Recovery of Debts Due to Banks

Recovery of Debts Due to Banks

The Ugly Truth About RECOVERY OF DEBTS DUE TO BANKS
1.

CHAPTER – I Theoretical Background - Introduction

Insolvency arises when an individual, corporation, or other organization is unable to meet its financial obligations for paying debts as they are due.[1] It can also occur; when certain things happen, some of which may include: poor cash management, increase in cash expenses, or decrease in cash flow.[2] The discovery of insolvency is crucial, as specific rights are enabled for the creditor to exercise against the insolvent individual or organization.[3]

It is evident that prior to the enactment of the RDDB Act, the normal remedy for recovery of debts due to Banks and Financial Institutions were to institute a suit in the Civil Court which was tried and decided in accordance with the procedure as laid down in Code of Civil Procedure, 1908. The procedure of suit was a long and cumbersome process. The position was that a civil suit took 5 – 15 Years for adjudication of liability there was considerable difficulty at the time of execution for recovery of loan amount or for sales of goods/property.[4]

At the stage of execution borrower was not there, several claimants for property will come up or the value of pledged assets have gone down or the identity of the immovable property was lost. This gave rise to hopelessness in banking industry and banks started to make compromises and to accept one time down payment. Heavy discounts on such repayments of loans were offered by the banks. Many companies availed the opportunity and escaped their full obligations to repay the debts through compromise agreements.[5]

Ultimately, realizing the problem, the GOI by virtue of Sec. 3 of RDDB Act has established Bank DRT with a view to exercise the jurisdiction, powers and authority by or under this Act and to ensure speedy recovery. Here only the Banks and Financial Institutions have rights to file the original application for the recovery of their dues.[6] It is pertinent to note that when DRT has jurisdiction in such matters the Civil Courts are debarred from handling any case. Their duties, powers and jurisdiction are well defined. From the date of establishing the Tribunal, i.e., the appointed day, no court or other authority should have any jurisdiction, powers or authority to deal with in any way in recovery cases above Rupees ten lakh. High Courts and Supreme Courts, however, have jurisdiction under Constitution Articles 226 and 227.[7]

The term ’debt’ covers the following types of debts of the banks and financial institutions:

(a) any liability inclusive of interest, whether secured or unsecured

(b) any liability payable under a decree or order of any Civil Court or any arbitration award or Otherwise or

(c) any liability payable under a mortgage and subsisting on and legally recoverable on the date of application.[8]

A bank begins a debt recovery process when it seeks money it is owed. A bank takes recovery action for a number of reasons, but the most common is when a customer fails to make loan repayments.

Debt recovery may include:

i) Referring the matter to a specialist debt recovery team within the bank

ii) Employing an external debt collection agency to act on its behalf

iii) Selling property over which the bank holds security

iv) Seeking a judgment from the courts to enforce the debts.[9]

[1] Deepti Kanojia, Meenakshi, Insolvency Law in India with Special Reference to Corporate Insolvency, (Int’l J. of Trade and Commerce-IIARTC, Vol. 3, No. 1, pp. 121-126),

available at: <http://sgsrjournals.com/paperdownload/(11)_pp(121-126).pdf>, accessed on: 16-02-2015.

[2] Ibid.

[3] Id.

[4] G.S. Dubey, An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 – A Study, available at: <http://www.manupatra.co.in/newsline/articles/Upload/80938A41-3558-4A9F-BB18-FD5C6192CA00.pdf >, accessed on: 16-02-2015.

[5] Ibid.

[6] Id.

[7] ICSI, Banking Law and Practice, Lesson 5, Banking Related Laws, available at:

<http://www.icsi.in/Study%20Material%20Professional/NewSyllabus/ElectiveSubjects/BL.pdf>, accessed on: 18-02-2015.

[8] Ibid.

[9] R. Gandhi, Banks, Debt Recovery and Regulations- A Synergy, available at:

<http://www.bis.org/review/r150109f.htm>, accessed on: 18-02-2015.

2.

