Pending Arbitration Does Not Bar Wilful Defaulter Proceedings Against Borrower: Calcutta High Court

On 23 September, the Calcutta High Court held that the pendency of arbitration proceedings cannot prevent a lender from issuing a show-cause notice to declare a borrower a wilful defaulter.

Justice Krishna Rao dismissed Kitply Industries' writ petition challenging SREI Equipment Finance Ltd.'s (SEFL) show-cause notice alleging that it had disposed of assets securing its credit facility without the lender's approval. The Bench observed:

“Pendency of the arbitration proceeding could not debar the issuance of show cause notice"

The dispute arose from two loan agreements dated 24 January 2019 between Kitply, SEFL and its parent company, SREI Infrastructure Finance Ltd. In May 2024, SEFL initiated insolvency proceedings before the National Company Law Tribunal, Guwahati Bench, alleging a default of Rs. 333.58 crore.

SEFL also approached the High Court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking protection over Kitply's assets. The Court granted an injunction over certain immovable properties and equity shares and subsequently appointed a sole arbitrator under Section 11 to adjudicate the dispute.

On 2 June 2026, the NCLT dismissed SEFL's insolvency petition, noting that disputes concerning the genuineness and legality of the underlying transactions were already before the arbitrator. On 17 June 2026, SEFL issued the show-cause notice alleging wrongful sale or non-accountability of 256 hectares of land allegedly mortgaged with it. The notice called upon Kitply and others to explain why they should not be declared wilful defaulters.

Kitply challenged the notice before the sole arbitrator under Section 17 of the Arbitration Act and sought a stay on further proceedings. The arbitrator declined to stay the notice, while clarifying that whether Kitply was actually a defaulter under the alleged loan would remain open for determination in the arbitration proceedings.

Subsequently, Kitply approached the High Court, arguing that SEFL had issued the notice with an “oblique motive” to overreach the arbitration proceedings, particularly when the validity and genuineness of the sums allegedly disbursed were themselves under adjudication. It also relied on the NCLT's dismissal of SEFL's insolvency proceedings.

SEFL argued that the writ petition was premature and that Kitply should first respond to the show-cause notice, after which the matter would be considered under the prescribed mechanism. It further relied on the Reserve Bank of India's (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, which provide that a borrower may be treated as having committed wilful default if it disposes of movable or immovable assets securing a credit facility without the lender's approval.

The High Court found that SEFL's allegation that Kitply had disposed of assets securing the credit facility without its approval was covered by the RBI Directions. It also noted that SEFL had supplied Kitply with the description of the assets and supporting documents. Kitply had not alleged that the material forming the basis of the notice had been withheld.

Further, the Bench noted that Kitply had already sought interim protection against the notice before the arbitrator but had failed to obtain it. Relying on an earlier Division Bench ruling, it held that interference at the show-cause notice stage would be premature, as the notice represented only a prima facie view and the affected party had an opportunity to respond before a final determination.

Accordingly, the High Court dismissed Kitply's writ petition and declined to interfere with SEFL's 17 June 2026 show-cause notice. It, however, granted Kitply two weeks from 23 September 2026 to submit its reply.

Appearances for petitioners (Kitply Industries Limited & Ors.): Senior Advocate Suman Kumar Dutt; Advocates Sumanta Biswas, Kanishk Kajriwal and Sk. Saad Islam.

Appearances for respondent (SREI Equipment Finance Ltd.): Senior Advocate Ranjan Bachawat; Advocates Suddhasatva Banerjee, Prithwish Roy Choudhury, Debomita Sadhu and Bhavesh Garodia.