Bombay High Court Reads Down RBI 5-Year Ban On New Venture Funding For Wilful Defaulters After NPA Settlement

The Bombay High Court has held that the five-year embargo on availing institutional finance for floating new ventures under the RBI's wilful defaulter framework cannot continue once an NPA account is settled and the dues are fully paid.

Such a restriction, it said, would apply only where fraud, siphoning or diversion of funds, misrepresentation or falsification of accounts is established.

A division bench of Justices Bharati Dangre and R.N. Laddha read down the five-year embargo under Clause 2.5(a) of the RBI's July 1, 2015 Master Circular on Wilful Defaulters. 

The provision, the court noted, contains two consequences, denial of additional credit facilities and a bar on institutional finance for floating new ventures for a period of five years from the date of removal of the borrower's name from the list of wilful defaulters, and cannot be invoked mechanically after a successful settlement.

“We find merit in the said submission, as when the NonPerforming Account is settled, we find no justification in continuing with the penalty measures further for a period of five years, unless it is established that the defaulter is guilty of fraud or that he has siphoned off funds, as we find that a wilful default by a borrower, can occur when a borrower defaults in making payment/repayment obligation to the lender and any one or more of the features as set out in the definition of wilful defaulter occurs.”

The case arose from a petition by Ravi Arya and Nakul Arya, directors of International Mineral Trading Pvt Ltd, who questioned the continued application of these restrictions even after settling their dues with Bank of Baroda. The bank issued a “No Due Certificate” on April 3, 2021, confirming that nothing further remained payable.

Even so, the promoters remained exposed to a five-year bar on accessing institutional finance under the circular.

The company had taken credit facilities from Bank of Baroda starting in 2008. The account later slipped into NPA, prompting recovery action under the SARFAESI law and the process to classify the promoters as wilful defaulters.

Before the court, the focus shifted to what follows after a settlement. The RBI framework treats wilful defaulters as a category warranting strict consequences, including denial of fresh finance. The bench drew a distinction between cases involving deliberate wrongdoing and those where repayment failed for other reasons and was later resolved.

Recent RBI directions from 2024 and 2025 were examined in this context. These draw a line between a one-year restriction on additional credit facilities and a five-year bar on funding new ventures. The court noted that the framework itself recognises different levels of severity.

“In the recent circulars of 2024 and 2025, we have found distinction being made, as regards the bar on additional credit facility and fresh credit facility for floating new ventures, the former being not allowed for period of one year and the latter for period of five years. However, if for unavoidable circumstances, the borrower is unable to repay the loan, in our opinion, the axe should not fall upon him, debarring him for five years.”

Not every default, the court observed, carries the same weight. A borrower who clears dues under a compromise and is removed from the wilful defaulter list cannot be placed on par with one who diverts funds or engages in fraud.

The five-year embargo under Clause 2.5(a), it said, is tied to such aggravating elements and cannot be extended in their absence.

"The degree of default would vary in every case, as there may be a simple case where the borrower has the capacity to honor the obligations but still default or the borrower has diverted the funds and defaulted or he has siphoned the funds and defaulted or he has played a fraud and defaulted. We find that it is unreasonable to treat every such default on par, as once the defaulter had paid the compromise amount, is name is allowed to be deleted from the list of wilful defaulters, but for making him liable for the embargo in clause 2.5(a), it is necessary to establish siphoning/diversion of funds, misrepresentation, falsification of account and fraudulent transaction, and as clause 2.5(a) impose additional embargo of five years from the date of removal of the name of the borrower/company from the list of wilful defaulters with the presence of element of diversion of funds, misrepresentation, falsification of account, fraudulent transaction being established"

Applying this to the present case, the bench read down the embargo and held that the bar on availing additional credit facilities would not operate against the petitioners. It clarified that the separate restriction on institutional finance for new ventures would arise only in cases where elements such as fraud, diversion, or similar misconduct are established.