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KFA Gets Wilful Defaulter Tag! What Next?

Published on Mon, Sep 08,2014 | 08:00, Updated at Mon, Sep 08 at 22:39Source : CNBC-TV18 |   Watch Video :

From the King of Good Times to wilful defaulter – the fortunes of the grounded Kingfisher Airlines and its founder Vijay Mallya took a turn for the worse this week. One of its many lenders – United Bank of India – declared Kingfisher a wilful defaulter, on grounds of ‘defaulting in meeting its payment obligations even when it has the capacity to honor the obligations’. The irony is that Kingfisher owes 17 banks an approximate Rs 7,000 crore; of that United Bank’s dues amount to a little over Rs 400 crore, but it is the non-repayment of a Rs 7.5 crore overdraft facility with United Bank that has earned KFA & Mallya the Wilful Defaulter tag. What does this mean for KFA, Vijay Mallya and other Directors of the airline and most importantly for United Bank’s ability to recover its money? To answer those questions CNBC-TV18’s Menaka Doshi speaks to Juris Corp’s Founding Partner- H Jayesh & Madhukar Umarji, Partner, Alliance Corporate Lawyers.

United Bank Says
KFA did not repay Rs 7.5 cr overdraft facility for 2 years
KFA had capacity to repay and yet didn’t pay

United Banks says

Total UBI loans to KFA: Approx Rs 400 cr
Total 17 Banks’ loans to KFA: Approx Rs 6500 cr

Doshi: What do you think of this development- this tag of wilful defaulter - that has come after years of battle against Kingfisher Airlines and Vijay Mallya. Seventeen banks trying to recover their dues; one bank has finally after all these years decided to call him wilful defaulter?

Jayesh: The question boils down on to grounds on which they have declared Mr. Mallya and Kingfisher a wilful defaulter. From what you are saying, it seems that a small overdraft (OD) facility hasn’t been repaid and United Bank of India seems to be claiming that Kingfisher has the ability to repay that. One would have thought that the other banks would have done this much earlier and not on these grounds because it’s universally known that Kingfisher does not have the ability to repay its debt and there are various grounds on which you can declare somebody a wilful defaulter. One of them of course is you have the money but you are not paying it deliberately. The other relate to diversion of funds or using the funds for purpose other than you borrowed them or the collateral you gave for the purpose of borrowing, you dispose off the collateral without the consent of the banks etc. So, in effect, a conduct which is fraudulent in nature or of a nature which defeats the security or the collateral given to the bank etc. There are many consequences but from the facts which you narrated at the beginning, I wouldn’t be surprised if the outcome is not going to be what we would have thought to be. Rs 7.5 crore and claiming that you have the ability to repay; I am not sure how strong a ground that is which can be sustained. Some of the other grounds, the story can be different

United Bank Says
KFA is a ‘WILFUL DEFAULTER’ as it did not repay Rs 7.5 cr overdraft facility for 2 years even though it had capacity to repay

Doshi: Would you agree with that that the very grounds on the basis of which United Bank has labeled KFA a wilful defaulter is slightly shaky, this may not prevail if this was to become a legal battle which it likely will and it is going to do very little to help United Bank in recovering its money which is a whole separate question altogether?

Umarji: The limit for declaring wilful defaulters as per RBI circular is 25 lakh and above, so Rs 7.5 crore is an amount for which if there is a diversion of funds…(Interrupted by Anchor)

Wilful Defaulter Definition
Minimum Default: Rs 25 lakh

Doshi: In this case United Bank has not referred to a diversion of funds or siphoning of funds or any of the other more gravers circumstances; it has said that KFA had the ability to pay and yet did not pay back its amount.

Umarji: That is one of the grounds on which a company can be declared as a wilful defaulter and the next step is that this information is forwarded to Reserve Bank of India (RBI). There are two categories of reports which are to be submitted. One is in respect of suit filed or Debts Recovery Tribunal (DRT) recovery proceedings filed cases, where the information is sent to Credit Information Bureau (India) Limited (CIBIL). This information is accessible to the banks and other lenders and the consequences are that if there is a company which is a wilful defaulter, it cannot borrow money from any other bank thereafter.

Penal Measures
- Prevent access to capital markets, inform SEBI
- No additional facilities should be granted by any Bank/FI
- Entrepreneurs/promoters should be debarred for 5 years from institutional finance for floating new ventures
- Legal process against borrower should be initiated expeditiously
- Lenders may initiate criminal proceedings
- Banks/FIs should adopt proactive approach for change in management of wilful defaulter company
- No borrowing company should induct promoter/director of a wilful defaulter company
- A borrowing company must remove from its Board any promoter/director of a wilful defaulter company

Doshi: It does say that besides no additional facilities being granted to that specific borrower, no other borrowing company should induct the promoter or director of a wilful defaulter company and if they do have such a person on Board, then they should find a way to expeditiously remove that person. I assume and this is what the United Bank management also pointed out to me that they are using this wilful defaulter tag in an effort to try and pressure and shame Mr Mallya in paying back that Rs 7.5 crore because otherwise the wilful defaulter tag does nothing else in helping United Bank recover its money.

Umarji: It is only a tactic to put pressure on the promoters/directors of the company. By treating a company as a wilful defaulter you are not going to recover any money. The recovery will come provided the promoter/director comes forward and says that I am paying you this and delete my name from the list of wilful defaulters.

