Useful Analysis of NPA Recovery by Banks and Counter-claim is the Best Defense of Borrowers:-  The following article will be highly useful to the Borrowers and Guarantors particularly those facing litigations in DRTs:- 

NPA Recovery by Banks - Counterclaim is the Best Defense of Borrowers

-         Ram Kishan*

Synopsis:-

The Supreme Court of India had delivered a landmark verdict on the Securitisation Act. The said verdict had been the turning point in the legal history of DRT Act and Securitization Act. Full text of the said ruling can be seen on this web site by clicking http://www.drtsolutions.com/sc_judgment_on_drt,_securitisation,_transcore.htm  In this article, important legal and practical aspects of the said ruling have been analyzed with particular reference to the status and legal defense of the borrowers and their counter-claims in DRTs. 

Important Judgment of Supreme Court on Securitisation Act:-

 The Supreme Court of India has ruled vide Transcore vs Government of India and Indian Overseas Bank, decided on 29^th November 2006 that during pendency of recovery proceedings under DRT Act, 1993, the applicant banks and financial institutions can also invoke Securitisation Act, 2002 (also known as NPA Act) Prior to this judgment, the lenders were debarred from  simultaneous proceedings under both the Acts and therefore were required to withdraw their recovery applications from DRTs before invoking the Securitisation Act. On account of removal of such restriction, the secured creditors has wielded all the powers hitherto desired and sought after by them. In this article certain important legal and practical aspects pertaining to litigations under Securitisation Act and DRT Act. and impact on the resultant adjudicatory legal process have been analyzed so as to be of practical utility for the lenders as well as the borrowers.  

Categories of Defaulters:-

The recovery cases can be divided in two broad categories viz. willful defaulters and secondly genuine borrowers turned defaulters for no faults of theirs. The provisions of law contained in DRT Act and NPA Act applied through special courts of DRTs provide adequate legal framework to accomplish recoveries from the defaulters. It is needless to mention that no businessman would like to make his unit sick and close down his business voluntarily. Many a times, the circumstances are beyond his control due to which his business or industry become sick such as natural calamities, deficiency of funds, inadequate working capital, inordinate delays in formulation of rehabilitation plans by the banks and FIs etc.  During such time, if the bankers do not provide timely and adequate financial assistance, the borrower undergoes acute financial miseries, loss and damages and then dragged to face undesirable litigation for recovery of alleged dues.  

Legal process in DRTs:-

The secured creditor approaches DRT with prescribed format of application stating that financial assistance was sanctioned, documents were executed, there were defaults, the account became NPA and hence recovery suit has to be filed within limitation period of three years. The recovery amount is arrived at by adding the compound interest on monthly rests and the DRT is requested to issue the recovery certificate for the amount prayed along with compound interest till the date of payment. The borrower in his written statement of defence, describes the circumstances on account of which the unit became sick and prays for rehabilitation so that the unit runs and the installments of loans and interest are paid out of the earnings. In most of the cases, such defence is ignored and the recovery certificate is issued for the amount prayed for by the applicant lender. All his assets may be sold and there may be balance amount for which he and his heirs may continue to be debted and pursued for recovery. He may be even arrested and jailed. This is the price genuine borrower may have to pay for his entrepreneurship in India. This model is pathetically illustrated by the farmers committing suicides due to bank loans They have no resources or knowledge to fight the thrusted recovery litigations or raise their counter-claims. In some cases where the secured assets are those which can be quickly sold such as residential properties, the secured creditor invokes the Securitisation Act to take possession of the said properties and sell the same without any adjudication in any court of law including DRT. These are the most simple instances of recovery litigations. Complications and complexities are further introduced by the factors like consortium lending, term loans from FIs, public issues, foreign exchange dealings, preparation of rehabilitation plans by operating agencies, intermediate legal proceedings in Appellate DRTs, Sec 138 of NI Act, Winding up, Labour courts, CBI Enquiries, Taxation matters, Insurance matters, High Courts, Supreme Court back and forth proceedings at all these courts etc. The proceedings in forthcoming NCLT (in short for National Company Law Tribunal) as well as simultaneous proceedings under the DRT Act and NPA Act on account of the latest judgment of the Supreme Court will further add to the complications and complexities of the said recovery litigations. Scarcity of finances for survival and litigation expenses for the borrower, no such financial problems for the lending banks and financial institutions and elements of corruption add further to existing complications and complexities of the entire adjucatory process.  

