In many of the developing countries and the transition economy, the quality of the formal judicial institution is poor. The cases in the court are subject to long delay. As a result the economic agents can not depend on the courts for the protection of their property rights, leading to the high transactions costs and other contracting problems. A large and the growing body of the theory suggest that in such a situation some welfare improving transaction will not be undertaken. Improving the quality of the judicial institution and more generally getting the institutions right may thus allow the achievement of superior economic outcomes. The concern as regards to a particular improvement in the judicial institution that processes the debt recovery cases in India is of paramount importance.
In the year 1993 the Indian government passed a national act that allowed the establishment of the Debt Recovery Tribunals across India. These tribunals are the quasi judicial institution to set up to process the legal suit filed by banks against defaulting borrowers. They follow the stream lined legal procedure that emphasizes speedy adjudication of the cases and swift the execution of the verdict. By March 31st 2003 they had disposed the claim worth Rupee 314 Billion and recovered Rs. 79 Billion.
There are the two aspects of this reform which are particularly relevant in this regard. One the monetary threshold for the claim to be filed in DRT is rupee 1 million approximately. The second one there is variation in the timing of the tribunal establishment in different states. Neither the monetary threshold nor the timing of thr DRT placement appears to be correlated with the other factors which may influence the ability or willingness of the borrower to repay the loans.
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the Act) is almost a decade old. As with any legislation breaking new ground, the Act has been challenged in various forum including the High Courts for its summary nature, the ousting of the jurisdiction of the Civil Courts, the provisions which allow borrowers to proceed against the bank or financial institution in the Debt Recovery Tribunals (DRT) and of course the latest challenge to the constitutional validity of the Act. Whatever may be, the Act of 1993 was a welcome step taken by the legislature in ensuring speedy recovery of bank dues. Civil courts had come to the conclusion after decades of reviewing case law, that in almost all cases the suit instituted by banks and financial institutions, there is hardly any defence and that the delay in disposal of the cases in the court is not due to the fault of the banks or financial institutions. The rationale behind the Act is contained in the Tiwari Committee Report, which stated:
“The civil courts are burdened with diverse types of cases. Recovery of dues due to banks and financial institutions is not given any priority by the civil courts. The banks and financial institutions like any other litigants have to go through a process of pursuing the cases for recovery through civil courts for unduly long periods.”
They suggested three modes to recover such dues, one of which was to set up quasi-judicial bodies to deal exclusively with the recovery process of the financial sector. The Committee on financial system chaired by Shri Narasimham in its report to the Ministry of Finance, Government of India in November 1991, endorsed the views of the Tiwari Committee for setting up special legislation and special tribunals to expedite the recovery process in the financial sector. Thus came the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
Non performing Assets (NPA):
In the distant past, banks had to deal with only few cases of bad-loans. So, they used to take legal actions against chronic defaulters of bank-loans. For the last ten or twelve years, banks are suffering from a large chunk of non-performing loans (assets) as a consequence of economic as well as non-economic factors in the country. By international parameter, non-performing assets of a bank should not exceed ten percent while such an indicator is estimated to have been crossed 26 percent, (Rs. 31 billion in aggregate) mainly due to the increase in willful defaulters in the government, semi-government and private sector banks.
Recovery of bad loans by banks and financial institutions has turned into a big issue in the financial sector. This has greatly caused negative impact upon Banks’ profit, government revenue and the overall financial sector of the country. This calls for an effective system and mechanisms that case the early recovery of debts of Banks and also of bank-like institutions.
In order to overcome these above problems the Debt Recovery Tribunal has been established to recover the debt due from the banks and other financial institution. The Tribunal shall have power to originally try and settle case on recovery of loans of banks and the financial institutions. The jurisdiction of the Tribunal shall be all over the country and shall exercise all powers equal to that of a district court. All undecided cases lying in the district courts shall be transferred to the Tribunal under the provision of the Act. The tribunal have the same powers including to issue summons, summon presence of petitioner, defendant, witness, administer oath, take deposition, examine proofs, evidence and necessary documents or statements, require submission of documents, require furnishing of security and impose punishment as the court of law has under the prevailing law. If the Tribunal holds that its contempt has been committed, it may punish the accused with a fine or imprisonment or with both.
