Oriental Bank of Commerce v. Darshan Lal Gaba, (1999) 2 BC 642 / Case Review
(1999)
2 BC 642 : 1999-2001 (Supp) ISJ (Banking) 496 (Del).
Introduction
Bank gives loan for the benefit of the entrepreneur
and ultimately, the society. There are few loan takers who, sincerely pay back
the loans but there are few black sheep who never intend to pay back the loan.
To cater these problems, we had the Debt Recovery Infrastructures namely,
Recovery of Debts due to Banks and Financial Institutions Act, 1993, to recover
dues from the defaulters. Presently, this act has been replaced by SARFAESI
Act, 2002[1].
SARFAESI Act
had to be brought in because when we mix Recovery of Debts due to Banks and
Financial Institutions Act, 1993, and Sick Industries Companies Act, then,
there is very negligible chance of recovery of the debt. SARFAESI Act, when we
go deeper then we find that this act gives power to the lender to take
possession of the mortgaged property without getting any sort of decree of
possession.
Below is the case of recovery where the lender bank
had basically, filed a suit for recovery of debt due to it. We shall discuss
this in detail.
Facts
The Plaintiff, Oriental
Bank of Commerce, has filed this suit for recovery of Rs. 2,22,289.31 together
with pendent lite and further interest from the date of the filing of the suit
till realisation of the decretal amount at the rate of 14.5 % per annum, inter
alia, for the sale of hypothecated Tata bus model LP 121 OE/52, chasis No.
344-050-I-61340 bearing registration No. DEP 5782. Defendant No. 1 was the
principal borrower and Defendant No. 2 is the guarantor. The Defendants had
filed Written Statements wherein they had denied their liability towards the
Plaintiff Bank on various grounds.
Contentions
The plaintiff contends that the defendant, Darshan
Lal Gaba had been sanctioned a loan by the Bank Manager and this was clearly
witnessed by one Mr, Sehgal because he was in the loan department. Mr. Sehgal
now, had filed the suit gainst the Defendant for recovery of money. Mr. Sehgal
has all authority.
The defendants denied the authority. Further they
contended that they were being charged penal interest which was illegal. They
also contended that their loan amount was a little less than what the plaintiff
claimed. It claimed that the bank had got blank papers signed by the defendants
for whatsoever reason.
Issues
The following issues were framed:
1. Whether the plaint is signed, verified and the
suit instituted by a duly authorised person?
2. Whether the plaintiff bank got signed blank
printed forms from the defendants? If so its effect?
3. What rate of interest the plaintiff is entitled to?
Judgements
The plaint was signed by a duly authorised person
and that the suit is valid. The defendants were not able to produce any proof
of blank paper signing therefore this issue was decided in favour of the
plaintiff. The penal interest was valid and that it will be included as the
borrower had defaulted in making the repayments.
Implications
In India, banks
and financial institutions had been required to institute a suit in civil court
to proceed with recovery. The suit was tried and decided in accordance with the
procedure laid down in Civil Procedure Code (CPC), 1908. The CPC resolution process
was long and cumbersome. In 1981, a committee under the Chairmanship of Mr. T.
Tiwari was formed to suggest reforms. The committee observed that the Indian
civil court system was burdened with diverse types of cases. Thus, recovery of
dues due to banks and financial institutions was often not given priority. The
committee suggested other modes to recover such dues. One measure was to set up
quasi-judicial bodies to deal exclusively with the recovery process of the
financial sector. These bodies could follow a faster “summary proceedings”
process for disposing of cases. However, actual action on the formation of such
bodies was not initiated until about a decade later around the Indian financial
market and economic liberalization.
In 1991, the
Committee on the Financial System headed by Shri M. Narasimham (Narasimham
Committee I) endorsed the views of the Tiwari Committee and 3 recommended
setting up Special Tribunals (DRT[2]
Ernakulam website, accessed December 4, 2014). As backdrop for this
recommendation, the committee noted the workload on the court system due to
defaults. As of 30th September 1990, more than 1.5 million cases filed by the
public sector banks and 304 cases filed by the financial institutions were
pending in various courts. The recovery of debts involved more than ` 5,622
crore owed to public sector banks and ` 391 crores to other financial
institutions. The Narasimham committee recommendations led to the enactment of
the Recovery
of Debts Due to Banks and Financial Institutions Act (RDDBFI), 1993. The Act established two types of agencies, Debt
Recovery Tribunals (DRTs) and Debt
Recovery Appellate Tribunals (DRATs) and conferred upon them special powers for
adjudication of debt recovery matters. Thus, the earliest establishment of DRTs
as institutional entities to resolve bankruptcy occurred in 1993. The first DRT
was formed in Calcutta (now Kolkata) on 27th April 1994.
Even after the
formation of the DRTs and DRATs loans
were not so easily recoverable. This was a case decided in 1999 and in
1994 the first DRT was established. The
bank had to get a decree of possession of the security mortgaged or
hypothecated. This is not the end. What after getting the possession? A
liquidated loan was given to the borrower. After possession of the property is
the bank able to liquidate the property easily? The answer is strict No. It is
so because to liquidate the property the bank again had to get a decree of
auction or self-utilising, etc.
It was lucky for
the bank that this was a vehicle loan and that it could recover it. If a
company had taken loan from the bank then it would be very difficult for the
bank to recover the amount. First, the company could get registered under the
SICA. Once a company is registered under SICA then that company does not have
to pay any money to the bank until it recovers completely. The Bank cannot file
any suit for recovery against that company. Now, if it cannot file any suit
against the company then it is impossible for the banks to take the secured
properties under its possession. Liquidation is a far question.
