Home » Banking & Security Law » Debt Recovery Proceedings Some Latest Judgments Part 2

Debt Recovery Proceedings Some Latest Judgments Part 2

The article provides a summary detailing of three cases of Debt Recovery Proceedings or of nature of Financial Disputes from different High Courts of India. Debt Recovery Proceedings generally means where the lender Banks through judicial actions make recoveries of their bad debts. The Recovery of Debts & Bankruptcy Act, 1993 and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are primary statues which assist in the recovery of debts for the Banks or Financial institutions.

The cases below provide the legal principles in the Debt Recovery Proceedings.

Case 1M/S Radhakrishna vs Aditya Birla Finance Ltd. And another.

The Reserve Bank of India’s general power of superintendence on NBFC’s does not mean the NBFC is doing a public duty.

The present case is a Writ Petition filed against the respondent Non-Banking Finance Company, wherein, an issue of non-closure of loan account No.ABFLBHULAP0000056685, as requested by the petitioner, was not executed by the respondent.

The petition though gets dismissed on the admission but provides several legal points on maintainability of writ petitions against a private company. I have at the end of this summary, has added, where such kind of petitions or grievance can be taken forward.

Fact- The petitioner filed this writ petition on the allegations that the Respondent No.1 a Non-Banking Financial Corporation (NBFC) was charging floating higher interest rate and requested to transfer his account from the respondent No.1 NBFC to ICICI Housing Finance Ltd. Company.

The petitioner made its request for foreclosure of the loan account which was rejected by the letter of the NBFC on the ground that since the loan is under lock-in period, the aforesaid loan cannot be closed.

According to the petitioner, the petition was maintainable because the NBFCs are regulated by Reserve Bank of India and is an institution as per the SARFAESI Act and shall come under the jurisdiction of the High Court.

Held- The High Court in the stage of admission assed whether such issue is maintainable before hearing before the Court?

The Court considered legal construction of an NBFC in its judgement and mentioned the Chapter III-B of the Reserve Bank of India, 1934 as per which the whole authority rests with the RBI in regulating the business of the NBFC companies. The judgment quoted relevant sections from the Chapter III-B of the RBI Act such as Section 45-I, Section 45-IA, 45-IC, 45-ID, 45-E and other section which defined an NBFC and the business they can perform, the control RBI will have into affairs and the management of the company and other compliance measures which the business has to perform.

The court also referred to Section 12 of the SARFAESI Act, which deals with the power of Reserve Bank to determine policy and issue directions which are in the public interest to regulate the financial system of the country. The RBI though regulates the financial institutions under the SARFAESI, but it cannot be said that it is discharging public duties.

The Court to cited the judgement of Hon’ble Supreme Court in Federal Bank Ltd. Vs. Sagar Thomas [AIR 2003 S.C. 4325], whereby the question of the writ against a private bank was considered in length and such considerations were been extended to the NBFC because they represent the same credit business. The court through this judgement conveyed that, the RBI through the SARFAESI and Banking Regulation Act has a general and greater powers of supervision to maintain proper fiscal discipline over the Banking and credit business,  which may go to the extent that, it can takeover a board of the company.

A writ only be maintainable if it violates any statutory provision. There being no violation as such by Respondent No.1, so carrying a banking profession does not akin to government function. Merely because the Reserve Bank of India lays the banking policy in the interest of the banking system or in the interest of monetary stability, it does not mean that private companies carrying on the business of banking, discharge any public functions or public duty.

Thus, the opposite party is not qualified as “State” within the meaning of Article 12 of the Constitution or under any obligation to discharge any statutory functions.  Though, Court dismissing the petition gave liberty to seek an appropriate remedy before the appropriate forum as per the law.

What can be the appropriate remedy in such Case?

The intent of writing an article on this judgement is that such nature of disputes between a Banker and a customer can now be resolved through a different dispute resolution method. The petitioner sought the foreclosure of the loan account held by the responding NBFC company. The Respondent NBFC provided sufficient reasons for rejecting the closure of the loan account. It is certain that the petitioner was not satisfied with the action taken by the NBFC. So, where can the petitioner raise her issue?

The dispute is of commercial nature between the Creditor and Debtor. The disputes can be solved by simply filing a civil suit but another alternative method has been devolved by the RBI concerning the Banker-Customer relationship.

The Banking Ombudsman Scheme, a dispute redressal mechanism devolved by the RBI. The scheme has been implemented and has been successfully functioning in major cities in India and also in resolving disputes effectively and efficiently with much lesser cost. To know more about the Banking Ombudsman scheme read this article.

