The Calcutta High Court has delivered a significant clarification on the legal definition of 'wilful default' under the Reserve Bank of India's 2025 Directions, quashing a show cause notice that sought to declare a corporate borrower and its joint venture partner as wilful defaulters. The judgment underscores that mere non-payment, even in the context of insolvency and arbitration, cannot substitute the statutory requirements of fund diversion, asset disposal, or deliberate refusal to pay despite capacity.
Background & Facts
The Dispute
BSCPL Infrastructure Limited (Petitioner No.1) and C&C Constructions Limited (C&C) entered into a 50:50 joint venture on 17.09.2010 to execute infrastructure projects across India and abroad. Both parties were obligated to contribute equally to the venture. C&C defaulted on its financial obligations, failing to infuse its share of capital. This imbalance forced BSCPL to inject additional funds beyond its 50% share to sustain project execution and honor bank guarantees worth Rs. 350 crores issued for contract performance. C&C was admitted to Corporate Insolvency Resolution Process (CIRP) on 14.02.2019 by the National Company Law Tribunal, New Delhi, and subsequently ordered into liquidation on 07.10.2022. The Reserve Bank of India (RBI), as a creditor, filed a claim of Rs. 1,46,50,26,106/- before the Liquidator of C&C, of which Rs. 18,78,16,347/- was admitted.
Key Facts
- BSCPL is a corporate guarantor for loans extended to C&C
- The RBI invoked guarantees against BSCPL on two occasions: 06.02.2025 (demanding Rs. 240,47,44,165/-) and 13.08.2025 (demanding Rs. 181,66,49,616.09)
- The 06.02.2025 notice threatened initiation of proceedings under the Insolvency and Bankruptcy Code, 2016
- The 13.08.2025 notice treated the demand as an arbitration notice under Section 21 of the Arbitration and Conciliation Act, 1996
- On 25.02.2025, BSCPL requested a One Time Settlement (OTS) proposal for equipment funding, indicating financial capacity
- The Wilful Defaulter Identification Committee met on 18.12.2025 and decided to issue a show cause notice based on "misuse of funds" and "non-honouring of guarantee"
- The show cause notice dated 15.01.2026 was issued to BSCPL and its associate (Petitioner No.2)
- Four applications under Section 11 of the Arbitration Act were pending before the Calcutta High Court; Arbitrators were appointed on 26.02.2026
Procedural History
- 17.09.2010: Joint Venture Agreement executed between BSCPL and C&C
- 14.02.2019: C&C admitted to CIRP by NCLT, New Delhi
- 07.10.2022: NCLT ordered liquidation of C&C
- 06.02.2025: RBI issued first guarantee invocation notice to BSCPL
- 13.08.2025: RBI issued second guarantee invocation notice, treating it as arbitration notice
- 25.02.2025: BSCPL requested OTS proposal
- 18.12.2025: Wilful Defaulter Identification Committee met and resolved to issue show cause notice
- 15.01.2026: Show cause notice issued by RBI
- 26.02.2026: Coordinate Bench of Calcutta High Court appointed Arbitrators in four Section 11 applications
- 08.04.2026: Writ Petition decided by Justice Krishna Rao
The Parties' Positions
Petitioners (BSCPL & Anr.): Argued that the show cause notice is legally unsustainable because: (1) no allegation of fund siphoning or asset disposal exists; (2) the notice is vague and lacks specific transactions; (3) the Committee’s minutes do not reference any factual basis; (4) the pendency of arbitration and insolvency proceedings bars initiation of wilful defaulter proceedings; and (5) natural justice was violated by failure to provide documents supporting the opinion.
Respondents (RBI & Anr.): Contended that: (1) the petitioners admitted control over projects and acted as guarantors; (2) the invocation of guarantees constitutes wilful default under Clause (xviii)(B); (3) arbitration and insolvency proceedings do not bar wilful defaulter proceedings; and (4) the petitioners had sufficient means, as shown by their OTS request.
Relief Sought
The petitioners sought quashing of the show cause notice dated 15.01.2026 and the Minutes of the Wilful Defaulter Identification Committee dated 18.12.2025, on grounds of legal infirmity, lack of evidence, and violation of natural justice.
The Legal Issue
The central question was whether the non-honouring of a bank guarantee, in the absence of any allegation that the guarantor had sufficient means to pay or had disposed of secured assets, constitutes a "wilful default" under Clause (xviii)(B) of the Reserve Bank of India (Non-Banking Financial Companies-Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025.
