Wilful defaulter classification requires independent bank satisfaction; forensic audit reports alone cannot sustain the declaration.

A bank may classify a borrower as a wilful defaulter only on its own objective satisfaction, formed from the borrower's overall track record and material showing intentional, deliberate default. A forensic audit report may corroborate suspicion but cannot replace the bank's independent determination under the Master Circular. Here, the show cause notice was issued primarily on the basis of the forensic report without the required recorded assessment, and the transactions relied on had earlier been disclosed and treated as strategic investments rather than diversion of funds. The confirmation of wilful defaulter status was therefore quashed.

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Issues: (i) whether the decision to issue the show cause notice and proceed against the petitioner as a wilful defaulter was made in accordance with the Master Circular, and (ii) whether the allegations of diversion of funds and related transactions constituted wilful default so as to justify confirmation of the petitioner's classification as a wilful defaulter.

Issue (i): whether the decision to issue the show cause notice and proceed against the petitioner as a wilful defaulter was made in accordance with the Master Circular.

Analysis: The scheme governing wilful default required the bank to independently assess whether default was intentional, deliberate and calculated, on objective facts and circumstances. The material relied upon by the bank showed that the show cause notice was issued primarily on the basis of the forensic audit report, without an independent recorded satisfaction drawn from the borrower's overall track record and the safeguards built into the scheme. A forensic audit report could corroborate, but could not substitute for, the bank's own objective determination.

Conclusion: The show cause action did not satisfy the requirements of the Master Circular.

Issue (ii): whether the allegations of diversion of funds and related transactions constituted wilful default so as to justify confirmation of the petitioner's classification as a wilful defaulter.

Analysis: The transactions relied upon by the bank had already been disclosed during restructuring, were known to the lender banks, and were treated at the time as strategic investments rather than diversion of funds. The borrower had been placed in the category corresponding to external stress, not diversion, and the later forensic report did not itself record a conclusive finding of diversion or siphoning. The scheme required assessment of the borrower's overall track record and prohibited reliance on isolated incidents alone. On that standard, the later reversal of position by the bank was unsustainable.

Conclusion: The allegations did not establish wilful default.

Final Conclusion: The impugned order confirming the petitioner as a wilful defaulter was quashed, and the writ petition succeeded.

Ratio Decidendi: A bank can classify a person as a wilful defaulter only on its own objective satisfaction, based on the borrower's overall track record and germane material showing intentional and deliberate default; a forensic audit report cannot be treated as the sole basis for such a declaration.

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