India’s Banking Sector:
In the independent India the banking sector was expected to fulfill development objectives by extending credit to various sectors of the economy. This objective override the concern about the financial health of the bank, poorly performing the public sector banks could expect to recapitalize by the government. The private sectors banks were also heavily. This led to the high volume of non performing loans in the banking. In the year 1996, 18.1 % of the gross loans of the public sector bank were non performing. The private sector banks which have only about 20 to 25 % of the assets in the banking sector reported 10 % of their gross loan as non performing.
When India started up on the economic reform and financial sector liberalization in the early 1990’s, the Narasimham Committee on the financial system argued that unless proactive measures were taken, these bad loans could jeopardize the entire financial system. The Reserve Bank of India responded with several measures. In the year 1992, it provided an objective classification system for the bank assets. Whereas the earlier banks could use a subjective health code system, now a loan would be classified as non performing if the payment of interest or repayment of installment principle or both had remained unpaid for certain pre specified period or more. It also imposed strict accounting standards, greater reporting requirements and required that the banks hold in the reserve larger proportion of the value of outstanding loans to cover themselves against possible default.
These changes created incentives for banks to reduce the volume of their non performing loans. Whereas in short term the banks can achieve this by restructuring the loan or writing off the unrecoverable part. Since the most bank loans in India are secured by collateral, this requires that collateral be liquidated.
Debt Recovery and Judicial Quality:
In order to recover a non performing loan whether secured or not, a bank must first obtain a court order. Before 1994, this involved filing a legal suit in the civil court system. In this suit the banks must state the particulars of the case and request that the court direct the borrower to pay the money to the banks. If the loan is unsecured the bank must request that the court liquidate the firm assets and distribute the proceeds from the liquidation among all the creditors according to the priority of their claim. If the loan is secured it must request that the court enforce its security interest that is allow the sale of collateral so that the bank may recover its dues.
The Indian court system is very famous for the time taken to resolve the cases. It has been remarked that the most effective method of dispute resolution in these courts are the out of the court settlement, withdrawals and compromises. The cases both in the district court and the High Court are subject to long delays. While the legal scholars point various for the inefficiency of the court system, it is widely acknowledged that the loopholes are important factors. The code which is known as the civil procedure code allows for numbers of applications, counter applications and special leaves by both the plaintiff as well as the defendant. Although both the central and state legislature has attempted to reform the code by enacting the various amendments but the general consensus is that these attempts have been unsuccessful. In this setting the benefit from filing a legal suit against the defaulting borrower is very low and the cost has been very high. In addition to this the bankruptcy procedure for the firms is time consuming and the banker complains that it creates incentives for the borrowers to mismanage the funds.
Evolution of the Recovery of the Debt Due to Banks and Financial Institution:
Leave of the Company Court for transfer of cases:
One of the earliest cases where the aspect of the overriding effect of the Act was faintly mentioned was in Industrial Credit and Investment Corporation of India Ltd v. Srinivas Agencies, where the issue of whether leave should be granted by the Company Court to continue proceedings in other civil courts and whether all proceedings should be transferred to the Company Court
Shri. Salve, one of the appearing advocates, to buttress the submissions of the opposing parties stated that: “…convenience may not be the guiding factor; whereas it was for the preservation of the integrity of the substantive right of the creditor which should be the main consideration when he referred to the Act which was then recently enacted because of the considerable difficulties faced by banks and financial institutions in recovering loans and enforcement of securities charged with them.” Section 18 of the Act has barred the jurisdiction of other courts, except the writ power of the higher courts, in relation to the matters specified in section 17 the same being recovery of debts due to such institutions.
The court was of the view that the approach to be adopted by the Company court does not deserve to be put in a straightjacket formula. The discretion to be exercised has to depend on the facts and circumstances of each case. While exercising this power, the Company Court should also bear in mind the rationale behind the enactment of the Act.
