Pending Arbitration Doesn't Bar Wilful Defaulter Proceedings Against Guarantors: Calcutta High Court

The Calcutta High Court has held that the pendency of arbitration proceedings does not prevent a non-banking financial company (NBFC) from initiating wilful defaulter proceedings against a guarantor under the RBI Master Circular.

The court, however, upheld the quashing of a show cause notice issued by SREI Equipment Finance Ltd after finding that it was vague and lacked material particulars.

A division bench of Justice Shampa Sarkar and Justice Ajay Kumar Gupta partly allowed SREI Equipment Finance Ltd's appeal against a single judge's order.

The bench set aside the Single Judge's finding that the matter was not one of wilful default, holding that such a conclusion was premature at the stage of a challenge to a show cause notice.

It nevertheless upheld the quashing of the January 15, 2026 show cause notice and the Identification Committee's decision dated December 18, 2025 for failing to disclose adequate particulars.

"Such reason could been a defence and could have been raised at the appropriate stage and in the reply. Secondly, we also hold that pendency of the arbitration proceeding could not debar the issuance of a show cause notice."

The dispute arose after SREI initiated wilful defaulter proceedings against BSCPL Infrastructure Ltd and its guarantor following defaults by BSC C&C JV, to which it had extended credit facilities. SREI relied on notices invoking the guarantees and a CIBIL report to issue the impugned show cause notice.

SREI contended that the guarantors had sufficient means to honor their obligations but deliberately failed to do so after the guarantees were invoked. BSCPL Infrastructure and the guarantor challenged the notice, arguing that it failed to disclose the factual basis for the proposed action and that disputes relating to the debt were already pending before an arbitral tribunal.

Rejecting that contention, the bench held that an NBFC is not required to exhaust remedies against the principal borrower before proceeding against a guarantor. It observed that once a guarantor refuses to honour an invoked guarantee, the lender may consider initiating wilful defaulter proceedings in accordance with the RBI Master Circular.

"We are of the view that, the NBFC could proceed against the guarantor, irrespective of whether the NBFC had tried to exhaust other remedies available in law. The moment the guarantor refused to comply with the demand, the NBFC could consider classification of such guarantor as a wilful defaulter.", the court held.

The court, however, found that the show cause notice did not meet the requirements of the RBI Master Circular. Although SREI relied on a CIBIL report running to nearly 100 pages, it did not identify the portions relevant to BSCPL Infrastructure or explain how they disclosed acts of wilful default. The bench held that this denied the noticees a meaningful opportunity to respond.

The court also observed that the Identification Committee was required to examine the material before it and specify the acts constituting wilful default with the relevant facts and supporting material. Merely annexing documents without identifying the allegations was insufficient.

The bench held that vague and omnibus allegations violated the principles of natural justice because they prevented the noticees from effectively answering the case against them.

"Under such circumstances, we uphold the decision of His Lordship to the extent of quashing the show cause notice and the extract of meeting of the Identification Committee which were part of the Annexure to the show cause notice, on the ground of vagueness and lacking in material particulars. We do not agree with His Lordship that, the case was not one of wilful default. Such finding is premature and beyond the powers of the writ court, at the stage of a challenge to the show cause notice. We set aside the finding.", the court ruled.

Accordingly, the bench upheld the quashing of the impugned show cause notice and the Identification Committee's decision. It granted the committee liberty to reconsider the material on record and issue a fresh show cause notice if the requirements were met.

For Appellant: Senior Advocate Ranjan Bachawat, Advocates Paritosh Sinha, Shounak Mukhopadhyay, Saubhik Chowdhury, Sayantani Banerjee, Advocates

For Respondent: Suman Kumar Dutt, Rajarshi Dutta, S. Chaudhury, A.P. Barwalla, Advocates