The Reserve Bank of India instituted the regulations on wilful defaulters which came into force from 01.04.1999.

Who is a Wilful Defaulter?
The RBI has defined ‘wilful default’ as ‘unit.’[1] As per the RBI guidelines, a ‘wilful default’ would occur if any of the following events occur:

1. Capacity to pay: The unit evaded its financial obligations despite having the capacity to honor the obligation.
2. Diversion of funds: The unit evaded its financial obligations & has diverted the funds for purposes other than what was sanctioned for.
3. Siphoning of funds: The unit evaded its financial obligations & has siphoned off the funds for any illegal purpose and the availability of the funds with the unit is uncertain.
4. Security: The unit evaded its financial obligations & has sold the security granted for procuring a loan devoid of the knowledge of the bank.

The amount of wilful default must be of at least Rs. 25 lakhs as per the Central Vigilance Commission. The wilful default must be based on the track record of the borrower and not on the secluded transaction. The wilful default must be premeditated, purposeful, and assessed.

To avert the bad debts in the market, the banks are proclaiming the evading promoters and entities as wilful defaulters. Under RBI guidelines, restriction on wilful defaulters was limited to financial markets. After the Vijay Mallya scandal, as a preventive measure, SEBI in its 5 regulations has levied constraints on wilful defaulter from the capital markets which came into force from 25.05.2016 to curb the loophole. SEBI has widened the scope of ‘wilful defaulter.’

Now even raising funds by public issue of equity, debt, and preference shares are also restricted & the extension has included promoter or director as a wilful defaulter of a company. SEBI has not included a listed company. However, it keeps on levying arduous disclosures to protect the interest of the investors.
Restrictions on Wilful Defaulter

A wilful defaulter is restricted from the following:

1. Barred from participating in the capital market.
2. Barred from availing of banking facilities for 5 years to start a new venture.
3. Lenders are free to initiate the process of recovery with full ferocity and ay initiate criminal proceedings.
4. Lending institutions do not allow any wilful defaulter to become a board member of any company.
5. Barred from making an open offer.

In the case of Ionic Metallils vs. Union of India, it was held that Master circular made by RBI is violative of A.19(1)(g) of the Constitution and is ultra vires as it applied to all the directors of the company and smashes the concept of Separate Legal Entity. To which, the RBI modified its stance and sliced out non-whole-time directors from the purview of ‘Wilful Defaulters.’[2]

Statutes that deal with Wilful Defaulters
Following are the statutes that deal with wilful defaulters:

1. Insolvency and Bankruptcy Code, 2016.
2. The SARFAESI Act, 2002.
3. The Companies Act, 2013. (S. 447 and 448)
4. The Indian Penal Code, 1860. (S. 415 and 403)
5. The Fugitive Economic Offenders Act, 2018.
6. The Passport Act, 1967. (S. 10) and numerous additional precautions.

End-Notes:

1. Unit includes individual, juristic person, and business entities.
2. C/SCA/645/2014.