CHAPTER – II Debt Recovery Tribunals and Process of Recovery

The DRT enforces provisions of the RDDBFI Act, 1993 and also SARFAESI Act, 2002. Under the RDDBFI Act, 1993 banks approach the DRT whereas, under the SARFAESI Act, 2002 borrowers, guarantors, and other any other person aggrieved by any action of the bank can approach the DRT.[10]

The DRT are fully empowered to pass comprehensive orders and can travel beyond the Civil procedure Code to render complete justice. It can hear cross suits, counter claims and allow set offs. However, a DRT cannot hear claims of damages or deficiency of services or breach of contract or criminal negligence on the part of the lenders. In addition, a DRT cannot express an opinion beyond its domain, or the list pending before it.[11]

Also, it can appoint Receivers, Commissioners, pass ex-parte orders, ad-interim orders, interim orders apart from powers to Review its own decisions and hear appeals against orders passed by the Recovery Officers of the Tribunal.[12]

DRT is established by virtue of the RDDBFI Act, 1993. Section 4 which deals with the composition of the Tribunal makes it clear that only the Presiding officer who is having powers which are vested in the tribunal. The second part of 4 (1) says that the presiding officer will be appointed by the notification of the central Government. Also, the Presiding Officer has the role to issue necessary Recovery Certificate which is forwarded to the Recovery Officer.[13]

Chapter – III and Chapter – V of the RDDBFI Act, 1993 deals with the Jurisdiction, Powers and Authority of Tribunals and recovery of determined debt by the Tribunal and a complete procedure of recovery of debts has been provided by Sec. 25 – 30.

Recovery Procedure: The Bank has to file an application for recovery of loan taking into consideration the jurisdiction and cause of action. Other bank or financial institution can also jointly apply. Application can be filed with fees, documents and evidence.[14]

Herein, the Limitation Act is also applicable in the DRT cases. Therefore, the application must be filed by the bank or the financial institution within limitation period from cause of action.[15] In such a scenario, when the defendant against whom the DRT has passed recovery order, wants to prefer appeal to the Appellate Tribunal, he is required to deposit 75% or the prescribed percent of the amount as decided by the Tribunal. Without such payment an appeal cannot be filed.[16]

The tribunal issues Recovery Certificate to the applicant. Recovery officers attached to the tribunal, have adequate powers for recovery under the Act. On receiving the recovery certificate, the recovery officer has to proceed for the recovery by attachment and sale of movable and immovable property. Defendant is debarred from disputing the correctness of the amount given in recovery certificate. Orders of recovery officer are applicable within thirty days to the Tribunal.[17]

[10] Bank DRT, Debts Recovery Tribunal, available at: <http://bankdrt.net/>, accessed on: 18-02-2015.

[11] Ibid.

[12] Id.

[13] Supra, N.4.

[14] Sec. 19 of the RDDBFI Act, 1993 r/w Sec. 4 – 9 of the DRT Procedural Rules, 1993.

[15] Supra, N. 7.

[16] Sec. 20 of the RDDBFI Act, 1993.

[17] Infra N. 7.

3.

Chapter – III Enforcement of Security Interest Under the SARFAESI Act, 2002- An Analysis

A security interest means a right, title and interest of any kind whatsoever in respect of a property created in favour of the bank or financial institution.[18] A security agreement means an agreement, instrument or a document or an arrangement under which the "security interest" is created in favour of the "secured creditor".[19]

The definition of "security agreement" includes a mortgage created by deposit of title deeds. The borrower should have committed a default. A default means non-payment of principal debt or interest or any other amount payable by a "borrower" to a "secured creditor". The "secured creditor" has to give a statutory notice giving the "borrower" a minimum prescribed time for repayment.[20]

Section 13 of the Act provides that pursuant to a notice period of 60 days by the secured creditor if the borrower is unable to discharge his liability in full, the secured creditor may take recourse to one or more mentioned in the section 13(4) to recover his secured debt.[21]

The Act has made a fair attempt at securing the creditors rights to recover the secured debt. This provision provides the adequate recourse for recovering the debts after giving sufficient notice of two months to the debtor to discharge his liabilities. In the case of failure of the debtor to act upon the agreed upon formulae to discharge his liability within a stipulated time frame, the creditor could proceed to take action under the section 13(4).[22]

Constitutionality of the SARFAESI Act, 2002:

In Mardia Chemicals Ltd v Union of India,[23]