The non-obstante clause:
The non obstante clause in the Act and the non obstante clause in the Companies Act were considered in Industrial Credit and Investment Corporation of India Ltd v. Vanjinad Leathers where the court opined that Section 18 of the Act creates a bar on jurisdiction of other authorities and courts except the Supreme Court and High Courts under Articles 226 and 227 of the Constitution. The court also stated that the Act and the Companies Act is special legislation. However since the Act was enacted after the Companies Act, 1956, the Parliament would have certainly in mind the provisions in the earlier special law namely the Companies Act. Therefore the latter special law will prevail over the former.
Courts have, from time to time, considered the effect of a special act enacted subsequent to a general act or a special act. The Supreme Court in Life Insurance Corporation of India v. DJ Bahadur & Orsheld
The legislature has an undoubted right to alter a law already promulgated by it through a subsequent legislation.
A special law may be altered, abrogated or repealed by a later general law through an express provision
A later general law will override a prior special law if the two are so repugnant to each other that they cannot co-exist even though an express provision is not provided for in that general law.
It is only in the absence of an express provision to the contrary and of a clear inconsistency that a special law will remain wholly unaffected by a later law.
The general rule to be followed in case of a conflict between two statutes is that a later statute abrogates the earlier ‘leges posteriors priores contrarias abrogant' and the well-known exception is that general legislations do not derogate special legislations ‘generalia specialibus non derogant’.
The Supreme Court (SC) held in JK Cotton Spinning and Weaving Mills Co. Ltd v. State of U.P that when there is a conflict between a specific provision and a general provision, the specific provision prevails over the general provision. The rule applies to resolve conflicts between different statutes as also in the same statute.
Where both statutes are special enactments the SC held in Maharashtra Steel Tubes Ltd., v. State Industrial and Investment Corporation of Maharashtrathat the Sick Industrial Companies (Special Provisions) Act, 1985 being a subsequent enactment, the non-obstante clause therein would ordinarily prevail over the non-obstante clause found in State Financial Corporations Act, 1951 which are both special enactments for the legislature is supposed to be aware of the fact that the statute already in force contains a non-obstante clause but still incorporates such non-obstante clause in order to obliterate the effect of the non-obstante clause in the former statute.
The Patna High Court in Bihar Solex (P.) Ltd., In reon the basis the judgment in Maharashtra Steel Tubes case held that u/s 17, 18 and 34 there cannot be any doubt that the jurisdiction of the DRT to entertain and decide suits or other proceedings by banks or financial institutions is exclusive, to the exclusion of all other courts except the Supreme Court or the High Court under Art 226/227.
The SC in the Industrial Credit and Investment Corporation of India Ltd case held that there was no requirement of the leave of the leave of the Company Court for any party to proceed in the DRT and that has to be tried in the specialised machinery set up under the Act.
Another question that came before the HC of Calcutta in State Bank of India v. S.M. Oil Extraction (P.) Ltd was whether the non-obstante clause contained in a different enactment that is the Act would operate to deprive or deny those rights of creditors or workers in a Company in liquidation, which were protected under the Companies Act. The Court held that the provisions of the non-obstante clause in the Act would have no effect on the procedure as contained in the Companies Act. Consequently there would be no conflict in the operation of the two clauses. For it was on record that section 446 of the Companies Act was not repealed and it could not be said with any certainty that there appeared any intention of the legislature anywhere in either of the enactments, that the later enactment would in effect operate as against the earlier clause. Had the legislators so intended, indeed appropriate provisions to that extent would have been provided for in the later or in further legislation. In those circumstances, it was held that when the rights of the creditors and workers were protected by the legislators in the Companies Act, in the absence of any specific and categorical provisions a, non-obstante clause contained in a different enactment neither could nor operate to deprive or deny any such right.
A lot of issues came for discussion in Allahabad Bank v. Canara Bank. The issues included jurisdiction of the tribunal and the Recovery Officer under the Act, need for the leave of the Company Court, power of the Company court to stay proceedings under the Act, whether banks filing for recovery can appropriate the entire sales proceeds realized except to the limited extent restricted under section 529A of the Companies Act, position of secured creditors who participate in the winding up proceeds and those who opt to stand outside the winding up proceedings.
The jurisdiction of the tribunal with respect to adjudication was held to be exclusive. The court observed that basically the tribunal is to adjudicate the liability of the defendant and then it has to issue a certificate u/s 19(22) of the Act, which was recently amended by Ordinance 1 of 2000. U/s 18 of the Act, the jurisdiction of other courts (except that of the SC and HCs under Art 226/227) is completely ousted and the power to adjudicate is exclusively vested in the DRT.