Arguments Presented
For the Petitioner
The petitioners relied on Indian Commodity Exchange Limited v. Neptune Overseas Limited & Ors. (2020) 20 SCC 106 to argue that a show cause notice must be specific and accompanied by the documents forming the basis of the allegation. They emphasized that the RBI’s notice failed to identify any transaction where funds were diverted, assets were disposed of, or equity was refused despite capacity. The mere invocation of a guarantee, without proof of wilful refusal to pay despite means, does not satisfy the statutory definition. The pendency of arbitration and CIRP further rendered the notice an abuse of process.
For the Respondent
The RBI contended that the failure to honour a guarantee when invoked, coupled with the petitioners’ financial capacity (evidenced by the OTS request), was sufficient to trigger wilful default under Clause (xviii)(B). It relied on Kaustuv Ray v. IDBI Bank & Others (2023 SCC OnLine Cal 656) to argue that interim proceedings like arbitration or insolvency do not preclude administrative action. The RBI maintained that the petitioners had ample opportunity to respond and that the notice was not defective on its face.
The Court's Analysis
The Court undertook a meticulous textual analysis of Clause (xviii)(B) of the RBI Directions, 2025, which defines wilful default by a guarantor. The provision requires two cumulative conditions: (1) failure to honour the guarantee when invoked, and (2) either (a) having sufficient means to pay, or (b) having disposed of secured assets without lender approval, or (c) failing to infuse equity despite capacity.
"In none of the notices, there is any allegation that despite of having sufficient means to make payment of dues or have disposed of movable or immovable assets provided for the purpose of securing the credit facilities."
The Court observed that while the invocation notices dated 06.02.2025 and 13.08.2025 demanded payment and threatened legal action, they contained no assertion that the petitioners possessed surplus funds, liquid assets, or had alienated collateral. The Minutes of the Wilful Defaulter Identification Committee, dated 18.12.2025, merely recited the conclusion of "misuse of funds" and "non-honouring of guarantee" without identifying any specific act, transaction, or document that satisfied the statutory criteria. The Court held that "misuse of funds" is not a recognized ground under the definition, which is exhaustive and not open to judicial expansion.
The Court further noted that the existence of arbitration and insolvency proceedings did not, in itself, invalidate the notice, but the absence of any factual foundation for the wilful default allegation rendered the notice legally unsustainable. The Court rejected the argument that the OTS request proved financial capacity, as such requests are routinely made in commercial negotiations and do not constitute an admission of ability to pay the full claim.
The Court emphasized that the principle of natural justice requires that the notice must enable the affected party to understand the case against them and respond meaningfully. The voluminous, unindexed documents provided did not cure the fundamental defect: the failure to specify which acts met the statutory definition.
The Verdict
The petition succeeded. The Calcutta High Court set aside and quashed the Show Cause Notice dated 15.01.2026 and the Minutes of the Wilful Defaulter Identification Committee dated 18.12.2025. The Court held that the RBI failed to establish any of the statutory conditions required under Clause (xviii)(B) of the 2025 Directions. No further action may be taken against the petitioners on the basis of these impugned documents. Parties are directed to act on the server copy of the judgment available on the Court’s official website.
What This Means For Similar Cases
Wilful Default Requires Specific Statutory Triggers
- Practitioners must now insist that any wilful defaulter notice explicitly link the borrower or guarantor’s conduct to one or more of the five enumerated conditions under Clause (xviii)(A) or (B)
- Allegations of "misuse of funds" or "financial imbalance" without proof of diversion, disposal, or refusal to pay despite means are legally insufficient
- RBI and other lenders must attach specific transaction records, asset registers, or financial statements proving capacity or disposal
Arbitration and Insolvency Do Not Bar, But Cannot Substitute, Wilful Defaulter Proceedings
- Lenders may initiate wilful defaulter proceedings concurrently with arbitration or CIRP
- However, the existence of such proceedings cannot be used to justify vague or unsubstantiated notices
- The burden remains on the lender to independently satisfy the statutory definition, regardless of parallel remedies
Natural Justice Demands Precision in Administrative Notices
- Voluminous document dumps without indexing or highlighting relevant portions violate the right to be heard
- Notices must clearly state: (i) which provision is invoked, (ii) which specific act constitutes default, and (iii) what evidence supports the allegation
- Failure to meet this standard renders the notice void ab initio, even if a reply is filed
