove the names of non-whole time directors (nominee directors / independent directors) in respect of whom they already do not have information about their complicity in the default / wilful default of the borrowing company. However, the names of promoter directors, even if not whole time directors, on the board of the wilful defaulting companies cannot be removed from the existing list of wilful defaulters.

(e) A similar process as detailed in sub-paragraphs (a) to (c) above should be followed when identifying a non-promoter / non-whole time director as a wilful defaulter.” UNQUOTE

1. Who is a wilful defaulter?

A company can be classified as wilful defaulter when it fails to repay loans even when it has the capacity to honour it, or when it diverts funds for purposes other than for which the loan was disbursed, or when assets which were used as guarantees are sold off without the prior knowledge of the bank.

2. How are they identified?

The Reserve Bank of India (RBI) advocates a two-committee screening process for identifying a wilful defaulter. The first committee would examine if the borrower can be classified as a wilful defaulter. If so, a show cause notice is issued to the borrower. After giving a hearing the borrower, the committee would justify their reasons. The second com mittee, headed by an MD or a chairperson of the bank, would look into the first committee's findings and issue the final order.

The RBI rule says that only the whole time directors and directors who had been party to the diversion of funds can be held liable for the default.

3. What is the main purpose of identifying a wilful defaulter?

The aim is to disseminate credit information regarding a wilful defaulter, so that he is unable to secure credit from any other financial institution or bank. Further once identified, a wilful defaulter's name along with all his address details and photograph is usually published in newspapers and websites so that they can be publicly shamed.

4. How does it affect the borrower's business?

If an individual is termed 'wilful defaulter', not only his company's assets are frozen but his access to funding gets restricted. Further if that person is present on the board of any other company , that company also gets prohibited from getting loans from banks or raising funds through equities.

5. What actions can a bank take in case of a wilful default?

In case of diversion of funds with malafide intentions, banks can initiate criminal proceedings against the wilful defaulter. Banks can also take other legal actions such as selling of their assets secured to them.

6. What banks can do to prevent?

Banks should monitor the end use of the funds and initiate prompt action in case of misuse of funds. Further, banks are required to inform Equifax, Experian, CRIF High Mark and CIBIL about all cases identified as wilful defaulters. They need to disseminate the information on their websites. It should also submit the quarterly list of wilful defaulters where suits have not been filed to the RBI.

Source : ET, RBI - RBI Master Circular on Wilful Defaulters: https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=9907

Read more at:
http://economictimes.indiatimes.com/articleshow/51418001.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst & http://economictimes.indiatimes.com/markets/stocks/news/et-in-the-classroom-damages-of-a-wilful-defaulter-stamp/articleshow/51404477.cms      .