Case 2: State of U.P vs Kotak Mahindra Bank Limited

A Bank can transfer its debt or NPAs to another Bank by an Instruments of Assignment. 

The question involved in this case as to what amount of stamp duty will be levied where Banks has inter-se transferred NPA assets or debts through an instrument of assignment.

Facts: The instrument of assignment executed between the Defendant Bank and the State Bank of India is in question before the Court. The Assignor is the State Bank of India which has transferred 48 debts of defaulting borrower to the Assignee/Respondent Bank at Rs. 31.06 Crores. When a photocopy of the Instrument was brought to the notice of the Collector, a doubt arose about its true nature. Thereupon, the matter was referred to the Board of Revenue which on the ambiguity of its legal status, involving an important question of law had referred to the High Court under the Stamp Act. The High Court after adjudicating on the legal issue, aggrieved by the order of the Appellant State of UP, has filed this Special Leave Appeal.

Order: The said case is at its preliminary stage of admission and it has pointed out some legal outline to which it may be heading forward. In the order dated 05-03-2020, Article 23 of Schedule 1-B of the Indian Stamp Act, 1899 was mentioned before the Court. The said Article 23 has provided a ceiling duty of Rs. 1,00,000/- in the State of U.P in the transfer of NPAs for Asset Reconstruction Company through a gazette notification.

The notification dated 15/03/2005, the government declared that Article 23 of the Schedule 1-B of the stamp duty executed by an Asset Reconstruction Company will be from Rupees Eighty per thousand to Rupees one per thousand, provided that the duty shall not exceed Rupees one lakh.

The Court in reference to the legal question cited a similar judgement titled ICICI Bank Limited vs. Official Liquidator of APS Star Industries Limited and Others [2010 (10 )SCC 1] in which it was held, by reversing the Gujarat High Court Judgement, that Banks can Inter-se transfer NPA’s among them. The transfer should be according to the guidelines prescribed by the RBI. The NPA’s are in general are debt, and the SARFAESI Act was enacted with the purpose of creating Special Purpose Vehicles (SPV) in the transfer of bad debts or NPA from the Banks. The SARFAESI does not hinder such transfer in the inter-se assignment of Bank either.

The Kotak Mahindra Bank having its regular banking business transferred NPAs through an instrument of assignment, which comes under the nature of the activity performed by an ARC. The State of UP through its notification as per Article 23 of Schedule 1-B extended its ceiling limit in stamp duty to ARCs. The Bank herein acted as an ARC which by applying the principles from the above judgement can be extended to be part of the banking business.

The Court opened this question for consideration to the State of U.P. to examine the matter and take an appropriate decision as to whether the benefit provided to the Asset Reconstruction Companies by capping the limit could be extended to the banks as well. The case is still open for final adjudication in this issue.

Case 3: Parimal Capital and Housing Finance Limited vs Anil Kumar and others.

A Leave from Defence can be granted to the Guarantor where Insolvency Resolution Proceedings is pending against the Corporate Borrower.

The case involves a legal dispute between the Lender and the Guarantor of a corporate loan, whereby, the Lender wants to enforce the liability the Guarantor has promised in the event of default by the Borrower.

The case also describes the legal position of the Guarantor, where an insolvency proceeding is going against the Borrower and whether the Lender in such a situation, recover its debt by invoking the surety as provided by the Borrower. The Defendant/Guarantor has raised several objections to this and the Court has held in favour of the Defendant but negated the objections raised by the Guarantor/Defendant.

Facts- The plaintiff is a company which filed a Commercial Summary Suit for recovery of a sum Rs 67,92,29,900/- on the basis of guarantee agreements by the defendant/promoters. The Defendants are promoters of two companies namely S.K Elite Industries India Limited and S.K Wheels Private Limited (the Borrower companies).

The Lender after negotiations provided a loan to the borrower company and executed a facilitating agreement whereby, under clause 15 of the agreement, in the event of default the right to invoke guarantee was given to the Lender/Plaintiff. In addition to the said agreement, the defendants agreed unconditionally and irrevocably in discharging the guarantee to the facility agreement and executed three personal guarantees.

Thereafter, in due course, the borrower company defaulted in the payment and the plaintiff demanded from the defendant to pay the overdue amount. After the defendants failed to discharge their liability, the plaintiff invoked the guarantee agreement and instituted the suit for recovery.

The defendants in the suit filed an affidavit and sought an unconditional leave to defend the suit. The defendant contended that the summary suit is not maintainable on the allegation that the plaintiff has suppressed material facts. The defendant informed that the facility agreement, as well as the guarantee agreement, are not sufficiently stamped which are the basis of the dispute.

