Thursday, December 16, 2010

Counter claims against banks

By Mr. V. Niranjan :indiancorplaw

The role of the Debt Recovery Tribunal has been the subject of a great deal of controversy. 

The main question has been whether an independent 
suit filed by a borrower against a bank in a civil 
court could be transferred to the DRT as a “counterclaim” 
against his wishes.

 The law on the point was uncertain, with several conflicting judgments.

  The Supreme Court put the controversy to rest 
with a comprehensive and well-reasoned judgment.

 A copy of the decision, Nahar Industrial Enterprises Ltd. v. HSBC,
 is available here.

The case concerned several appeals that had been filed against
 decisions of various High Courts on this question.

 Some had held that an independent suit was not barred, 
while others had held that it was, and transferred it to
 the appropriate DRT. 

To briefly recapitulate the context, 
s. 17 of the RDB Act provides that the DRT shall have
 jurisdiction to entertain and decide applications from 
banks and financial institutions for recovery of debts
 due to such banks and financial institutions”. 

S. 18 ousts the jurisdiction of all courts except on
 writ jurisdiction to hear matters that form the 
subject of s. 17. 

Originally, the RDB Act did not contain
 any provision that allowed the borrower to
 raise a counter claim or set off. 

S. 19 of the Act 
was amended, and the law as it stands today
 allows a borrower to raise those issues as well.

 Consequently, some courts began holding that an 
independent suit may constitute a “counterclaim” 
for the purposes of s. 19 and is consequently liable
 to be transferred.

The two main, and conflicting decisions on the
 point prior to Nahar were Indian Bank v. ABS Marine Products,
 (2006) 5 SCC 72 and SBI v. Ranjan Chemicals Ltd.
(2007) 1 SCC 97. ABS Marinehad held that an
 independent suit cannot be transferred without the consent 
of the borrower even if it inextricably connected with the bank’s 
suit and is in the nature of a counter claim.

 Ranjan Chemicals
had held that the consent of the parties
 is not a limitation on the power of the court to order a transfer.

In Nahar, the Supreme Court held that Ranjan Chemicals
 could not have departed from the law laid down in ABS Marine
as it was a decision of a coordinate Bench. 

The Court also seems to have accepted the argument that
 s. 31 of the DRT Act is exhaustive of the powers of transfer
 under the Act. 

Substantively, the Court agreed with the reasoning 
that a DRT is incapable of adjudicating complex issues
 of law and fact. It noted that a Tribunal that has the “trappings” 
of a court is not necessarily a court, and approved decisions that
 had held that the DRT is not a court. 

Moreover, the DRT cannot issue a decree, 
but only a recovery certificate. 

Although a DRT is
 empowered to take evidence in a detailed manner,
 the Court observed that its function is intended to make
 this the exception and not the rule. 

Thus, the position is that the DRT is not a civil 
court for the purposes of ss. 23, 24 and 25 of the CPC. 

Nor is it subordinate to the High Court. 

The following observations are apposite:

Concededly in the proceeding before the 
Debt Recovery Tribunal detailed examination;
 cross-examinations, provisions of the Evidence
 Act as also application of other provisions 
of the Code of Civil Procedure like interrogatories,
 discoveries of documents and admission need not
be  gone into. Taking recourse to such proceedings
 would be an exception. Entire focus of the
 proceedings before the Debt Recovery
 Tribunal centers round the legally recoverable 
dues of the bank… Under the Act, as it originally
 stood, did not even have any power to entertain a 
claim of set off or counter-claim. No independent
 proceedings can be initiated before it by a debtor.
 A debtor under the common law of contract as 
also in terms of the loan agreement may have an 
independent right. No forum has been created for
 endorsement of that right. Jurisdiction of a civil court 
as noticed hereinbefore is barred only in respect of the 
matters which strictly come within the purview of 
Section 17 thereof and not beyond the same. 
The Civil Court, therefore, will continue to have jurisdiction
 [emphasis supplied].

The Court evolved two other important propositions.
The first is the well-settled principle that a bar on the
 jurisdiction of the civil court is not to be readily inferred

. The second, and more important, was the Court’s finding
 that since the right to appeal is a vested, statutory right
 by virtue of s. 96 of the CPC, the line of reasoning 
employed in Ranjan Chemicals would not only deprive
 the borrower of his right to sue, but also of his right to appeal. 

In sum, the Court has not only reached the correct conclusion, 
but also finally clarified the law on DRTs with a 
well-reasoned and authoritative judgment. 

Worries remain, however, 
that the judgment may be used by borrowers 
as a tool to stall the efficacy of DRTs.

No comments:

Post a Comment