Wilful defaulter declaration must rest on proven diversion of borrowed funds and a reasoned, evidence-based review.

A borrower may be declared a wilful defaulter only where diversion or siphoning of borrowed funds is established on objective consideration of all relevant material and a reasoned assessment of the borrower's reply. The Delhi High Court held that the declaration could not stand because the alleged investments in subsidiaries were shown to have been made from internal accruals, the lending banks were already aware of them through audited statements and restructuring material, and the source of funds was not proved to be borrowed money. The court also noted that the proceedings were initiated after an inordinate delay and that the relevant defence and material were not properly considered.

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Issues: Whether the petitioner's declaration as a wilful defaulter could be sustained when the alleged investments in subsidiaries were found to have been made from internal accruals, were already known to the lending banks, the source of funds was not established as borrowed funds, and the proceedings were initiated after an inordinate delay.

Analysis: The Master Circular on wilful defaulters applies only where borrowed funds are diverted or siphoned off, and the identification process must be based on objective facts, consideration of the borrower's reply, and a reasoned decision. The record showed that the lending banks had knowledge of the investments from the outset through audited financial statements, the Flash Report, the lender meetings, and the Final Restructuring Scheme, which itself recorded that the investments were funded from cash surpluses and internal accruals. The forensic audit did not verify the source of those investments, and the show-cause notice was issued nearly eight years after the petitioner had exited the company. The identification and review committees did not adequately address the petitioner's core defence or the relevant pre-existing material, and the finding of diversion or siphoning was unsupported by the scheme's jurisdictional requirements.

Conclusion: The declaration of wilful default was unsustainable in law and was quashed.

Final Conclusion: The impugned order could not stand because the essential ingredients of wilful default under the RBI framework were not established and the decision-making process was vitiated by delay and non-consideration of relevant material.

Ratio Decidendi: A borrower can be declared a wilful defaulter only when diversion or siphoning of borrowed funds is established on objective consideration of all relevant material and a reasoned assessment of the borrower's reply; a decision rendered without such basis is liable to be set aside.

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