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.