Writ Court Will Not Interfere With Show Cause Notice For 'Wilful Defaulter' Classification Pending Arbitration: Calcutta High Court

"The proceeding for declaring the borrower as a wilful defaulter has its source in statute and Reserve Bank of India guidelines. It is substantially independent of the dispute which is the subject matter of the arbitration." Calcutta High Court, in a judgment delivered by Justice Krishna Rao on September 23, 2026, held that a writ petition is not maintainable against a show cause notice issued for the purpose of declaring a borrower a 'wilful defaulter,' even if parallel arbitration proceedings regarding the underlying debt are pending.

The court emphasized that the determination of a wilful default under the Reserve Bank of India (RBI) Master Directions is a statutory process that remains independent of contractual disputes being adjudicated by an Arbitral Tribunal.

The petitioners, Kitply Industries Limited, challenged a show cause notice issued by SREI Equipment Finance Limited (SEFL) dated June 17, 2026, which sought to classify them as wilful defaulters due to the alleged unauthorized disposal of secured assets. The petitioners contended that since the underlying debt and the nature of the transactions were already subject to an ongoing arbitration, the issuance of a show cause notice was an attempt to overreach the arbitral process. The petitioners had previously failed to secure an interim stay on the notice from the Sole Arbitrator.

The core legal questions before the court were whether a writ court should exercise its jurisdiction to quash a show cause notice at the pre-adjudication stage and whether the pendency of arbitration proceedings regarding a loan agreement bars a lender from initiating statutory proceedings to declare a borrower a 'wilful defaulter.' The court also examined the extent to which the RBI's Master Directions 2024 override or operate independently of pending private commercial arbitration.

The court reiterated the principle of judicial restraint concerning the issuance of show cause notices. It observed that courts should be reluctant to interfere at the stage of a mere notice, as the lender has only formed a prima facie view. The determination of whether a borrower is a wilful defaulter is a multi-tiered process involving an Identification Committee and a subsequent Review Committee, which provides the borrower with ample opportunity to be heard.

"No Adjudicating Proceedings Must Be Stalled By Courts"

The court relied on the precedent established by the Division Bench in Kaustuv Ray v. IDBI Bank and Others, which held that no adjudicating proceedings should be stalled by courts at the show cause stage. The bench noted that the petitioners had already exhausted their remedy by seeking an interim order from the Sole Arbitrator, which was refused, and that the current writ petition was essentially an attempt to bypass that outcome.

Nature of Statutory Wilful Defaulter Proceedings

The court highlighted that the identification of a wilful defaulter under the RBI Master Directions, 2024, is rooted in statutory mandate rather than mere contractual enforcement. While an Arbitral Tribunal may decide whether a debt is due and owing, the classification of a wilful defaulter—which involves allegations of diversion of funds or unauthorized disposal of secured assets—remains a distinct statutory exercise of the lender.

"Whether the respondent is a defaulter or not in the alleged loan taken by them from the claimant, would be open before the arbitral tribunal as an issue as a result of the order referring the dispute to arbitration before me."

Statutory Independence of Proceedings

The court observed that the Sole Arbitrator had rightly noted that any finding in the wilful defaulter proceedings could be cited as a relevant fact in the arbitration, but the two proceedings are fundamentally different in scope. Consequently, the court found no merit in the contention that the initiation of the wilful defaulter process was intended to undermine the arbitral tribunal’s authority, as the issues of contractual validity versus statutory compliance remain parallel but distinct.

Conclusively, the court refused to set aside the impugned show cause notice. Observing that the petitioners had been afforded sufficient procedural fairness, the court dismissed the writ petition. However, in the interest of justice, the court granted the petitioners a period of two weeks to file their reply to the show cause notice, ensuring the statutory process could proceed in accordance with the RBI Master Directions.

Date of Decision: 23 September 2026