Derivative defaults studied in legal victory for banks

In what is seen as a resounding victory for the banking sector, the Supreme Court, India’s highest judicial body, recently held that banks could consider default in payment obligations under derivative transactions at par with default under other lending facilities, for the purposes of reporting of wilful defaulters. This effectively puts an end to the conflicting decisions previously passed by lower courts on this point and gives banks a fillip in enforcement of claims.

Woe to wilful defaulters

The Reserve Bank of India (RBI) had notified instructions from time to time to banks and other financial institutions in connection with reporting of wilful defaulters. These instructions were consolidated in a master circular on this subject in 2008, and subsequently updated on an annual basis.

The master circular states that an event of “wilful default” would occur upon any of several events of default of obligation to pay or repay a lender, including instances when a defaulting unit had resources to honour its commitments or had siphoned off or misused funds.

Sawant Singh is a partner, Aditya Bhargava is a senior associate, and Davis Kanjamala is an associate at the Mumbai office of Phoenix Legal.