It was desired that compared with civil courts, the DRTs would be able to achieve quicker recoveries. When this was found not happening, the Securitisation Act was enacted. The handicap of not having simultaneous proceedings has also been removed with the Supreme Court judgment. Despite all these, the contemplated quick recoveries will not and can not be achieved as legal process is simultaneous proceedings of the two contesting parties i.e. lender and borrower. The former is beauracracy managed and the later is privately owned entrepreneurship. The excessive pressure for recovery alone rebounds with only greater exposure of inbuilt inefficiency and incompetence of the former. As a result, not only the adjudicatory process will take time but may result in payout of damages rather than recoveries. Hence it is more appropriate to recognize that the recovery out of profit by way of running of the business is the better option rather than destroying the business by all out pressure only for recoveries out of the assets of the borrowers and guarantors and thus killing the entrepreneur and converting his assets into cash with huge depletion of value. The bank and the FIs are better advised to be more careful in appraisal so that once sanction of the loan is awarded, the only security should be surplus generating business and during periods of losses, interest and repayment of loan suspended till surplus generating mode is accomplished. With such approach only, production and productivity will rise and ultimate recoveries will be better and the real NPA will be at the lowest as well as the recovery litigation will be the least. The initiative has to be taken by the lenders otherwise the counter-claims and damage suits will compel them to transform themselves as proposed.    

Legal defence for Borrowers:-

 The genuine and innocent borrowers and guarantors in above mentioned litigations feel trapped, helpless, victimized and cheated more so when they are unable to find suitable advocates to understand their points of view. On one hand, he is deprived of all his assets and belongings. He finds even bare survival difficult leave alone legal fight with the banks and FIs who have no such financial problems for litigation. The general environment and thinking also happens to be in favour of banks and FIs. To that extent, the Judges also carry such opinions. The fight is just like between a sick hungry child and a well fed strong experienced wrestler. Such fight is highly against equity. As a result many of litigant borrowers have fled away, some have committed suicides. Under such facts, circumstances, consequences and backdrop, in this article, we have analyzed the rights and liabilities of the contesting parties as well as the related legal aspects.

Despite above, there is a silver lining. The existing Constitution of India and the legal procedures provide all solutions to achieve ultimate justice based on well defined principles of justice, equity and good conscience. The basic requirement is that, first, the borrower himself will have to pay adequate attention to the entire legal process.  The advocates and judges have their own limitations. At every stage of adjudication and before every date of hearing, the borrower will have to study the requirements of substantive and procedural law. All out efforts should be made to obtain admissions from the opposite party so that no avenue is left for exercise of discretion by the judges. We provide complete professional help and guidance during the entire process of litigation in DRT, ADRT, High Court and Supreme Court .If the borrower is not so extremely vigilant and cautious, he will be defeated in DRT. With such defeat in lower courts, nothing better may be achieved in higher courts like ADRT, High Court and Supreme Court as they rarely interfere with the decision of the lowest court particularly in respect of facts.. Hence the borrowers must regard the litigation in DRT as the first, last and ultimate court battle and accordingly the DRT fight should be with the best preparation on every date. It must be kept in view that the banks and FIs will employ best advocates in all the courts upto Supreme Court. Hence the borrower has to work hard himself from day one to the last verdict of the Supreme Court. Accordingly he has to choose a lawyer who can also work hard on every date of the proceedings. 

In the above backdrop, we now describe below, the most fundamental legal and factual aspects of the entire process particularly concerning industrial and business finance under examination in this article.  

