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Government tightens laws on willful defaulters to stop them from fleeing.

The Specific Relief Act, 1963 Negotiable Instrument Bank Defaulter

Read time: 4 minutes
Inhouse credit: Writer: Feba Nisha
Last updated: 21/10/2021

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Synopsis: The government brings about fundamental change in the creditor-debtor relationship by adding more restraints through the law against willful defaulters of bank loans to flee the country.

 

The government on November 22, 2018 gave power by amending the Ministry of Home Affair's (MHA) circular on issuance of look out circular (LOC) in respect of Indian citizens and foreigners, to include the heads of public sector banks (PSB’s) so that they can directly request the concerned authorities for issuance of LOC against willful defaulters and prevent them from fleeing to another country. The recommendation had been part of the committee headed by financial services secretary Rajiv Kumar as a step towards the clean banking drive by the government.

 

As per the circular, as soon as a LOC is declared against an offender, the immigration authorities will be notified for a year to watch out and keep the government informed about the applications for visas and passports by the said offender. Hence, this law will now be a deterrent for any escapes planned by the defaulters.

 

As per the Master Circular on Willful Defaulters, RBI/2015-16/100- A ‘willful default’ under Section 2.1.3 would be deemed to have occurred if the unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honor the said obligations; has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes; nor are the funds available with the unit in the form of other assets or has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.

 

The circular also states that the identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as willful must be intentional, deliberate and calculated.

 

Some of the other change’s government had made to prevent default of loans are as follows:

  1. The Fugitive Economic Offenders Act, 2018, the new law allows designated special court to declare a person as fugitive economic offender and to confiscate his property, including 'benami' ones and bring it under the control of the Central Government as soon as it is confiscated.
     
  2. The Negotiable Instruments (Amendment) Act, 2018 allows a court to try offences related to cheque bounce expeditiously and direct the drawee to pay a minimum of 20 percent of the cheque amount as interim compensation.
     
  3. The Specific Relief (Amendment) Act, 2018 grants a party the right to seek damages from the other side in case of a breach of a business contract and to reduce discretion of courts in such matters.

 

Takeaways:

  1. The above said power empowers the PSB’s with the following:
    1. The MDs’ and CEOs’ can issue lookout notices for the offenders directly.
       
    2. It will reduce time delays caused by permissions from various departments.
       
    3. Banks will be able to stop offenders from fleeing the country.

 

  1. The banks and the Government are tightening the law as an aftermath of big time offenders like Nirav Modi, Kingfisher Airlines founder Mallya and many other promoters who have fled the country even before being declared willful defaulters or accused of swindling money.





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