The concept of wilful default is central to India’s banking and insolvency framework. It safeguards public money and ensures accountability among borrowers, while also preventing misuse of financial restructuring mechanisms. Yet, its application is often controversial. The recent decision of the Delhi High Court in Punjab National Bank v. Nita Puri and Connected Matters (decided on 8 August 2025) has revisited and clarified a crucial question:
Can isolated incidents of default be treated as wilful default, or must the assessment be based on the borrower’s overall track record?
The Court held that isolated incidents cannot suffice; the borrower’s track record, intent, and objective circumstances must be examined before declaring someone a wilful defaulter. This article analyses the case, the legal framework, and the broader implications.
Legal Framework: RBI’s Master Circular on Wilful Defaulters
The Reserve Bank of India (RBI) issues the Master Circular on Wilful Defaulters, under Sections 21 and 35A of the Banking Regulation Act, 1949. Key provisions include:
Definition of Wilful Default (Clause 2.1.3)
A wilful default occurs when:
(a) the borrower defaults despite capacity to repay,
(b) borrowed funds are diverted for purposes other than sanctioned, or
(c) borrowed funds are siphoned off, leaving the unit without assets.
Diversion and Siphoning of Funds (Clause 2.2)
- Diversion includes using borrowed funds for unrelated purposes, routing them through unauthorised accounts, or transferring them to subsidiaries.
- Siphoning refers to using borrowed funds for unrelated purposes to the detriment of lenders.
Crucially
- The Circular requires that the track record of the borrower must be considered, and wilful default cannot be decided based on isolated transactions or incidents.
Thus, intent, deliberateness, and systemic misconduct are necessary elements.
Background of the Dispute
Moser Baer and its Subsidiaries
- Moser Baer India Ltd. (MBIL) and its subsidiaries—Moser Baer Solar Ltd. (MBSL) and Helios Photo Voltaic Ltd. (HPVL)—had availed large loans from banks including Bank of Baroda (BoB) and Punjab National Bank (PNB). With declining fortunes, MBIL and MBSL were admitted into Corporate Debt Restructuring (CDR) in 2012.
- The restructuring involved Flash Reports, Techno-Economic Viability (TEV) studies, and Final Restructuring Schemes (FRS) prepared by lenders themselves.
- MBIL and MBSL were placed in Class B of CDR, which applied to companies facing external factors and weak resources, but not to those guilty of diversion of funds (Class C).
The Forensic Audit and Show Cause Notices
- In 2019, forensic audits (FAR) by GSA Associates (for MBIL) and Haribhakti & Co. (for MBSL) flagged investments in subsidiaries.
- Relying almost solely on these FARs, BoB issued show cause notices in 2020 to Ratul Puri (then director of MBIL and MBSL) proposing to declare him a wilful defaulter.
- Identification Committees of BoB in 2022 declared him a wilful defaulter. Review Committees in 2023 upheld these findings.
The grounds mainly related to:
- Investments of over ₹1,500 crore in subsidiaries, and
- Write-offs of over ₹280 crore between 2013–2015.
Single Judge’s Findings
The learned Single Judge (in WP(C) 4181/2023 and WP(C) 4128/2023) quashed the banks’ orders, holding:
Borrowed v. Own Funds:
The investments were made from MBIL’s cash surpluses and FCCB proceeds, not from borrowed funds. Therefore, diversion/siphoning clauses of the RBI Circular were inapplicable.
Lenders’ Knowledge:
Investments were disclosed in audited financial statements and acknowledged in the FRS prepared by the lenders themselves, which stated that they were funded from cash surpluses.
Failure of Committees:
Identification and Review Committees mechanically relied on FARs without verifying the source of funds. FARs themselves admitted that they did not verify whether funds were borrowed.
Track Record Ignored:
Clause 2.1.3 mandates assessment of the borrower’s overall track record, not isolated events. Here, banks had approved restructuring, never alleged diversion during CDR, and continued support.
Civil Death Consequences:
Being branded a wilful defaulter is a “financial death knell”, affecting reputation, creditworthiness, and future business. Such drastic consequences require strict compliance with the Circular.
Accordingly, the declarations were set aside.
Division Bench Decision (Appeals by PNB & BoB)
On 8 August 2025, a Division Bench of the Delhi High Court (Justices C. Hari Shankar and Ajay Digpaul) dismissed the banks’ appeals, affirming the Single Judge.
Key Principles Laid Down
- Borrowed Funds are Essential: Diversion or siphoning under the RBI Circular applies only to borrowed funds. Since the FRS itself showed that MBIL’s investments were from internal accruals, no wilful default was made out.