Today,
thankfully we have the SARFAESI Act, 2002 where we do not face the SICA problem.
As for possession of the mortgaged property, there is no need for a suit of
recovery. This act has made the made the bank KING. It has the power under
section 13(4) of the SARFAESI Act, 2002[3],
to take mortgaged property into its possession. Not only that but it can also
auction it or do anything to liquidate it.
In an industrial
loan, if there is any loss and the industry is not able to pay its dues on time
to the bank then this concept comes in handy to the industry as well as the
bank. The concept is RESTRUCTURING. In this generally, if a business is running
into loss just because it does not have that little money which would increase
its capacity of production, then the bank moves forward to help the industry
with additional loan. This is given so that the deficiency is finished and the
industry not only revives but also earns profits. An industry can pay interest only
when it has profits. This is how Restructuring helps the banks.
In the above
case, Restructuring should not come in anybody’s mind. This is so because in a
vehicle loan nothing can be done to increase its capacity of production.
Nothing can be increased in the vehicle that it would increase the business’
profits. The bank was right in initiating the recovery process.
Conclusion
Inefficiencies
in the Actual Recovery Process: Informal discussions with industry reveal that
the recovery process is inefficient and often witnesses lack of robust
participation in properties auctioned under DRTs. A key issue is the presence
of claw back provisions as discussed below. Under the DRT, a bank recovers its
dues by sale of the asset by publicly auctioning it. It is mandatory for the
bank to advertise the auction in the leading newspapers, after mentioning a
reserve price. One day is allotted to the potential buyers to examine the asset
and verify its documents. Bidders must deposit a refundable amount called the earnest
money deposit (EMD), which could be 15% of the reserve price. Upon winning the
auction the successful bidder has to pay the remaining amount within the period
determined by the bank. If the bidder is unwilling or unable to pay the
remaining amount, the EMD is not refunded. Following the successful bidding of
the asset a 30 day cooling period is observed. During this period, an
injunction may be sought. For instance, the owner of the asset may argue that
the price is lower than expected or there may be lack of proper advertising of
the asset. Other bidders could contest the auction on grounds that the bank did
not furnish sufficient documents during inspection of the property. The bank
may re-auction the asset if it does not get the expected price for it. Less
frequently, banks may choose to settle for a price that is lower than the
reserve price. Informal discussions suggest that the illiquidity of the asset
and the specificity in value of the asset to the original borrower can result
in peculiar outcomes. For instance, the original owner of the property may have
the highest value of the asset, in which case the 10 debt is effectively
reduced to the valuation of the asset to the defaulter, who then has the option
of purchasing a property back at price that is lesser than what is originally
due under the defaulted loan. These types of inefficiencies can arise in many
bankruptcy proceedings and are thus clearly not unique to DRTs or India.
However, protracted proceedings in the legal bankruptcy process offer more
opportunities for such situations to arise.
Even today, when
we have the SARFAESI Act, we still are facing this problem mentioned above. It
is completely on the luck of the Lender whether he can get the full money or
not.
Truth is bitter
but truth is truth. India is a corrupt country. Banks do cross their extent in
order to recover the loan easily. Once the bank takes the mortgaged property
into its possession then it has to value the property according to the banks
norms and government values. This valuation is done in order to get the reserve
price as mentioned above. The bank themselves appoint the valuers. Its like
they are the judge in their own cause. These valuers value the property at a
minimum rate higher than the loan amount
and not the actual amount which could possibly,
be 10 times higher. This is done so that they can have more potential
buyers.
If the property
was woth 2 crores it might get sold for Rupees 20 lacs, a little more than the
loan amount. This would angry the owner of the property. This is completely
against natural justice. If the owners want to move to the court then they have
to submit 25% or 50% of the loan amount
in the court, to get their case admitted. If
a person was genuine all his life and due to market fluctuation he
suffers loss, then there is full chance that he will die of injustice. He cant
go to the court because if he had that much money then ,for sure, he would give
that to the bank.
What I believe
is that SARFAESI Act is better than the RDDBFI Act for the fact that it makes
the recovery process comparatively faster but it does have a demerit. As I
mentioned above that even a Genuine Party has to submit 25% or 50% of the loan
amount to file a case against the bank, in case of grievances. This is unfair.
A solution must be brought up for this.
[1] The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,2002 (also known as the Sarfaesi Act) is an Indian law
.It allows banks and other financial institution to auction residential or
commercial properties to recover loans.
[3] In case the borrower fails to discharge his liability in full
within the period specified
in sub-section (2), the secured
creditor may take recourse to one or more of the following measures to recover
his secured debt, namely: --
(a) take possession of the secured
assets of the borrower including the right to transfer by way of
lease, assignment or sale for
realising the secured asset;
(b) take over the management of the
business of the borrower including the right to transfer by
way of lease, assignment or sale for
realising the secured asset:
PROVIDED that the right to transfer
by way of lease, assignment or sale shall be exercised
only where the substantial part of
the business of the borrower is held as security for the debt:
PROVIDED FURTHER that where the
management of whole of the business or part of the
business is severable, the secured
creditor shall take over the management of such business
of the borrower which is relatable to
the security for the debt.
(c) appoint any person (hereafter
referred to as the manager), to manage the secured assets the
possession of which has been taken
over by the secured creditor;
(d) require at any time by notice in
writing, any person who has acquired any of the secured assets
from the borrower and from whom any
money is due or may become due to the borrower, to
pay the secured creditor, so much of
the money as is sufficient to pay the secured debt.
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