Similarly, regarding ‘execution’ the jurisdiction of the recovery officer is exclusive. The Tiwari Committee, in its report mentioned that the exclusive jurisdiction of the Tribunal must relate not only to the adjudication of liability but also to the execution proceedings.
The next issue was whether the leave of the company court is required for continuing or initiating proceedings in the DRT and whether the Company Court could stay proceedings in the DRT. Questions also arose w.r.t. to priorities u/s 529, 529A, and 530. Reliance was placed on the judgment of the Supreme Court in Valji Shah v. LIC of India, where the analogy between s18 of the Act and s 41 of the Life Insurance Corporation Act was brought out and the court held:
” …just as the Company Court was held incompetent to stay or transfer and decide the claims before the LIC tribunal because the Company Court could not decide the claims before the LIC tribunal, the said court cannot decide the claims of banks and financial institutions. On parity of reasoning with the Valji Shah case, there is no need for the appellant to seek leave of the Company Court to proceed with its claim before the DRT or in respect of the execution proceedings of the recovery officer. Nor can they be transferred to the Company Court.” It further held that the Act and the special provisions in it were for a superior purpose, i.e., the provisions of the act are superior to the provisions of s 442, 446, and 537 of the Companies Act. As far as priorities for creditors are concerned, the Tiwari Committee had stated, “The Adjudication Officer will have such power as to distribute the sale proceeds to the banks and financial institutions being secured creditors in accordance with inter-se agreements or arrangement between them and to other persons entitled thereto in accordance with the priorities in Law.” The above recommendations have been brought in to the act with greater clarity u/s 19(19) as substituted by Ordinance 1 of 2000.
Position of secured creditors standing outside winding up:
There are in fact two categories of secured creditors during winding up proceedings. First, are those who go before the Company Court by relinquishing their security in accordance with s 529 of the Companies Act that refers to Insolvency Rules contained u/s 45 to 50 of the Provincial Insolvency Act where the secured creditor who wishes to come before the Official Liquidator has to prove his debt and he can prove his debt only if he relinquishes his security for the benefit of the general body of creditors. Second, are those who come under s 529A(1)(b) read with the proviso to 529(1). These creditors are the ones who opt to stand outside winding up proceedings to realize their security.
U/s 529(1)(c) of the Companies Act the priority of the secured creditor who stands outside winding up is confined to the ‘workmen’s portion’ as defined in section 529(3)(c). ‘Workmen’s portion’ means the amount which bears to the value of the security, the same proportion which the amount of workmen’s dues bears to the aggregate of (a) the workmen’s dues (b) the amounts of the debts due to all the creditors. The court held that the words ‘so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso’ as provided in the first part of the said proviso (c) to s 529(1) obviously means the amount taken away from the private realization of the secured creditor by the liquidator by way of enforcing the charge for workmen’s dues under clause (c) of the proviso to s 529(1). To that extent the secured creditor who has stood outside the winding up and who has lost a part of the monies otherwise covered by security can come before the DRT to reimburse himself from out of other monies available in the tribunal, claiming priority over all creditors by virtue of s 529A(1)(b).
Response to Debt Recovery Tribunal:
Although the Debt Recovery Tribunal welcomed by the bankers as well as the economists the act also met with opposition. DRT had begun to establish in the year 1994. As soon as Delhi received a DRT in July 1994, the Delhi Bar Association filed a suit in the Delhi High Court challenging the DRT Act and asking that it should be declared as unconstitutional. In August 1994 the Delhi High Court stated that it was of the prima facie view that the Act may not be valid and required that Delhi DRT to stay its operations pending. In the final verdict the argument of the Delhi Bar Association was accepted that the act was unconstitutional because it violated the independence of the judiciary from the executive. It had also ruled some other flaws that there is lack of provisions of the counter claims and the transfer of the cases from one DRT to another.
The central government moved to the Supreme Court against this judgment in a special leave petition. And the Supreme Court held that the DRT Act was constitutional and at this time all the pending cases about the constitutionality was dismissed.
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