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Delhi High Court Upholds Quashing of 'Wilful Defaulter' Tag on Ratul Puri, Sets High Bar for Banks

NEW DELHI — In a significant ruling with wide-ranging implications for the banking sector, the Delhi High Court has dismissed appeals from Punjab National Bank (PNB) and Bank of Baroda (BOB), affirming a single-judge decision that set aside the classification of industrialist Ratul Puri and his mother, Nita Puri, as "wilful defaulters."

A division bench of Justice C. Hari Shankar and Justice Ajay Digpaul on August 8, 2025, held that a borrower cannot be declared a 'wilful defaulter' for investing the company's own cash surplus into subsidiaries. The court emphasized that the RBI's Master Circular on Wilful Defaulters is triggered only when "borrowed funds" are diverted or siphoned off, not when a company utilizes its internal accruals.

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Case Background: From Corporate Debt Restructuring to Wilful Default

The case stems from loans availed by Moser Baer India Ltd (MBIL) and its subsidiary, Moser Baer Solar Ltd (MBSL), where Ratul Puri was a director. After facing financial distress, the companies underwent a Corporate Debt Restructuring (CDR) process with a consortium of lenders, including BOB and PNB, around 2012.

Years later, following the failure of the CDR and initiation of insolvency proceedings, the banks relied on forensic audit reports (FARs) to issue show-cause notices to the Puris. They alleged that MBIL's investment of over ₹1586 crore in its subsidiaries constituted diversion and siphoning of funds, leading to the banks' committees declaring them "wilful defaulters."

The Puris challenged this classification in the High Court, arguing that Ratul Puri had exited the company's management and, crucially, that all investments were made from MBIL’s own substantial cash surpluses, a fact well-known to the banks during the CDR process itself.

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Court's Scathing Analysis of the Banks' Actions

The division bench upheld the single judge's findings, delivering a detailed judgment that scrutinizes the procedural and substantive obligations on banks before branding a person with the "civil death" of a wilful defaulter tag.

1. The "Borrowed Funds" Doctrine: The court found the banks' entire case to be fundamentally flawed. It highlighted that the RBI Master Circular explicitly defines diversion and siphoning in the context of "borrowed funds" being used for purposes other than those sanctioned.

"The first is that 'wilful default'… takes place only when borrowed funds are diverted or siphoned off... The investments in the subsidiaries were, therefore, made from the internal accruals and cash surpluses of MBIL, and not from borrowed funds. This being the acknowledged position, even as per the documents of BOB and other lender banks… there could be no question of any diversion or siphoning off funds being alleged."

The bench pointed out the irony that the banks’ own Final Restructuring Scheme (FRS) , prepared in 2012, acknowledged that MBIL’s investments were "fully funded from the substantial cash surplus generated by the company."

2. Flawed Reliance on Forensic Audit Report (FAR): The court severely criticized the banks for initiating proceedings based solely on a Forensic Audit Report which, by its own admission, had not verified the source of the funds used for the investments.

"The most important aspect which was to be objectively assessed… i.e., whether the investments by MBIL in its subsidiaries were of ‘borrowed funds’ was not examined by the FAR, and the FAR was the sole material on the basis of which the Identification Committee arrived at the conclusion that the respondent was a ‘wilful defaulter’."

3. Intent is Indispensable for 'Wilful' Default: Reiterating a cornerstone of the Master Circular, the bench stressed that a default must be "intentional, deliberate and calculated." It held that mens rea (a guilty mind) is an indispensable element. The court found no evidence that the investments, which were known to lenders and deemed strategic at the time, could be retrospectively termed a deliberate and calculated act of default.

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A 'Parting Note' on Lenders' Responsibility

In a powerful concluding section, the court laid down a clear marker for how banks must approach such cases, describing the declaration of a wilful defaulter as a measure that "results in civil death."

The judgment underscored that scrutiny must be thorough at every stage: * During the preparation of the FAR. * Before issuing a show-cause notice. * By the Identification Committee. * By the Review Committee.

The court noted that facts known during the CDR process, which were not deemed problematic then, cannot be repurposed later to allege wilful default without new material. The fact that the lenders had placed MBIL in a "Class-B" category during CDR—for entities affected by external factors—rather than "Class-C" (for entities that divert funds), was seen as a clear contradiction of their later stance.

Final Decision

Dismissing all appeals filed by PNB and BOB, the High Court concluded that the banks' decision to declare Ratul and Nita Puri as wilful defaulters was unsustainable in law and on facts. The judgment serves as a stern reminder to financial institutions to adhere strictly to the letter and spirit of the RBI's guidelines, ensuring objectivity and fairness before taking such a drastic step against any borrower.