Devising Better Legal Mechanisms for Disciplining Wilful Defaulters and Deterring such Conduct
Recommendations for disciplining Wilful Defaulters
In July, 2014, the Reserve Bank of India (RBI) issued a Master Circular on Wilful Defaulters (‘Master Circular’) which incorporated all instructions and guidelines issued on cases of willful default till such date. Certain important features of the Master Circular included that all borrowing units identified as willful defaulters or the promoters involved in diversion of funds were subject to penal measures and initiation of criminal proceedings.
This report examined the wilful defaulter regime proposed in the Master Circular along with the framework governing company and insolvency laws, particularly provisions on managerial liability and transaction avoidance and other related provisions such as direct remedy for creditors to approach the National Company Law Tribunal for relief in cases of willful defaulters and investigation into affairs of a company for business being carried on fraudulently.
It also studied in detail international practices on disqualifying directors and whistle-blowers’ protection to suggest reforms that may be suitably adopted in the Indian context. The report presented key recommendations in relation to director identification and reporting, managerial liability and transaction avoidance under insolvency laws, auditors’ reporting obligations, re-instating the debt-enforcement function of liquidation law and developing a separate director liability regime in order to strengthen the framework governing wilful defaulters in India.
The report also recommended special protections for independent and non-executive directors from the applicability of the willful defaulter regime. This recommendation was implemented.