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April 29, 2024

FinMin Reviewing High Court Order on PSBs’ Authority to Issue Look Out Circulars for Wilful Defaulters

The Finance Ministry is currently scrutinizing a recent Bombay High Court order that restricts public sector banks (PSBs) from seeking the issuance of look out circulars (LOCs) against wilful defaulters, sources revealed.

The High Court, in its ruling, invalidated the powers granted by the Union government to PSBs to act against wilful defaulters, deeming it arbitrary and violative of individuals’ fundamental rights. The division bench of Justice Gautam Patel and Justice Madhav Jamdar declared unconstitutional the clause of an office memorandum empowering PSB officials to request LOCs against defaulting borrowers or guarantors.

Former Financial Services Secretary D K Mittal weighed in on the court’s decision, stating that it’s improper for banks to pursue LOCs against defaulters without thorough investigation, echoing the High Court’s concerns about arbitrariness. He highlighted that investigative agencies like the Central Bureau of Investigation (CBI) typically issue LOCs only after proper scrutiny.

Mittal emphasized that default by a borrower can occur due to various reasons, including business failure or adverse economic conditions, and only a few are wilful defaulters. He criticized banks for hastily labeling borrowers as wilful defaulters, which adversely affects their future business prospects, often leading to bankruptcy and reduced values during asset sale.

In light of these issues, the recent recommendation by an expert committee for a voluntary mediation framework under the Insolvency and Bankruptcy Code (IBC) is timely. The expert panel, appointed by the Insolvency and Bankruptcy Board of India (IBBI), proposed the introduction of voluntary mediation as a complementary mechanism for dispute resolution.

The proposed framework emphasizes independence and flexibility, aiming to incorporate implementation learning quickly. It suggests establishing a dedicated and specialized NCLT-annexed insolvency mediation cell with an independent secretariat to administer, oversee, and manage insolvency mediations under the Code.

This approach seeks to streamline the resolution process while maintaining the sanctity of existing timelines for various insolvency resolution processes. It aims to prevent hasty actions by banks and foster fair resolution mechanisms that consider the complexities of default situations.

In conclusion, the Finance Ministry’s review of the High Court order underscores the need for a balanced approach in dealing with wilful defaulters. Implementing effective dispute resolution mechanisms, such as voluntary mediation, can contribute to a more equitable and efficient resolution of default cases under the Insolvency and Bankruptcy Code.

Jhumpa Lahiri

Jhumpa Lahiri

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