Important Legal aspects:-

In this connection, it is highly essential to comprehend the material facts relating to the industrial and business finance. In our country there is no ‘No Fault Insurance’ We have yet to enact formal ‘Lenders’ Liability Law’ Further the basic facts involved in the complete process of industrial and business finance have not yet been pleaded before the trial courts and DRTs. As a result, judicial determination of these facts have not taken place and hence there are no precedents available. On account of unadjudicated facts of modern complex industrial finance, the legal community  like judges will continue to apply their opinions, common sense and hearsay based on day to day experience of personal finance i.e. loan for personal consumption and full recovery out of security only whereas the industrial and business finance have entirely different attributes due to appraisal for technical feasibility and financial viability, security by way of positive viability for projected turnover for 5 to 10 years, etc.

With such handicaps, borrower has to apply the fundamentals of law enshrined in the common as well as statute laws in our country. First step is drafting of the pleadings. The person drafting the pleadings should have mastery of all the relevant laws as well as mastery of relevant facts The said person having mastery over the related business laws need to have adequate understanding of complex facts involved in the entire process of business and industrial creation, development and growth. Thus the pleadings need to be drafted only by the person having mastery of law and mastery of facts. Such person alone should provide guidance and course correction at every moment of the trial to the borrower. With such setup only, one can think about getting justice in our country otherwise not. Since the type of industrial litigation under analysis in this article is at the nascent and evolutionary stage, it would take few years to attain logical outcome. 

The banks, FIs and Industries in India are governed by RBI Act 1934, Banking Regulations Act 1949, IDR Act 1951, SFC Act 1951, Companies Act 1956, IDBI Act  1964, Banking Companies (Transfer of Undertaking) Act 1970, NI Act 1881, Evidence Act 1872, Bankers’ Books Evidence Act 1891, IT Act 2000, DICGCI Act 1961, DRT Act 1993, Securitisation Act 2002 etc. along with fundamentals of law contained in Constitution of India, law of torts, law of damages and principles of natural justice. It is needless to mention that the justice is above all. The entire setup of all the courts right from DRTs to the Supreme Court is to attain justice. No other considerations can overshadow, override or supersede the said objective of achieving justice. The litigant borrowers in DRTs and higher courts must keep this objective always in view and wherever they find that the process, procedure or order affects this objective, they must not allow the process to continue till the objective at that stage is achieved. This is how leading judgments will be obtained and will be useful to the future litigants.   

Violations of RBI Guidelines and Law of Torts:--

The public policies in respect of banking decided in the Parliament are communicated by the Central Government to the RBI (in short for Reserve Bank of India). The RBI in turn communicates the same to the Chairmen or Heads of all the banks in the country. These are called RBI Guidelines and have been held to be statutory and mandatory for the banks and FIs. The said Chairmen or Heads issue internal circulars in their respective banks so that all the employees and functionaries are bound by them. Thus the said public policies are intended to be duly implemented with the all pervasive and binding tool of the law, a most important process in modern democratic society like ours. Any violation of the said RBI Guidelines amounts to wrong doings on part of the bank and concerned officials. The wrong doings, if any, cause legal damage to the affected person apart from actual damage, if any.  Such damages commence the moment, the wrong doings are committed. Further as per the law of torts, the bank officials have no power or authority to cause any injury to their clients intentionally or even unintentionally. On the other hand, they owe a duty of care towards the assisted borrowers. If any injury is caused on account of the said wrong doings or violation of the duty of care, the affected person is entitled for compensation for unliquidated damages. If the wrong doings are willfully caused, knowingly continued and if they are arbitrary, unconstitutional and oppressive, the affected person is entitled for aggravated and exemplary damages.  

The above framework of law emanates from the Constitution of India. All the functionaries of the lending banks and financial institutions, the borrowers as well as the courts including DRTs are bound by the said framework of law. 

