Friday, December 23, 2011

Debts Go Bad, Then It Gets Worse


A personal bankruptcy is supposed to cut borrowers loose from lenders and debt collectors, but Capital One Financial Corp.—one of the nation's largest credit-card issuers—sometimes doesn't want to let go.
Leila Torres, a 35-year-old waitress who lives in Hawthorne, N.J., concluded her Chapter 7 bankruptcy case in 2009. She was stunned when she got a letter notifying her that Capital One was suing her for $4,266 in credit-card debt.
"I was trying to move on, and this whole thing has sucked me back into a nightmare," she says.
Capital One dropped the suit after Ms. Torres accused the company in a separate lawsuit filed in September of flouting bankruptcy law. Capital One asked a bankruptcy judge to throw out her suit, but he refused.
[CAPONE]










It wasn't the first time the company went after its customers for debts that had been snuffed out in bankruptcy, even though the practice is illegal. A court-appointed auditor concluded earlier this year that Capital One pursued 15,500 "erroneous claims" seeking money previously erased by a bankruptcy-court judge.
More than 800 of those borrowers have filed lawsuits or other legal actions against Capital One, the auditor said in a Dec. 6 court filing. Without admitting or denying wrongdoing, Capital One agreed to reimburse about 130 borrowers, lawyers and bankruptcy trustees for legal costs incurred trying to fend off Capital One.
A spokeswoman for the McLean, Va., company said: "It is our policy and practice not to collect on discharged debt."
In a court filing earlier this year, Capital One disputed the auditor's finding of 15,500 erroneous claims but didn't disclose what the company thought the correct tally should be.
[capone1223]Associated Press
Debt collection is a major component of Capital One's business.



















The auditor is scrutinizing Capital One as part of a 2010 settlement between the company and a U.S. bankruptcy trustee in Massachusetts.
Separately, David W. Houston III, chief judge of the U.S. Bankruptcy Court in Aberdeen, Miss., said he plans to demand that Capital One show up in his courtroom to explain its debt-collection practices.
In October, the judge rejected the company's request to throw out a lawsuit that alleged Capital One tried to collect $43,396.59 that was legally erased in an earlier bankruptcy case filed by the same person.
"I want some proof from the company that this was a legitimate error and not a conscious, malevolent effort to go out and collect a debt that's been discharged," Judge Houston said in an interview.
Capital One said in a court filing that it didn't know about the previous bankruptcy.
Once the company found out, it abandoned its claim, saying it made a mistake that was "neither willful nor intentional," according to the filing.
Capital One is the 10th-largest U.S. bank by assets, best known for the credit cards pitched in its "What's in your wallet?" ads. The company's banking unit has grown to nearly 1,000 branches, and federal regulators are reviewing the proposed $9 billion acquisition by Capital One of ING Groep NV's U.S. online-banking business.
[CAPONE_jump]
