Brief Facts: The IDBI sent a notice under S.13 of the Act to Mardia Chemicals requiring it to pay the amount of arrears indicated in the notice within 60 days, failing which the IDBI, as a secured creditor, would be entitled to enforce its security interest without intervention of the court or tribunal by taking over possession and/or management of the secured assets.[24]

The Mardia Chemicals challenged the constitutionality of the provisions in Sec.13 of the Act allowing the IDBI to enforce its security interest after the expiry of the 60- day notice period on the grounds that the Banks and the F.I. have been vested with arbitrary powers, without any guidelines for their exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount of dues sought to be recovered from the borrowers.[25]

Arguments Made by the Claimant:

Mardia Chemicals argued that it was not necessary to enact a strict legislation such as the SARFAESI Act, 2002 when a special enactment i.e. RDDBFI Act, 1993 already existed. The borrowers also argued that the Sec.17 appeal is not entertainable unless 75 per cent of the amount claimed in the notice is deposited by the borrower with the DRT, although the DRT has the power to waive or reduce such pre-deposit. It was further argued that, after the possession of the secured assets or its management has been taken over by the secured creditor or the property is leased or sold to another person, it would not be possible to raise and deposit 75 per cent of the amount claimed by the secured creditor. The borrowers argued that these provisions are arbitrary and suffer from the vice of unreasonableness.

JUDGMENT :

The SC observed that there is a presumption in favour of the constitutionality of a statute.[26] Secondly, the Court held that the issue of a notice to the debtor by the creditor under Sec.13 (2) does not, per se, attract the application of the principles of natural justice as it is always open for a creditor to tell the debtor to repay what he owes. No hearing can be demanded at that stage.[27] However, the Court struck down the requirement under Sec.17 of the Act that 75 per cent of the amount claimed in the Sec. 13(2) notice must be deposited with the DRT for the following reasons:

(i) the pre-deposit requirement is imposed while approaching the adjudicatory authority of first instance, not in appeal;

(ii) there is no determination of the amount due as yet;

(iii) the secured asset or its management is already taken over and under control of the secured creditor;

(iv) there is no special reason for double security in respect of an amount yet to be determined;

(v) 75 per cent of the amount claimed is no meagre amount;

(vi) the borrower will not be in a position to raise the funds required to make the 75 per cent deposit. The Apex Court concluded that the deposit requirement is thus onerous and oppressive. Therefore, s.17(2) is unreasonable, arbitrary and violates the Constitution of India.[28]

The Supreme Court therefore upheld the validity of the Act except that of s.17(2) which was declared ultra vires Art.14 of the Constitution of India.

[18] See Sec. 31 of Act of 2002.

[19] Avani Bansal, ENFORCEMENT OF SECURITY INTEREST UNDER RDDBFI ACT, 1993 AND SARFAESI ACT, 2002, available at: <http://www.taxmann.com/taxmannFlashes/flashart6-10-09_3.htm>, accessed on: 27-02-2015.

[20] Ibid.

[21] Editorial, “Only a Beginning”, Economic & Political Weekly, December 7, 2002.

[22] Bharathan, Sri Krishna, “Securitization and Reconstruction of financial Assets and Enforcement of security Interest (Second) Ordinance, 2002- Material Issues”, SEBI & Corporate Laws, Nov-Dec, 2002, p.190.

[23] [2004] 51 S.C.L. 513, SC.

[24] Supra, N. 19.

[25] Ibid.

[26] Unless it is found that the provision enacted results in palpably arbitrary consequences, the courts will refrain from declaring the law invalid. (R.K. Garg v Union of India (1981) 4 S.C.C. 675.)

[27] Infra, N. 24.

[28] Supra, N. 19.

4.

CHAPTER – IV Debt Recovery and Securtization – A Centre –States Conflict?