The scenario of banking in India underwent a significantly change in 1970 on account of Bank Nationalization Act. Also the security based lending was altered to object, purpose and project oriented financing. The application for industrial or business loan is required to include a project report or scheme. The said project report is appraised by experts in the lending institutions from the angle of technical feasibility of the scheme or project and financial viability of the same based on future projections of 5 to 10 years. When those experts and hence the said lending institutions or banks are fully satisfied with the appraisal, then only the loan is sanctioned. At this stage there is no existence of any secured asset or any other physical security or guarantee. The only and sole security is the viability i.e. surplus wealth i.e. profit generation capacity of the project or scheme. It is to be noted that in the said appraisal, the interest as well as the repayment of loan is out of the profit. The appraisal does not say that if there is no profit, the interest and repayment of loan will be paid out of any other source or securities, if any, and hence in the event of ‘no profit’ the payment of interest and repayment of loan should wait. Under no circumstances, these should be out of securities or personal guarantees as the same did not exist at the time of the appraisal and sanction of loan. These important aspects are to be kept in view by the borrowers and guarantors so that it is pleaded in defence if there is any litigation for recovery initiated by the lenders.  

The Objectives and Purpose of Securities:-

Question arises as to what for the securities and guarantees are taken. As stated above, during the periods of loss, the payment of interest and repayment of loans should wait. The borrowers should be helped so that profit is achieved as early as possible. As soon as the profit state is achieved, the suspended payments may commence without affecting the health of the assisted unit. Interest burden during the suspended period may be borne by the borrower if the sickness is due to him but for conditions beyond his control, it should be shared equally between the lender and borrower. If the sickness is due to wrong doings of the lender, the said burden should be borne by the lender. Rehabilitation Term Loan should be provided on realistic basis. Correct executive decision would be arrived at by the bank officials if they picture themselves in the situation faced by the borrower.

It is pertinent to note that this year, the Nobel Peace Prize has been awarded to Mohammed Yunus, founder of Grameen Bank in Bangla Desh who provided working capital loans to poor for self employment without security. Such loans totalled over Rs. 20,000 crores. The repayment rates against such loans have been healthy 98% as in absence of securities, the banker concentrated on running of the business first and then recoveries out of profit generated. In our country bankers obtain multiple securities and guarantees and hence when the business faces rough weather, the banker concentrates on recoveries by recourse to court of law, seizing and selling securities etc. For this purpose, even the bank beauracracy initiated and followed up for special legislations like DRT Act, setting up special tribunals like DRTs and Securitisation Act etc.. 

In case, the acts and omissions of the bank officials are not keeping the above aspects in practice, it would amount to wrong doings attracting compensation for the loss and damages, legal as well as actual which become due the moment, the wrong doings are caused. The borrower can claim the said compensation in form of counter-claim or may file a damage suit in the court of law. Since the said loss and damages are on continuing cause of action, there is no bar due to limitation. Further the said compensation attracts interest on the same footing as charged by the bankers i.e. on monthly rests basis as at present. In most of the cases we have observed that the said counter-claim is much more than the claim of the lenders and hence prima facie, there is no debt due and hence the lenders can not invoke DRT Act or Securitisation Act. The pleadings of the counter-claim must conform to Law of Pleadings and should be based on documents such as Project Report, Application for Financial Assistance, Appraisal Report, Sanction for Financial Assistance, Correspondence, Minutes of Meetings, Balance Sheets, Annual Reports etc. Wherever the facts are denied, the opposite party must be called to witness box to elicit the real facts as well as to admit the wrong doings. All the facts must be proved by way of admission either in writing or orally in witness box. Nothing should be left for decision by way of discretion by the judge. This should be the goal for the borrower if he desires to achieve justice. With such approach, the judge will be left with no alternative but to award decision in favour of the borrower. The higher courts also will not be able to disagree. 

