Banks should pass reasoned orders while declaring entity/person wilful defaulter: Bombay High Court

In February 2023, the bank’s review committee passed an order declaring the firm and its promoters as wilful defaulters.The high court said once a final order of declaring an entity or firm as wilful defaulter is passed, then multiple grave and serious penal consequences follow.”In a nutshell, the wilful defaulters are ostracized from access to the financial sector. No additional facilities can be granted to such a person by any bank or financial institution,” the HC said.The circular itself explicitly contains a note of caution that it would be imperative on the part of banks and financial institutions to put in place a transparent mechanism for the entire process so that penal provisions are not misused, it said.The HC said the RBI in its circular has also mandated that evidence of wilful default must be examined by the bank.”The discretion conferred on these banking entities to inflict penal consequences was meant to be kept to the bare minimum, which only underlines that the exercise of discretion has to be reasonable and not arbitrary,” the bench said.In any proceedings that can inflict serious civil consequences on a citizen, the person or entity should be provided with detailed and proper reasons, it said.The objective of initiating proceedings against someone by issuance of a show cause notice was not to somehow find that person or entity guilty of wilful default but the objective is to arrive at the truth, the HC said.In the present case, the final order was a near-verbatim reproduction of the show cause notice and was not a reasoned order, it said.Pursuant to a suggestion from the court, the Union bank submitted that it would withdraw the order and continue the proceedings from the stage of the show cause notice.The bank said it would provide the petitioner full access to all relevant documents and material.



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