Prospective application of wilful defaulter rules limits liability of a personal guarantor under an earlier guarantee.

Assignment of a corporate debtor's admitted debt under an approved resolution plan did not extinguish the financial creditor's right to proceed against a personal guarantor where the plan expressly excluded personal and corporate guarantees from the assignment. Wilful defaulter proceedings under the RBI Master Circular were treated as operating in rem because the declaration affects credit availability across the banking system. Post-NPA defaults could still support a wilful defaulter case, as the Circular contains no bar on later defaulting conduct. Clause 2.6 applied prospectively only to guarantees executed on or after 9 September 2014, so it did not cover a guarantee executed earlier; the wilful defaulter declaration against the personal guarantor was therefore set aside.

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Issues: (i) Whether assignment of the corporate debtor's admitted debt under the approved resolution plan extinguished the bank's right to proceed against the personal guarantor. (ii) Whether wilful defaulter proceedings under the RBI Master Circular are proceedings in rem. (iii) Whether alleged defaults occurring after classification of the account as NPA could sustain a wilful defaulter declaration. (iv) Whether Clause 2.6 of the Master Circular applied to a guarantee executed before 9 September 2014.

Issue (i): Whether assignment of the corporate debtor's admitted debt under the approved resolution plan extinguished the bank's right to proceed against the personal guarantor.

Analysis: The resolution plan assigned the entire admitted debt of the corporate debtor to the assignee, but expressly excluded personal guarantees and corporate guarantees from the assignment. The plan also clarified that it did not deal with personal guarantors. On that construction, the corporate debtor's liability stood transferred to the assignee, but the guarantor was kept outside the assignment structure. The surviving right to recover from the guarantor remained with the financial creditors, including the bank, and the assignment did not shift that liability to the assignee.

Conclusion: The bank's right to proceed against the personal guarantor was not extinguished by the assignment; the petitioner did not succeed on this ground.

Issue (ii): Whether wilful defaulter proceedings under the RBI Master Circular are proceedings in rem.

Analysis: A declaration as wilful defaulter is intended to disseminate credit information and caution all banks and financial institutions against extending further finance. Its effect is not confined to the immediate lender and borrower but operates generally against the banking system. The character of the proceeding is therefore wider than a private dispute between two parties.

Conclusion: Wilful defaulter proceedings were held to operate in rem.

Issue (iii): Whether alleged defaults occurring after classification of the account as NPA could sustain a wilful defaulter declaration.

Analysis: The Master Circular contains no bar against defaulting conduct occurring after an account has been classified as NPA. NPA status is not immutable and may be regularised upon subsequent repayment. Correspondingly, continued non-payment after NPA classification can still fall within the definition of wilful default if the other ingredients are met.

Conclusion: Post-NPA conduct could, in principle, support a wilful defaulter proceeding.

Issue (iv): Whether Clause 2.6 of the Master Circular applied to a guarantee executed before 9 September 2014.

Analysis: Clause 2.6 made the treatment of non-group corporate and individual guarantors applicable only with effect from 9 September 2014. The guarantee in question was executed on 28 March 2014, which was before the cut-off date. The language of the clause did not permit retrospective application to earlier guarantees.

Conclusion: Clause 2.6 did not apply to the petitioner, and the declaration of the petitioner as a wilful defaulter as a personal guarantor was bad in law.

Final Conclusion: The impugned wilful defaulter declaration was set aside, and consequential steps were directed to be reversed.

Ratio Decidendi: A guarantor cannot be declared a wilful defaulter under a provision that applies prospectively only to guarantees executed on or after the specified cut-off date.

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