A Case Study on Central Bank Of India v/s State Of Kerala (C.A. No. 95/2005, decided on 27 February 2009)

Issue: The issue in general before the court was whether recovery mechanisms prescribed in legislations like the RDB Act, the Securitisation Act, 2002 etc. have primacy over State legislations which provide that the State shall have first charge over assets to enforce any dues that it may be owed.[29]

The issue in particular was whether Section 38 C of the Bombay Act and Section 26 B of the the Kerala Act and similar provisions contained in other State legislations by which first charge has been created on the property of the dealer or such other person, who is liable to pay sales tax etc., are inconsistent with the provisions contained in the DRT Act; for recovery of `debt' and the Securitisation Act; for the enforcement of `security interest' and whether by virtue of non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act, two Central legislations will have primacy over the State legislations are the questions which arise for determination in these appeals.[30]

Brief Facts:

The Central Bank of India[31] gave Rs.12 lakhs cash/credit facility to the Kerala Refineries (P) Ltd. The borrower executed mortgage of movable and immovable properties for securing repayment. As the borrower failed to repay the dues, the bank filed civil suit bearing O.S. No.234/1996. Later on, the suit was transferred to Ernakulam Bench of the Tribunal.

By an order dated 1.12.2000, the Tribunal decreed the suit for an amount of Rs.55 lakhs with future interest. Also, the Recovery Certificate dated 1.11.2001 was issued in the favour of the bank and the Recovery Officer issued notice for sale of the movable and immovable properties of the borrower. At that stage, Tehsildar, Mavelikara issued notice dated 26.11.2001 to the borrower for recovery of Rs.40,38,481/- as arrears of sales tax stating therein that its moveable and immovable properties had been attached on 2.2.2000 and 4.9.2000 and that steps are being taken to sell the attached property by public auction. The Tehsildar claimed that by virtue of Section 26B of the Kerala Act, as amended by Act No.23/1999, the State Government has got first charge over the attached properties. The bank challenged the notice of the Tehsildar by filing a petition under Article 226 of the Constitution of India, which was registered as O.P. No.7835/2002(G).[32]

Arguments by the Appellant before the Kerala H.C. (Single Bench):

The learned Single Judge of the Kerala High Court rejected the bank's challenge by holding that proceedings under the Kerala Act had been initiated before the issue of certificate by the Tribunal and that even if the Tribunal has got exclusive jurisdiction to recover the amount due to the bank, the Tehsildar was not obliged to approach it for recovery of the State dues.[33]

The learned Single Judge by referring to Section 46 of the Kerala Revenue Recovery Act, 1968, held that as the bank had claimed first charge or prior charge over the attached property, it can file appropriate objections under Section 46 of the Kerala Revenue Recovery Act, 1968 and make a prayer that public revenue can be recovered after paying its dues. Further, the learned Single Judge observed that under the terms of Section 47 of the Kerala Revenue Recovery Act, 1968 the petitioner can obtain release of the attached property by paying arrears of the public revenue.[34]

Appeal against the order of the learned Single Judge:

An appeal was made against the order of the learned Single Judge was dismissed by the Division Bench which held that the bank can avail remedy by filing objections under Sections 46 to 48 of the Kerala Revenue Recovery Act, 1968.[35] The bank argued that in view of the conflict between Section 38C of the Bombay Act and Section 35 of the Securitisation Act, the latter being a Central legislation, the first charge created by the State Act cannot have priority over debts of the bank because while enacting the Securitisation Act the Parliament will be deemed to be aware of the provisions of the State legislation.[36]

Also, it was contended that under Section 169 of Maharashtra Land Revenue Code, 1966, the State Government can claim priority over unsecured dues, but being secured creditor, the bank has first and exclusive charge over the properties of the company and has priority over the sales tax dues of the State.[37]

Observation made by the Division Bench of the High Court:

The Division Bench of the High Court analysed the provisions of the Securitisation Act, the State Act and observed:- "......... if any Central Act provides for first charge, the charge created under Section 38C of Bombay Sales Tax Act is overridden. Conversely, if the Central Act does not provide for first charge in respect of the liability under the said Act, the first charge created under Section 38C of Bombay Sales Tax Act shall hold the field."[38]

Judgement:

It held that there is neither any conflict in these two Acts nor Section 38 C of the Bombay Sales Tax Act can be said to be inconsistent with Section 35 of the Securitisation Act. It is because of the fact that the area of operation is entirely different and there is no overlapping anywhere. Section 35 of the Securitisation Act may have had some bearing, if there was some provision in the Securitisation Act for first charge in favour of the banks and financial institutions. But neither Section 13 nor any other provision under the Securitisation Act makes a provision for first charge. There being no provision in the Securitisation Act providing for first charge in favour of the banks section 35 of the Securitisation Act cannot be held to override section 38C of the Bombay Sales Tax Act, 1959 that specifically provides that the liability under the said Act shall be the first charge. The overriding provision contained in Section 38C is only subject to the provision of the first charge in the Central Act holding the field. The case of the Bank is not covered by the expression, "subject to any provision regarding first charge in any Central Act for the time being in force" and that being the position, Section 38C is not overridden by section 35 of the Securitisation Act."

