- 19-Apr-2025
- Healthcare and Medical Malpractice
The Insolvency and Bankruptcy Code (IBC) aims to facilitate the resolution of financially distressed companies in a fair, transparent, and time-bound manner. However, the issue of wilful defaulters, who intentionally default on their financial obligations, undermines the integrity of the Corporate Insolvency Resolution Process (CIRP). The IBC incorporates provisions to address and penalize wilful defaulters, preventing them from misusing the insolvency framework for personal gain.
Wilful defaulters are individuals or entities who intentionally default on loan repayments despite having the capacity to pay. This typically involves borrowers who, having sufficient resources, deliberately choose not to repay loans.
Under the Reserve Bank of India (RBI) guidelines, a wilful defaulter is someone who:
The IBC includes provisions that disqualify wilful defaulters from participating in the Corporate Insolvency Resolution Process (CIRP). This is done to ensure that such individuals or companies do not manipulate the resolution process to escape liabilities or retain control over distressed companies.
Section 29A of IBC specifically states that a wilful defaulter is disqualified from submitting a Resolution Plan during the insolvency process. This prevents them from using the insolvency process to restructure or take control of their company inappropriately.
This provision ensures that any party responsible for wilful default cannot regain control of the distressed assets under CIRP, protecting creditors’ interests and preserving the integrity of the process.
Personal guarantors to corporate debts, including directors or promoters of companies, may also be disqualified from participating in the resolution process under Section 29A of IBC if they are considered wilful defaulters.
If an individual who is a personal guarantor to the corporate debt is found to be a wilful defaulter, they will not be allowed to submit a resolution plan or take control of the distressed company.
Additionally, personal insolvency proceedings can be initiated under IBC against personal guarantors to recover the dues owed by the corporate debtor.
Apart from the IBC’s disqualification provisions, wilful defaulters may also face criminal liability under the Indian Penal Code (IPC) for fraud or misappropriation of funds, particularly if fraudulent transactions are involved.
Fraudulent transactions during the period leading to insolvency can be investigated by the Insolvency Professional (IP) or Resolution Professional (RP). If found guilty, the defaulters may face imprisonment or penalties in addition to the financial consequences under the IBC.
To prevent wilful defaulters from misusing the CIRP to regain control over the distressed company, the Insolvency and Bankruptcy Board of India (IBBI) and RPs are empowered to scrutinize the backgrounds and financial conduct of potential resolution applicants.
The IBC allows creditors to challenge the eligibility of a resolution applicant if they suspect that the applicant has been a wilful defaulter in the past. This ensures that the process remains transparent and that wilful defaulters are not allowed to manipulate the system.
In cases where a wilful defaulter is also the promoter or director of the company undergoing CIRP, the process aims to resolve the company’s debts and ensure that the company continues to operate in a way that benefits its creditors, rather than allowing the defaulting party to misuse the resolution process.
The RP and CIRP framework aim to balance the interests of creditors while preventing a wilful defaulter from controlling the process or continuing operations without addressing the company’s financial issues.
Some parties have challenged the Section 29A disqualification on the grounds of its constitutionality or its wide-ranging application. However, the courts have generally upheld the IBC provisions, stating that they are designed to protect the interests of creditors and the integrity of the insolvency process.
Legal cases may also arise in scenarios where a defaulter contests their designation as a wilful defaulter. These cases are typically heard in National Company Law Tribunals (NCLTs) or appellate tribunals.
Consider a company, ABC Ltd., which defaults on a loan despite having substantial assets and cash flow. The Resolution Professional (RP) finds that the company's promoters had misused the borrowed funds for personal expenses and had the means to repay the loan but chose not to do so.
The IBC addresses the issue of wilful defaulters by disqualifying them from participating in the Corporate Insolvency Resolution Process (CIRP). This ensures that those responsible for defaulting on their financial obligations cannot exploit the insolvency process to avoid their debts or regain control of the distressed company. The legal framework also provides avenues for criminal liability and financial penalties for wilful defaulters, further strengthening the IBC’s role in promoting ethical business practices and protecting creditor interests.
Answer By Law4u Team
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