Wilful Defaulter Declarations: Banks to Share Reasoned Order

In a judgment dated March 4, 2024, the Bombay High Court held that banks and financial institutions seeking to invoke the Reserve Bank of India’s (RBI) Master Circular on wilful defaulters were required to share reasoned orders.[1]

With respect to facilities sanctioned by the respondent bank, a show cause notice was served upon the concerned company and the petitioner, in his capacity as a whole time director, in the year 2022. In response, the petitioner requested a copy of the material based on which the said show cause notice was issued, and also maintained that his role had changed after which he wasn’t overseeing the lending business. The respondent bank, however, did not respond to this request. Subsequent to a personal hearing, the petitioner again asked for the relevant material.

Aggrieved by the final order declaring him as a wilful defaulter, the petitioner filed the present writ petition before the Bombay High Court. It was averred that the draft order of the identification committee was not received by him, and his submissions were not considered in the final order passed by the review committee.

In its decision, the Court highlighted that in view of banks’ lack of quasi-judicial expertise and the repercussions of wilful defaulter declaration, RBI’s Master Circular envisaged a transparent mechanism which necessitated that the noticee had to be apprised of relevant facts. Further, the Court observed that compliance with principles of natural justice entailed providing access to all relevant material. With this, it was held that the final order passed in the instant case was not a reasoned order and resulted from non-compliance with the principles of natural justice.

Based on the suggestion of the Court, the respondent bank stated that the relevant material would be shared with the petitioner and the proceedings would be continued from the stage of the show cause notice. Considering this, the Court held that the identification committee had to deal with the fresh submissions that may be made by the petitioner on review of relevant material, after giving him a personal hearing.

[1] Milind Patel v. Union Bank of India and Ors. [WP No.3671 of 2023]


Date: March 27, 2024