Bombay high court lifts restrictions for 2 directors of a Co; holds 5-year-loan bar unjustified after compromise settlement

The Bombay High Court ruled that continuing penalties for five years against individuals who reach a compromise settlement with lenders after being labeled wilful defaulters is unjustified, unless fraud or fund siphoning is proven. The court granted relief to Ravi and Nakul Arya, directors of International Mineral Trading Private Limited, removing their names from the list of wilful defaulters and allowing them to access new loans. The judges noted that the degree of default varies and that a compromise settlement should allow removal from the defaulter list.

The case stemmed from a loan of Rs 115 crore from Bank of Baroda and Rs 90 crore from Union Bank taken in 2008. While Union Bank initially listed the company as a wilful defaulter in 2017, Bank of Baroda later removed them after a successful settlement. The court distinguished between those resolving Non-Performing Assets (NPAs) through compromise and those continuing to default.

The RBI’s master circular on wilful defaulters aims to caution financial institutions, but recent 2024 circulars have diluted the restrictions, allowing credit facilities within one year of removal from the defaulter list, though a five-year bar remains for new ventures. The court emphasized that borrowers unable to repay due to unavoidable circumstances should not face a five-year debarment, and specifically ruled that the Aryas should not be restricted from accessing additional credit facilities given the compromise settlement.

(Source：The Times Of India)