Debt collection is a major component of Capital One's business that gets little attention from analysts and investors. As of Sept. 30, Capital One had $2.7 billion in net income so far this year on revenue of $12.22 billion, but it also was forced to write off $2.9 billion in uncollectible loans.
As a result, like most lenders, Capital One invests significant resources into trying to collect from customers who are behind on their bills. But unlike most others who outsource their debt collection, Capital One largely relies on employees.
If a customer files for bankruptcy, the company often lines up with other creditors to collect whatever assets are left. This is entirely legal, up to the point that a customer's debts are officially erased by a bankruptcy judge.
Capital One is accused of filing claims to get debts that were previously discharged in some cases.
There is a lucrative niche in collecting even small amounts from debtors in the window between when a bankruptcy proceeding is filed and when it is completed.
About $120 billion in debt will wind up in Chapter 7 or Chapter 13 bankruptcy proceedings this year, estimates Sean McVity, a debt broker in Harrison, N.Y. Portfolio Recovery Associates Inc., based in Norfolk, Va., bought $1.52 billion of bankruptcy debt in the first nine months of 2011, paying nine cents on the dollar, according to a securities filing.
Buyers are hungry for bankruptcy debt because they often wind up doubling their initial investment, according to Mr. McVity.
William Weinstein, chief executive of Weinstein & Riley, a debt-collection company in Seattle, said he proceeds carefully when buying bankruptcy-related debt because some firms "aggressively pursue payments in violation of the law."
For example, collectors sometimes report erased debts to credit bureaus, a pressure tactic that is in violation of the law if the debt has been discharged.
About 1.4 million Americans filed for Chapter 7 or Chapter 13 bankruptcy-court protection in the fiscal year ended Sept. 30, down 8% from a year earlier but nearly double the number of bankruptcy filings in 2007.
In 2008, a U.S. bankruptcy trustee in Massachusetts accused Capital One of illegally trying 5,600 times to collect debts already wiped out by a bankruptcy judge.
The trustee, who declined to comment, said the wrongful claims were the result of Capital One's failure to keep track of bankruptcy filings by its customers. The trustee began investigating the company when it allegedly sought $5,542.50 from a couple 14 years after the debt was erased.
Capital One denied any wrongdoing but agreed to turn over internal records detailing 2.2 million filings of bankruptcy-court claims between 2005 and 2010.
The company also agreed to supervision from a court-appointed monitor that will last until the auditor has completed a review of the bankruptcy-collection records.
So far, the auditor has identified 15,500 allegedly erroneous claims.
The Capital One spokeswoman wouldn't comment on the allegations, settlement or ongoing scrutiny. In a court filing, Capital One said it beefed up record-keeping procedures before being prodded by the bankruptcy trustee.

Thursday, December 22, 2011

SBI V/S M/s.Open 2 all systems (Bangalore) Pvt. ltd & ors






M.A:147/2009


R1 to R9 are already called absent.

Ld. Counsel Shri Sunder appearing on behalf of the appellant bank stated that a reading of  the order of the Ld.  Presiding Officer, DRT, Bangalore reveals that the same is not based on any material but based on the Ld.  Presiding officer’s conjectures.  

 Ld.  Counsel drew the attention of this Tribunal to paragraph 4 of the order under appeal and stated that the Ld.  Presiding Officer has come to the conclusion found therein based on his own assumptions and presumptions that the bank is intending to prolong the litigation and that the order under appeal is perverse and further that it is liable to be set aside as the same is not passed on the basis of any material. 

 Ld.  Counsel further stated that the Ld.  Presiding Officer has neither gone through the averments made in the petition nor gone through the averments made by the respondents in their counter before the Tribunal below and that he has proceeded to pass orders on his own assumptions. 

 Ld.  Counsel also drew the attention of this Tribunal to the imposition of cost of Rs.50,000/- and stated that no circumstances warranted  imposing of such a condition and that the imposition of cost of Rs.50,000/-  is absolutely uncalled for in this case. 

He added that the State Bank of India being a premier bank in the country has only sought to enforce its rights to protect the economy of the nation. 


Ld. Counsel stated that the order as seen in paragraph 4 of the order under appeal is liable to be set aside and that the reasons set out therein for the dismissal of the petition are unjustifiable.   

Ld.  Counsel prayed that the Ld.  Presiding officer, DRT, Bangalore may be directed to go through the averments made in the petition and the counter and give a proper hearing to both the parties and thereafter proceed to pass orders.

Heard the Ld. Counsel.

In view of the facts and circumstances of the case more particularly in view of the fact that the Ld. Presiding officer has neither gone through the averments made in the petition nor the averments made in the counter of the respondents for the purpose of adjudication this Tribunal is compelled to remit the matter to the Tribunal below to be disposed of in accordance with law. 

 Accordingly the following order is passed.