- Isolated Incidents Insufficient: Clause 2.1.3 requires consideration of the borrower’s entire track record. A single act of write-off or investment loss cannot establish wilful default unless intentional and deliberate.
- Mens Rea (Guilty Intent) Required: Wilful default must be “intentional, deliberate and calculated”. Mere business failure, misjudgment, or adverse market conditions cannot amount to wilful default.
- Objective and Reasoned Decision-Making: Identification and Review Committees must apply independent judgment, not rely mechanically on FARs. Quasi-judicial application of the mind is necessary.
- Civil Death Doctrine: Given the severe consequences—loss of credit facilities, initiation of criminal proceedings, reputational harm—courts will scrutinise such declarations with the highest care.
- Isolated Incidents ≠ Wilful Default: The Court made it clear that a borrower cannot be labelled as a wilful defaulter just because of a single or isolated lapse. The overall repayment history and track record must be considered before reaching such a conclusion.
Key Highlights of the Decision
Justice C. Hari Shankar and Justice Ajay Digpaul stated:
We reiterate, most emphatically, the finding of the learned Single Judge that the categorization of a borrower as a “wilful defaulter” under the Master Circular cannot be a superficial exercise. In arriving at such a decision, the Master Circular envisages thorough scrutiny at four stages; first, in the drawing up of the FAR, secondly, at the stage of examination of the FAR and arriving at a conclusion as to whether the observations and findings therein justify a conclusion of wilful default, so as to require the borrower to show cause; thirdly, by the Identification Committee in arriving at the said conclusion after examining the response of the borrower to the show cause notice and, fourthly, by the Review Committee in examining the findings of the Identification Committee and the representation of the borrower thereagainst.
At each stage, the scrutiny has to be precise and thorough. Most importantly, it has to be borne in mind that the default has to be intentional, deliberate and calculated. Every default is not a “wilful default” within the meaning of the Master Circular. Clearly, the expression “wilful” embodies a far stricter connotation, and standard, than its normal etymological confines.
In arriving at a conclusion regarding wilful default, at each stage, the examination has to be based on an objective examination of the facts and circumstances of the case. Isolated, or stray, incidents of default cannot be regarded as wilful default, and the decision has also to factor in the track record of the borrower. Facts which were known at the time of approval of the CDR package, and which were not regarded as wilful default at that time, cannot suddenly be regarded as wilful default at a later stage, without any additional material justifying such a change in stance.
Broader Legal and Policy Implications
- Protection Against Overreach by Banks: Banks often act conservatively, branding borrowers as wilful defaulters to insulate themselves. This judgment curbs such practices by demanding objective, evidence-based decisions.
- Encouraging Genuine Entrepreneurship: Business involves risks. The ruling ensures that entrepreneurs are not penalised for commercial failure, provided there is no mala fide intent. This is critical for investment and innovation.
- Importance of Procedural Safeguards: The Court underscored that procedural lapses—failure to verify sources, reliance on untested FARs—vitiate the process. Natural justice and due process are paramount.
- Precedent for Future Cases: This judgment aligns with Supreme Court rulings such as:
SBI v. Jah Developers (2019), which stressed the drastic consequences of wilful default classification.
Om Prakash Chautala v. Kanwar Bhan (2014), recognising reputational damage as punishment.
Together, they form a body of law protecting borrowers from arbitrary action.
Critical Evaluation
While the judgment strengthens safeguards, some concerns remain:
- Bank Autonomy v. Judicial Oversight: Excessive judicial interference may make banks hesitant to classify genuine wilful defaulters, enabling some wrongdoers to escape.
- Forensic Audits: The Court criticised FARs for not verifying sources. This raises questions about the reliability of forensic audits commissioned during insolvency.
- Need for Legislative Clarity: The RBI Circular, though detailed, leaves interpretative gaps. Legislative codification of criteria for wilful default could bring greater certainty.
Conclusion
The Delhi High Court’s 2025 ruling is a landmark in borrower-lender jurisprudence. It firmly establishes that:
- Isolated incidents of default cannot constitute wilful default.
- The entire track record of the borrower must be considered.
- Wilful default requires intent, deliberateness, and use of borrowed funds for unauthorised purposes.
This decision balances the twin goals of protecting public money and preventing undue stigmatisation of genuine business failures. In doing so, it reinforces the principle that commercial risk is not criminality, and only deliberate misconduct deserves the harsh tag of wilful default.
Important Link
Law Library: Notes and Study Material for LLB, LLM, Judiciary, and Entrance Exams