SREI Equipment finance Limited v. BSCPL Infrastructure Limited & Ors.
A wilful-default show-cause notice must state the events, incidents and facts that led the Identification Committee to its prima facie view, with dates and nature of the transaction, and must disclose all materials relied on, otherwise it is vague and violates natural justice; a guarantor can be proceeded against without exhausting remedies against the borrower, and pending arbitration does not bar wilful-default proceedings.
By CA Nikhil Gupta · Reviewed against the retained judgment 2026-10-07
Srei issued a joint show-cause notice to a joint venture, a partner that gave a corporate guarantee and a personal guarantor, citing only a 100-page credit report and two demand notices. The Division Bench held the notice too vague, but corrected the Single Judge's view that arbitration barred the proceedings and that no wilful default existed.
What happened
BSC-C&C JV took loans from Srei Equipment Finance, secured by the corporate guarantee of BSCPL Infrastructure Ltd. and the personal guarantee of its director. The corporate guarantee covered facilities of Rs. 59,78,87,917 and Rs. 55,26,12,083 under agreements dated 5 January 2017 and was invoked on 6 February 2025; the personal guarantor was served with a notice of 13 August 2025 claiming Rs. 181,66,49,616.09 as of 24 January 2025 and referring the claim to a sole arbitrator under section 21 of the Arbitration and Conciliation Act, 1996. On 18 December 2025 the Wilful Defaulter Identification Committee resolved to issue a show-cause notice, stated as 'Misuse of fund' for the partner, based on a CIBIL report of 13 November 2025, and 'Non-honouring of the guarantee' for the guarantor; the notice of 15 January 2026 gave 21 days to reply. The Single Judge in WPA 3211 of 2026 quashed the notice and the Committee minutes on 8 April 2026 and held that the case was not one of wilful default, noting pending arbitration. Srei appealed in M.A.T. No. 820 of 2026.
Questions before the court
- Was the show-cause notice for declaration as wilful defaulters valid, and does pending arbitration bar wilful-default proceedings against guarantors?
Why the court ruled this way
Clause 5 of the Master Circular requires the Identification Committee to be satisfied that an event of wilful default has occurred and to disclose all materials and information on which the notice is based; a default is wilful only if it is intentional, deliberate and calculated, and for a guarantor the Master Circular's definition requires failure to honour a guarantee despite sufficient means, disposal of secured assets or failure to infuse equity (paragraphs 26 and 27). The notice mentioned only unspecified 'transactions' and attached a 100-page credit report of the borrower, without saying which part showed misuse by the partner, and two notices which asked for payment and referred to insolvency or arbitration, so the respondents could not give a meaningful reply (paragraphs 25 to 28). Pending arbitration cannot bar a notice because the definition of wilful defaulter includes a borrower or a guarantor, and a guarantor can be proceeded against without exhausting remedies against the principal debtor (paragraphs 26 and 28). A court should not hold at the show-cause stage that the case is not one of wilful default (paragraph 30).
Controlling point
The notice was vague and lacked material particulars, but the finding that this was not wilful default was premature and the arbitration was no bar.
Order and next steps
The Single Judge's order was modified: the notice and the Committee extract were quashed, the finding that the case was not one of wilful default was set aside, and the Committee was left free to consider the materials and, if prima facie satisfied, issue a fresh show-cause notice complying with clause 5 of the Master Circular. The appeal and application were disposed of.
Practical implications
A lender or NBFC should set out the specific acts, dates and materials against each borrower, partner or guarantor in a wilful-default notice; a guarantor served with a vague composite notice can challenge it in writing without waiting for the arbitration.
Limits of this ruling
- The Court quashed the notice only on lack of particulars and expressed no view that wilful default is made out or not; it did not decide the guarantors' liability or the money claim, which are in arbitration.
Law and judgment source
- Master Direction on Treatment of Wilful Defaulters, clauses 3 and 5
- Arbitration and Conciliation Act, 1996, section 21
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Source checked: 2026-10-07 · Judgment paragraphs: paragraphs 1-31 · Later case history: not verified. Verify appeals, stays and subsequent orders before reliance.
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