Non-routing of transactions and diversion of funds to related entities justify wilful defaulter declaration.

The petitioners, M/s Extol Industries and its Directors, challenged a communication dated 29.03.2019 issued by the Bank of Baroda declaring them "wilful defaulters"

The Bank had sanctioned a term loan of Rs. 1272.96 Lakhs and a cash credit limit of Rs. 1500 Lakhs in 2011, which was later restructured

Despite the petitioners claiming timely repayments and the issuance of a "no dues" certificate, the Bank classified the account as a Non-Performing Asset (NPA) effective 31.03.2016

Following a show-cause notice on 13.08.2018, the Bank’s Identification Committee and Review Committee concluded that the petitioners had defaulted despite having the capacity to repay and had diverted/siphoned funds

The petitioners contended they were denied a reasonable opportunity for hearing and that the Bank's decision was arbitrary

1. Whether the respondent-Bank complied with the procedural requirements and principles of natural justice as established by the RBI Master Circular and judicial precedents before declaring the petitioners as wilful defaulters

2. Whether the petitioners’ conduct, specifically regarding the non-routing of transactions and transfers to related entities, justified the declaration of "wilful default" under the RBI framework

RBI Master Circular on Wilful Defaulters dated July 1, 2015, which defines "wilful default" to include instances where a borrower defaults despite having the capacity to repay or diverts/siphons funds for purposes other than those sanctioned

procedural safeguards established in SBI v. Jah Developers (P) Ltd. (2019) 6 SCC 787, which mandates an opportunity for the borrower to represent their case before the Review Committee

the principle that the Insolvency and Bankruptcy Code (IBC) and the SARFAESI Act are distinct proceedings that can continue simultaneously

The court found that the Bank had strictly adhered to the RBI Master Circular and the principles of natural justice.

It noted that the petitioners were granted multiple personal hearings on 26.10.2018 and 19.12.2018, and their written replies were duly considered

the Bank placed cogent material on record, including net-worth statements and account details, proving that the petitioners possessed significant financial strength and had diverted funds to group entities (e.g., Xyron Technologies) and family members while the lender remained unpaid

the petitioners' admission regarding the "non-routing" of transactions through the respondent-Bank, which constitutes a per se "diversion of funds" under the RBI guidelines as it impairs the Bank's ability to monitor the account

the petitioners failed to discharge their burden of proof by withholding primary financial records like ITRs and audited balance sheets that could have demonstrated a genuine inability to repay

The court emphasized that a similar controversy involving the personal guarantors of the same corporate debtor had already been dismissed by the Court and upheld in appeal (WA No. 423 of 2026), leaving no room for further indulgence

No order as to costs was made