[29] Indian Corp. Law, Securitisation and Debt Recovery – A Centre-States Conflict?, March 8, (2009), available at: <http://indiacorplaw.blogspot.in/2009/03/securitisation-and-debt-recovery-centre.html >, accessed on: 19-02-2015.

[30] Ibid. See also: <http://epfoa.in/judgements/source/supremecourt10.pdf>, accessed on: 19-02-2015.

[31] which is a nationalized bank.

[32] Supra N. 29.

[33] Ibid.

[34] Id.

[35] Id.

[36] Id.

[37] Supra N. 29.

[38] Ibid.

5.

CHAPTER –V Conclusion

It is pertinent to note that earlier under the RDDBFI Act, 1993 only the banks could approach the DRT whereas, under the SARFAESI Act, 2002 borrowers, guarantors, and other any other person aggrieved by any action of the bank can approach the DRT.
Recently in the landmark case of Mardia chemicals V. Union of India[39] the SC upheld the constitutional validity of the SARFAESI Act, 2002 except subsection (2) of section 17 of the Act under which the Debts Recovery Tribunal shall not entertain the appeal unless the borrower deposits with Tribunal, 75% of the amount claimed in the notice issued under Sec. 13(2).
Although the court in Central Bank Of India v/s State Of Kerala[40] have tried to deal with the issue of primacy of RDDBFI and SARFAESI Act, 2002 over the State laws; the researcher opines that the court could not fully address the issue.

[39] See Chapter III

[40] See Chapter IV

6.

BIBLIOGRAPHY

Primary Sources

The Legal Text:

· SARFAESI Act, 2002

· RDDB and Financial Institutions Act, 1993

· Debts Recovery Tribunal (Procedure) Rules, 1993

Secondary Sources

Articles

§ Deepti Kanojia, Meenakshi, Insolvency Law in India with Special Reference to Corporate Insolvency, (Int’l J. of Trade and Commerce-IIARTC, Vol. 3, No. 1, pp. 121-126),

available at: <http://sgsrjournals.com/paperdownload/(11)_pp(121-126).pdf>, accessed on: 16-02-2015.

§ G.S. Dubey, An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 – A Study, available at: <http://www.manupatra.co.in/newsline/articles/Upload/80938A41-3558-4A9F-BB18-FD5C6192CA00.pdf >, accessed on: 16-02-2015.

§ ICSI, Banking Law and Practice, Lesson 5, Banking Related Laws, available at:

<http://www.icsi.in/Study%20Material%20Professional/NewSyllabus/ElectiveSubjects/BL.pdf>, accessed on: 18-02-2015.

§ R. Gandhi, Banks, Debt Recovery and Regulations- A Synergy, available at:

<http://www.bis.org/review/r150109f.htm>, accessed on: 18-02-2015.

§ Bank DRT, Debts Recovery Tribunal, available at: <http://bankdrt.net/>, accessed on: 18-02-2015.

§ Avani Bansal, ENFORCEMENT OF SECURITY INTEREST UNDER RDDBFI ACT, 1993 AND SARFAESI ACT, 2002, available at: <http://www.taxmann.com/taxmannFlashes/flashart6-10-09_3.htm>, accessed on: 27-02-2015.

§ Indian Corp. Law, Securitisation and Debt Recovery – A Centre-States Conflict?, March 8, (2009), available at: <http://indiacorplaw.blogspot.in/2009/03/securitisation-and-debt-recovery-centre.html >, accessed on: 19-02-2015.

§ Bharathan, Sri Krishna, “Securitization and Reconstruction of financial Assets and Enforcement of security Interest (Second) Ordinance, 2002- Material Issues”, SEBI & Corporate Laws, Nov-Dec, 2002, p.190.

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