Pendency of arbitral proceedings does not bar issuance of a wilful-default show-cause notice.

The petitioners challenged a show-cause notice dated 17 June 2026 issued by SREI Equipment Finance Limited (“SEFL”), requiring them to explain why they should not be declared wilful defaulters for allegedly disposing of movable and immovable assets securing credit facilities without the lender’s approval.

SEFL had earlier initiated insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, concerning alleged dues of approximately ₹333.58 crores under loan agreements dated 24 January 2019.

Separately, SEFL had initiated proceedings under Sections 9 and 11 of the Arbitration and Conciliation Act, 1996; an arbitrator was appointed to adjudicate disputes concerning the transactions and the alleged loan liability.

The NCLT, Guwahati Bench subsequently dismissed the Section 7 insolvency petition, observing that the genuineness and legality of the transactions were disputed and were subject to arbitration.

The petitioners challenged the show-cause notice before the arbitral tribunal and sought interim protection, but the tribunal declined to stay the wilful-default proceedings while preserving the issue of whether any loan liability was owed by the petitioners for determination in arbitration.

The petitioners thereafter approached the High Court under Article 226 of the Constitution.

Whether the writ petition was maintainable against the mere issuance of a show-cause notice proposing declaration of the petitioners as wilful defaulters.

Whether the pendency of arbitral proceedings concerning the underlying loan transactions and liability barred SEFL from initiating or continuing wilful-default proceedings.

Whether the impugned show-cause notice was covered by the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, particularly the provision concerning disposal of secured assets without the lender’s approval.

The Court applied the Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024, under which “wilful default” includes a borrower’s disposal of movable or immovable assets provided as security for a credit facility without the lender’s approval, where the borrower has otherwise defaulted.

A wilful defaulter includes a borrower or guarantor against whom wilful default is established and whose outstanding dues meet the prescribed threshold; in the case of a company, the relevant promoters and directors may also be covered, subject to the Directions.

The Court further applied the principle that courts should ordinarily not interfere with a show-cause notice because it reflects only a prima facie view and the affected party must first submit its reply; the matter may thereafter be adjudicated by the competent authority and reviewed through the prescribed mechanism.

The Court relied on *Kaustuv Ray v. IDBI Bank*, 2023 SCC OnLine Cal 656, which held that interference at the show-cause stage is premature, particularly where the respondent has an opportunity to consider the reply and a review remedy is available.

The Court also recognized that statutory wilful-default proceedings are substantially independent of contractual disputes pending in arbitration.

The Court held that the show-cause notice specifically alleged conduct falling within the RBI Directions, namely disposal of secured movable and immovable assets without the lender’s approval, and that the petitioners had been supplied with the relevant property descriptions and documentary material.

The existence of arbitral proceedings did not prevent SEFL from commencing the statutory wilful-default process because the latter was distinct from the arbitral adjudication of contractual liability and could have consequences extending beyond the parties to the arbitration.

Although the NCLT had dismissed the insolvency petition and the arbitral tribunal had noted that the underlying loan liability remained open, neither determination invalidated the show-cause notice or required the statutory process to be stayed.

Applying the rule against premature judicial interference with show-cause notices, the Court concluded that the petitioners should first submit their explanation before the Identification Committee and thereafter pursue the available review or other remedies if an adverse decision was rendered.

The writ petition was dismissed.

However, the Court extended the petitioners’ time to submit their reply by two weeks from the date of judgment.

Accordingly, W.P.A. No. 24869 of 2026 was dismissed, with no interference in the statutory wilful-default proceedings.