Impact and consequences of SC Judgment:-

On account of the above mentioned Supreme Court judgment, the lenders have resorted to simultaneous proceedings under DRT Act and Securitisation Act. Pleadings may be same in the written statement in both the proceedings. The counter-claim may also be filed therein. Counter-claim can also be filed in SA under sec 17 of the SARFAESI Act vide DRAT ruling in the matter of Vijaya Bank vs B.L. Gupta decided in 2011. Copy of the said judgment has been given on this website which you may see by clicking http://www.drtsolutions.com/counterclaim-SA.htm  Both the proceedings may have to be combined together to avoid any conflicting decisions. Since as per the DRT Act, the claim and counter-claim are to decided together, the same will now be true in respects of proceedings under the Securitisation Act. 

In view of above, the bankers must examine, at their end, before invoking the DRT Act and or NPA Act, that no wrong doings have been committed and they have fully abided by all the RBI Guidelines, otherwise, they will have to face counter-claim or damage suit from the borrowers and guarantors. In the cases already filed, they must carry out this examination and if they are at fault, they should settle with the borrowers. In the current matters of financial assistance, the bankers must keep all the above aspects in view so that the NPAs are calculated correctly only after implementing all the RBI Guidelines. For potentially sick viable units, the bankers may even arrange postponement of declaration of NPA. 

The contesting borrowers will have to be always vigilant and alert to ensure that DRTs act keeping in view the fundamental principles of justice, equity and good conscience. The DRTs must treat the banker and borrower as two contesting parties on equal footing. Isolated discussions with the bankers or Ministry of Finance are against the principles of equity and fair trial. In the matter of violations, the borrowers must raise objections and if the situation does not improve, they must ask for change from one DRT to another. 

It is needless to mention that entire setup of the courts and DRTs is meant for  justice. No reason or interpretation can justify that the DRT has any limitation or restriction in securing or awarding justice. In fact since the DRT is not bound by CPC and is to work on the principles of natural justice , it has much wider powers, authority and jurisdiction to discover the real facts as well as admission from the opposite party. Until and unless all the required facts have been judicially determined, the borrower should not proceed with the arguments. Justice is above all. Legal technicalities and procedures can not come in way of getting justice.  Unnecessary hurry and delay have no place in perfect judicial process.  All out efforts must be made to complete the trial in DRT or civil court in all respect so that no deficiency arises in higher courts during the process of appeal, if any. No chance or scope should be left for higher courts to point out the deficiencies, if any, in the lower court or DRT. This is all the more important when the existing facts, circumstances and consequences are more favourable to the banks. The present generation of the contesting borrowers have greater responsibilities towards their  coming generation to fight out the battle successfully against greater odds. With missionary zeal and undaunted spirits, the borrowers can win against the banks and such leading judgments will make the task easier in future.   

Conclusion:-

In order to expedite bank litigations, the DRT Act 1993 was enacted and special courts in form of tribunal i.e. DRTs were created. The specialized knowledge in banking, industries, finance and related laws is growing in the DRTs day by day. The litigant borrowers and guarantors as well as their advocates have started using the above knowledge in contesting their cases and with passage of time, useful judgments continuously are and will be delivered. Such leading cases will form the precedents. All these will create better environment not only for development, creation and sustained growth of industries and business but also appropriate banking in our country. Under such facts, circumstances and consequences, the real NPAs as well as litigations in DRTs will come down. We are in this line since 1989 and thus have experience for more than 30 years. Our website was setup in 2000 exclusive for defence of borrowers  and since then we have long exposure particularly to the problems of borrowers and solutions thereof. Whenever you have any problem, you may contact us on our phone M-9691103689 during week days. You will get instant advice. In the meantime, please study our this web site. We wish you all the best.

*Mr. Ram Kishan, now 81 years, has rich and wide professional experience in the field of management, industries and law since 1989. His web site www.drtsolutions.com was created in 2000 ie more than 20 years of such online exposure presents most useful and practical knowledge pertaining to all aspects of DRT  Act and Securitisation Act. He is always available on M-9691103689.    

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