FinMin reviews HC order curbing PSBs' powers to seek LOCs against wilful defaulters

The Bombay High Court has banned public banks from seeking look out circulars against wilful defaulters. The Finance Ministry is studying the order, which the court deemed arbitrary and violative of fundamental rights. Former Financial Services Secretary D.K. Mittal criticizes banks for hasty labelling of borrowers as wilful defaulters, despite failures often arising from external factors. An expert committee recommends a voluntary mediation framework under the Insolvency and Bankruptcy Code to resolve disputes amicably.

The Finance Ministry is studying the recent Bombay High Court order banning public sector banks from seeking the issuance of look out circulars, or LOCs, against wilful defaulters, sources said. Quashing the powers granted by the Union government to public sector banks (PSBs) to act against wilful defaulters, the High Court said it is arbitrary and violative of a person's fundamental rights.

The finance ministry is aware of the April 26 judgement and will make a detailed assessment of the order, sources said, adding that the next course of action will be decided after studying the order.

A division bench of Justice Gautam Patel and Justice Madhav Jamdar had on April 23 held as unconstitutional the clause of an office memorandum issued by the central government empowering the Chairman, Managing Directors and Chief Executive Officers of public sector banks to seek issuance of LOCs against default borrowers or even persons who stood guarantee for such borrowers.

In its 289-page judgement made available on April 26, the bench said an executive function cannot substitute a statute and the executive cannot in any event contravene the Constitution.

Commenting on the Bombay High Court order, former Financial Services Secretary D K Mittal said it is not proper on behalf of banks to seek issuance of LOC against a defaulter as it is not done after thorough investigation and that is why the High Court has termed it arbitrary.

However, he said, investigative agencies like the Central Bureau Investigation (CBI) do it after proper investigation in any matter.

Default by a borrower can take place due to various reasons, including business failure, economic condition turning adverse, global factors, etc, he said, adding that there are only a few wilful borrowers whose intension is not to pay.

Additionally, he said, banks often hastily label borrowers as willful defaulters without thorough investigation, severely impacting their future business prospects.

Without mediation, companies are forced into bankruptcy, sold at reduced values, leading to losses for shareholders, banks, and promoters.

The recent recommendation by an expert committee for a voluntary mediation framework under the Insolvency and Bankruptcy Code (IBC) is timely.

An expert panel set up by the Insolvency and Bankruptcy Board of India (IBBI) made such recommendation of introduction of voluntary mediation as a complementary mechanism for the resolution of disputes.

It has recommended a phased introduction of voluntary mediation as a dispute resolution mechanism under the Code while maintaining the sanctity of the timelines for various existing insolvency resolution processes. The core essence of the framework is its independence and flexibility to provide room for quick incorporation of implementational learning.

It has suggested establishment of a dedicated and specialised NCLT-annexed insolvency mediation cell with an independent secretariat to administer, oversee, and manage the conduct of insolvency mediations under the Code.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)