The defendant also informed that the Borrower company is undergoing a corporate resolution process under the Insolvency and Bankruptcy Act, 2016 (IBC) whereby, the plaintiff has already lodged a claim of Rs.15,31,56,271 before the resolution professional. Thus, in the operation of moratorium under Section 14 of the IBC suit is not tenable.

Held- The court observed that there was no dispute in the jural relationship between the parties, it is evident that the Lender had advanced Rs 62 Crores to the borrower companies and the defendants are there promoters. In fact, the Defendants are guarantors to the loan and the personal guarantees constitute as security as per the facility agreement, which is undisputed by the parties.

On the question of deficit stamp duty, paid in the facility agreement accompanying with the guarantee agreement, is that, during the pendency of the suit, the Plaintiff, had submitted the executed agreements for adjudication to the Collector of Stamps and eventually in the proceedings had paid the deficit stamp duty of Rs. 10,01,600/- and penalty of Rs 20,400. Thus, from the aforesaid development as per Section 34(a) of the Stamp Act, 1958 on the payment of Stamp duty and penalty the instrument becomes admissible and the bar against acting upon such instrument under the principal provision of the section gets eclipsed.

The defendant also raised the contention that the case is surrounded by the controversy of the facility agreements and the original documents of the said agreements have not been placed on record before the Court in the summary suit and in support, it cited judgements, in Neebha Kapoor vs. Jayantilal Khandwala and Others the Hon’ S. C observed that for the purpose of obtaining summary judgement in terms of Order 37 of the Code (C.P.C) ordinarily the original documents must be produced, Original documents are not available, Appellant, therefore, is obligated to prove the loss of documents.”

The above judgement was not favoured by the Court because the plaintiff also raised the question of the proof of loss of documents, which was constituted as the foundation of the claim in the summary suit and was framed as an issue in the suit. In fact, the original suit was sent for adjudication whereby, the plaintiff has placed the document for payment of deficit stamp duty, before the Collector. Also, as per Section 34(a) of the Stamps Ac, 1958 where deficit stamp and penalty are paid the instrument can be admissible and the bar against such instruments gets eclipsed.

It was also alleged by the defendant that deficit stamp duty was paid in the instrument of personal guarantee, in fact, a stamp duty of Rs. 100/- was paid as the instrument was accompanied with the principal loan facility agreement.

The Court pointed out the Section 4 of the Maharashtra Stamps Act, 1958 where several instruments are employed for completing the transaction, the principal instruments only shall be chargeable with the duty prescribed and each of the others instrument shall be chargeable with a duty of Rs 100/- instead of the duty prescribed in the Schedule. For this, the Court relied on the judgement cited by the Plaintiff in The Madras Refineries Limited vs The chief Controlling Revenue Authority, Board of Revenue Madras.

On the question of adjudication of insolvency resolution process by the Adjudicating Authority appointed by the NCLT, the Court held that until a resolution plan under Section 31 of IBC gets approved the moratorium as per Section 14 of the IBC will be effective only after the approval and will provide a stay against institution and continuation of proceedings against the corporate debtor. The Court observers that if there is a pendency in the insolvency resolution process against the Borrower, the Defendants are entitled to unconditional leave to defend, because there being no outcome due to the pendency of the proceedings.

Still, if leave is granted to the defendant because of the pending insolvency resolution process, the guarantor does not have any bar from proceedings as the Court as cited from the judgement of the Supreme Court in State Bank of India vs V. Ramakrishnan, where Section 14 moratorium doe not bar the proceedings against the corporate guarantors.

The Court finally opined that, if insolvency resolution proceedings are approved as per Section 31, a situation may arise where the liability of the borrower may be scaled down. In such an event if leave to defend is not granted and a decree is passed, the Defendants would be prejudiced. Therefore, the Court allowed the Defendants the leave to defend on a conditional by depositing the principal amount of Rs. 60,10,45,045/- in the Court in eight-week time.

The Court made the following order

  1. Leave to defend is granted to the Defendants subject to deposit of a sum of Rs 60,10,45,045/- in the Court within a period of eight weeks date of judgement.
  2. If the aforesaid deposit is made within the stipulated period, this suit shall be transferred to the list of Commercial Causes and the defendant shall file written statement within a period of four weeks from the date of deposit.
  3. If this conditional order of deposit is not complied with within the aforesaid stipulated period, the plaintiff shall be entitled to apply for an ex-parte decree against the defendants after obtaining a non-deposit certificate from the Prothonotary and Senior Master of this Court.

Leave a Reply

Your email address will not be published.