Payment default
- Even when borrower has capacity to pay
- Borrower has diverted the funds
- Borrower has siphoned off the funds
- Borrower has disposed/removed assets/property offered as collateral

Identification of wilful default should be made
- Keeping track record in mind
- Not decided on basis of isolated incident
- Default must be intentional, deliberate and calculated

Doshi: How often has this name and shame worked?

Jayesh: It has worked in the past. There are names which I will not take now given that they have been settled and borrowers have paid off and they paid off after being declared as a wilful defaulter but then they file a legal challenge and then they choose to settle it out of court by paying off. So the tag of wilful defaulter doesn’t any longer continue for those names. Therefore, I won’t name them, but to answer your question, it does work provided it’s done in time.

In the given instance, I have few points to make or a bunch of questions to ask- why are the other banks not taking steps and are all the consortium members of the view and assessment that there has been no diversion of funds or the funds used for the very purpose as was stated or none of the collateral given was altered or disposed off without the consent of the banks because the ground on which United Bank has declared it, I do not think that will sustain. At least my limited understanding from the media is Kingfisher is broke and I do not think they even must be having Rs 5 crore in a bank balance somewhere in the country – that’s one question. The other is why is it being done now. Why wasn’t it done a year or two back where the Kingfisher brand as an airline brand would have had value where you could look at post wilful declaration, change of management and maybe handing over the company to be run by somebody else who is willing to restructure the whole operation. As to consequences, I do not agree with one of the points made. There is no legal compulsion for a person declared as a wilful defaulter, their directors to resign necessarily from the boards of other companies.

Doshi: I am reading from the RBI master circular – it says no borrowing company should induct promoter or a director of a wilful defaulter company. A borrowing company must remove from its board any promoter or director of a wilful defaulter company.

Jayesh:  That is an extract you are reading out. You need the loan agreement to have such a clause. If the loan agreement doesn’t have the clause, the banks cannot compel but you are right that these are pressure tactics but the real objective was, if you want to call it social service for the banking system that I have defrauded or whatever by this borrower so I am declaring this person as a wilful defaulter so you- the other banks- don’t have to undergo the same.

Penal Measures
‘Banks/FIs are, therefore, advised to seriously and promptly consider initiating criminal action against wilful defaulters or wrong certifications by borrowers, wherever considered necessary…’

Doshi: I put this question to United Bank asking if they were likely to pursue any criminal proceedings on the basis of this wilful defaulter tag. The bank told me that we have the option to do so but we are not inclined to do so right now and we hope that the leader of the consortium makes up its mind on the wilful defaulter tag and decides to initiate criminal proceedings on its own. What are the chances of any criminal proceedings under a wilful defaulter tag succeeding; how does the process work?

United Bank Says
Can take criminal action against KFA under IPC Sec 403/415. But as yet have not considered criminal action.

Jayesh: The RBI circular requires banks to apply the wilful defaulter proceedings and many banks are not doing so and that’s something which RBI needs to look at as to why banks are not doing so. Second, if you do declare somebody a wilful defaulter on grounds such as diversion of funds or diversion of collateral etc then you are required to file criminal proceedings.

Doshi: But in this case it doesn’t seem to be those two points. It just seems to be the ability to pay but refusal to pay?

Jayesh: That is not a ground for criminal proceedings.

Umarji: It is not going to help. It is only bringing a pressure on the Directors. Unless there is a specific allegation of fraud and misuse of the funds obtained from the bank and diversion of funds; only that amounts to offence of cheating. There cannot be any criminal proceeding in respect of this wilful defaulter.

I only wanted to mention two more developments which have happened – there is another bank which has started the action for classifying this company as a wilful defaulter – that is Punjab National Bank and that action has also been challenged by the company on the grounds saying that we should be allowed to be represented by an advocate in the proceedings which are conducted for classification as wilful defaulter. The Delhi High Court has passed an order that he should be allowed to be defended by an advocate whereas Calcutta High Court has taken a contrary view. Therefore, this is one development and I understand that I do not know which company but some company has filed writ petition in the Bombay high court challenging the constitutional validity of the RBI circular.

Media reports indicate other banks such as PNB & SBI are also considering declaring KFA a wilful defaulter

Delhi High Court
Ruled in KFA’s favour & permitted it to be represented by lawyers in wilful defaulter proceedings by PNB
PNB intends to challenge the Delhi HC order in the Supreme Court

Doshi: I think that company is Finolex. It is a company that has been tagged wilful defaulter in the past in connection to some derivative contracts.

Umarji: They are challenging on the ground…(Interrupted)

Doshi: We don’t know how that challenge will turnout but at this point, he might actually challenge the grounds on which he has been labeled wilful defaulter. What are the likely chances of success of this tag persisting, of United Bank winning that?

Umarji: I agree with Mr. Jayesh that that it will be extremely difficult to prove the company has a capacity to pay but it is not paying because the company is closed down for last two-three years.

Doshi: In my conversation with the United Bank management, they indicated to me that we do know of instances where there was money in the account but they did not pay us. I do not have that evidence but I am curious to know what you make of where all of this is going to head. Is wilful defaulter just a nice headline tag, it amounts to nothing else?

Jayesh: You can use wilful defaulter to show that you are taking some action or if you are serious about it, then you would have gone on more serious charges and that is a question I asked earlier – is it the bank’s case, the full consortium that they have no evidence of diversion of funds etc because those are far more serious charges and far more difficult to challenge if you are able to demonstrate that that’s where the facts lie. Therefore, you are right that is this just to show that some action is been taken and whether that action gets sustained or not and then the other question is how serious are the banks in this case given the nature of the persona we are dealing with.


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