Wilful defaulter declarations require independent bank satisfaction; a forensic audit report alone cannot sustain the finding.

A borrower cannot be branded a wilful defaulter merely on a forensic audit report; the bank must independently apply the Master Circular and record objective satisfaction on intentional, deliberate diversion or siphoning of funds. The borrower's overall track record, including known lease arrangements, subsidiary investments and advances to a group entity, must be assessed rather than isolated transactions. A forensic report may support the enquiry, but it cannot be the sole basis for the declaration. Where the bank merely repeats the report's observations without independent assessment, the wilful defaulter declaration is unsustainable and the resulting order is liable to be set aside.

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Issues: Whether the declaration of the petitioner as a wilful defaulter could be sustained when the bank relied substantially on the forensic audit report and did not independently record satisfaction, and whether the alleged lease transactions, investments in a subsidiary, and advances to a group entity constituted wilful default within the Master Circular.

Analysis: The Master Circular required the bank to determine wilful default on objective facts and circumstances, to treat the borrower's overall track record as relevant, and not to proceed on isolated incidents. The terms "wilful default", "diversion of funds" and "siphoning of funds" contemplated intentional, deliberate and calculated conduct. A forensic audit report could support the enquiry, but could not be the sole basis for branding a borrower a wilful defaulter. The record showed that the bank had long known of the lease arrangements, the subsidiary investments and the advances, had continued to sanction credit, had admitted the borrower to corporate debt restructuring, and had itself treated the transactions as part of the restructuring exercise. The forensic report did not itself record a conclusive finding of diversion of funds, and the bank's order merely repeated its observations without independent assessment.

Conclusion: The bank failed to comply with the mandatory safeguards in the Master Circular and the declaration of the petitioner as a wilful defaulter was unsustainable. The challenge succeeded and the impugned order was set aside.

Ratio Decidendi: A person cannot be declared a wilful defaulter merely on the basis of a forensic audit report; the bank must independently and objectively find intentional and calculated diversion or siphoning of borrowed funds, considering the borrower's overall track record and not isolated transactions.

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