Court holds that pendency of arbitration and earlier IBC proceedings do not bar lender from initiating wilful defaulter action; borrower granted two more weeks to reply to notice.
The Calcutta High Court has dismissed a writ petition filed by Kitply Industries Limited and its connected petitioners challenging a show cause notice issued by SREI Equipment Finance Limited (SEFL) proposing to declare them wilful defaulters.
Justice Krishna Rao held that the mere pendency of arbitration proceedings over the underlying loan transactions does not prevent a lender from initiating action under the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024. The Court found the petition premature, observing that the petitioners should first file their reply before the competent committee and then pursue the statutory remedy if any adverse decision is taken.
The petitioners had argued that SEFL’s show cause notice dated 17 June 2026 was issued with an oblique motive to overreach the arbitration proceedings. They contended that the arbitral dispute involved the genuineness and legality of the loan transactions, and that the lender could not proceed with wilful defaulter action while those issues remained sub judice. They also relied on the dismissal of SEFL’s Section 7 insolvency petition by the NCLT, Guwahati Bench, which had noted that the disputes were already pending before the arbitrator.
However, the High Court noted that the wilful defaulter proceedings arise independently under RBI’s Master Directions and are not barred merely because arbitration is pending. The Court also referred to the arbitrator’s own observations that the wilful defaulter proceedings were substantially independent of the arbitration and that the arbitral tribunal did not have jurisdiction to stay the show cause notice.
The Court further observed that the notice specifically alleged that the petitioners had disposed of movable and immovable assets provided as security for the credit facility without the lender’s approval, which falls within paragraph 3(t)(i)(D) of the RBI Directions. Since the notice disclosed the properties and documentary basis, and the petitioners did not claim that relevant documents were withheld, the Court found no legal infirmity at the stage of issuance of notice.
Relying on precedent, including Kaustuv Ray v. IDBI Bank and Trade Tax Officer, Saharanpur v. Royal Trading Co., the Court reiterated that writ courts should be slow to interfere at the stage of a mere show cause notice. Such notices reflect only a prima facie view, and the proper course is for the noticee to respond and allow the authority to decide the matter in accordance with law.
While refusing to interfere with the notice, the Court extended the time to file a reply by two weeks from the date of the judgment. The writ petition was accordingly dismissed.
Bottom Line :
Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024 - Challenge to show cause notice for declaring borrower as wilful defaulter - Mere pendency of arbitration concerning validity/genuineness of underlying loan transactions does not bar lender from initiating wilful defaulter proceedings under RBI Directions - Writ petition against show cause notice held premature - Borrower must submit reply before the competent committee and pursue statutory/remedial process.
Statutory provision(s): Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024 paras 3(t), 3(u), 3(t)(i)(D), Constitution of India Article 226, Arbitration and Conciliation Act, 1996 Sections 9, 11, 17, Insolvency and Bankruptcy Code, 2016 Section 7
Kitply Industries Limited v. Reserve Bank of India, (Calcutta) : Law Finder Doc id # 2983992
