Wilful defaulter declarations require strict RBI procedure, disclosure of reasons, and a reasoned review before they can stand.

A wilful defaulter declaration under the RBI framework must follow the prescribed committee process: the Identification Committee must examine the material, issue the show cause notice, record reasons, and make its order known to the borrower, and the Review Committee must pass a reasoned decision. Where the notice is issued by the bank instead of the committee, the identifying order is not supplied, and the review confirmation gives no reasons, the borrower is denied a meaningful opportunity of hearing and the declaration is procedurally invalid. Consequential reporting to RBI/CIBIL based on such a defective declaration also cannot stand, and the matter must be reconsidered afresh in accordance with the circular.

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Issues: (i) Whether the declaration of the petitioners as wilful defaulters was vitiated for non-compliance with the RBI Master Circular procedure and principles of natural justice, including failure to issue the show cause notice through the Identification Committee, failure to supply the Identification Committee's order, and absence of a reasoned Review Committee order; (ii) Whether the impugned declaration and consequential reporting to RBI/CIBIL were liable to be quashed and the matter remanded for fresh consideration.

Issue (i): Whether the declaration of the petitioners as wilful defaulters was vitiated for non-compliance with the RBI Master Circular procedure and principles of natural justice, including failure to issue the show cause notice through the Identification Committee, failure to supply the Identification Committee's order, and absence of a reasoned Review Committee order.

Analysis: The governing circular required the Identification Committee to examine the material, issue a show cause notice, consider the borrower's response, record reasons, and then have the order reviewed by a separate Review Committee. The order of the Identification Committee was required to be made known to the borrower so that the findings and reasons could be effectively contested. The Review Committee was also expected to pass a reasoned decision. On the facts, the notice was issued by the bank, the Identification Committee's order was not furnished, and the Review Committee's confirmation did not disclose reasons. This amounted to denial of a meaningful opportunity of hearing and breach of the mandatory procedure contemplated by the circular.

Conclusion: The declaration of the petitioners as wilful defaulters was procedurally invalid and unsustainable.

Issue (ii): Whether the impugned declaration and consequential reporting to RBI/CIBIL were liable to be quashed and the matter remanded for fresh consideration.

Analysis: Since the declaration had been made in breach of the prescribed procedure and natural justice, the consequential reporting based on that declaration could not stand. However, the underlying question of wilful default was not finally foreclosed on merits, and the matter required reconsideration by following the prescribed steps afresh.

Conclusion: The impugned action and consequential reporting were quashed and the matter was remanded to the Identification Committee for fresh proceedings in accordance with the circular.

Final Conclusion: The petitioners obtained relief against the existing wilful defaulter declaration, but the bank was permitted to restart the process from the stage of fresh notice and consideration under the prescribed procedure.

Ratio Decidendi: Where a wilful defaulter declaration under the RBI framework is made without the required show cause procedure, disclosure of the identifying order, and a reasoned review, the action violates natural justice and cannot be sustained.

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