Firm failing to pay derivative liabilities can be branded ‘willful defaulter’: SC

Strengthening the hands of the Reserve Bank in ushering in financial discipline with respect to "credit policy and credit system of the country," the Supreme Court on Tuesday ruled that a company that fails to pay up its derivative liabilities can be branded as a "willful defaulter."

Settling the controversy over the scope of RBI's powers and interpreting its 2008 master circular on foreign exchange derivatives contracts, a Bench led by Justice AK Patnaik held that a contextual interpretation of the relevant terms in the circular made it clear that it covered not only willful defaults of dues by a borrower to the bank but also willful defaults of dues by a client of the bank under other banking transactions, such as bank guarantees and derivative transactions. Derivative transactions involve hedging in foreign exchange transactions and covers fluctuations in currency rates on which contracts are signed.

"Keeping in mind the mischief that the master circular seeks to remedy and its purpose, we interpret the words used in the definition of 'willful default' in clause 2.1 of the circular to mean not only a willful default by a unit which has defaulted in meeting its repayment obligations to the lender, but also to mean a unit which has defaulted in meeting its payment obligations to the bank under facilities such as a bank guarantee," noted the Bench.

"We hold that willful defaults of parties of dues under a derivative transaction with a bank are covered by the master circular and this we hold not because the RBI wants us to take this view, because this is our judicial interpretation of the circular," said the court.

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