Bombay HC Rules No Penal Restrictions After NPA Settlement Without Fraud, Relaxes 5-Year RBI Ban On Borrowers Post Payment

Mumbai, April 4: The Bombay High Court has ruled that once a borrower settles a non-performing account through a compromise with the lending bank, penal restrictions under the Reserve Bank of India (RBI) framework cannot continue for five years as a matter of course. Such measures, the court said, would only be justified where there is clear evidence of fraud, siphoning or similar misconduct by the borrower.

A bench of Justices Bharati Dangre and RN Laddha made the observation allowing appeals by Ravi Arya (67) and Nakul Arya (40), directors of International Mineral Trading Private Limited (IMTC). They had approached the court challenging the continued application of penal measures under the RBI’s 2015 Master Circular on Wilful Defaulters.

Background of loan and settlement

IMTC had availed credit facilities exceeding Rs 200 crore from Bank of Baroda. After the account turned into an NPA, the bank initiated proceedings under the SARFAESI Act and also classified the directors as wilful defaulters.

However, during the course of recovery proceedings, a one-time settlement was reached and the entire outstanding dues were cleared. The bank subsequently issued a “No Due Certificate” in April 2021.

Despite this, the petitioners argued that they continued to face a bar on accessing institutional finance due to clause 2.5(a) of the 2015 circular, which imposes a five-year embargo even after removal of names from the wilful defaulters list.

Arguments by petitioners and RBI

Petitioners’ counsel submitted that the circular created an “ambiguous situation” and that “nowhere is it intended to continue penal measures against those who cease to be wilful defaulters”.

He argued that the company’s default was not deliberate but the result of adverse market conditions and business difficulties.

Opposing the plea, counsel for the RBI argued that the circular has statutory force and can only be interfered with if it is shown to be manifestly arbitrary.

Court cites evolving RBI stance

The court, however, noted that subsequent RBI circulars in 2024 and 2025 have adopted a more balanced approach by recognising the effect of compromise settlements and permitting removal of names from the wilful defaulters list upon full payment.

Observing that “it is unreasonable to treat every default on par”, the bench emphasised that the nature and degree of default must be considered. In the absence of any finding of fraud, siphoning of funds or misrepresentation, the court held that the five-year embargo could not be applied to the petitioners.

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Relief granted to petitioners

Accordingly, the bench read down the applicability of the five-year ban clause on the petitioners and clarified that the restriction on availing institutional finance would not operate against them.

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