“The order of the Ld.  Presiding officer, DRT,Bangalore dt 6.8.2009 passed in IA 2680/08 in OA 408//08 is hereby set aside.  Further the order of imposition of cost of Rs.50,000/- is also set aside. The Ld.  Presiding officer, DRT, Bangalore is requested to take up IA No.2680/08 in OA No.408/08 for disposal and dispose of the same in accordance with law within a period of one month from the date of the receipt of a copy of this order”

This MA is disposed of accordingly.


IA 1281/09 (stay);  MA is disposed of today. Hence this is closed.

 THE HON'BLE CHAIRPERSON OF DRAT CHENNAI PASSED THIS ORDER ON 21/12/2011

 

Govt, RBI must find a lasting solution to tackle NPAs


source : BL :T.V. GOPALAKRISHNAN :18 Dec2011
With the high interest rate regime, persisting inflationary and near recessionary conditions in the domestic economy, and discouraging economic scenario in the US and Europe, the chances of generation of more NPAs in the coming months cannot be ruled out.
The NPA (non-performing asset) menace which was kept under some check for a few years has again started raising its ugly head disturbing the peace of mind of the Government and the Reserve Bank.
More NPAs mean, more resources the banks have to find to maintain capital adequacy. As long as lending remains an inevitable function of banking and banks have to deal with human beings as borrowers, this problem will continue to haunt the banks.
Further, the changes in economic scenario which is influenced by several micro and macro economic factors, on both domestic and international fronts, such as declining GDP growth, high inflation, financial instability, exchange and interest rate volatility and monsoon conditions also affect the working of banks adversely and result in increased level of NPAs.

PRESENT APPROACH

The present approach by the regulator to expect the banks to make good the loss on account of NPAs by charging to banks' profit and loss account at the cost of all stakeholders of banks that is depositors, borrowers, shareholders, employees and ustomers, is neither ethical nor prudential.
Further, the loss to the economy on account of NPAs is unfortunately made to bear by the tax payers as the Government loses its revenues on account of reduction of GDP because of non-performance of assets and also is made to contribute to capital through budgetary provisions to enable the banks maintain the capital adequacy standards according to Basel norms. The position of public sector banks NPAs vis-a-vis advances, deposits and investments for the period 1993 to 2011 is show in the accompanying chart.
It can be observed that the gross NPAs as percentage of gross advances have drastically come down from 23.2 per cent in March 1993, (when the concept of NPA was first introduced in terms of financial sector reforms) to 2.2 per cent in March 2011. Working of banks got further streamlined based on banking sector reforms introduced in 1998. The results are very encouraging. In the decade 2000 to 2010s, banks could bring down considerably their NPAs.
Many factors have come to the rescue of banks in keeping the NPAs down. The banks were identifying the NPAs through manual process all these years and it was humanly impossible to assess the correct position of such assets . The banks could manage to keep many NPAs under the carpet and the hidden NPAs were difficult to be identified as banks had umpteen ways to camouflage them. The boom in real estate prices came handy for banks to bring pressure on borrowers who also found it advantageous to sell off their assets and come out of banks' clutches.
Further, Debt Recovery tribunals, Lok Adalats, implementation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for recovery of dues, improved performance of the economy and banks' own performance in terms of better profitability on account of enhanced efficiency, productivity, competition, better return out of investments and diversification of operations greatly contributed to bringing down NPAs.
Huge write-offs of NPAs at the cost of shareholders who include the Government, effective regulation and supervision of the Reserve Bank also played an important and effective role in keeping down the level of NPAs.
The provisioning requirements in particular compelled banks to be vigilant in minimising the bad loans . Added to this, the permission granted by the Reserve Bank in August 2008 to restructure some of the accounts (though strictly need to be classified as NPAs) and treat them as standard assets if found viable, limited the growth of gross NPAs. With all aforesaid adjustments, NPAs stood at Rs 71,047 crore as at end March 2011, but are still staggering and causing concern.
The steep increase in advances since 2005 onwards (CD ratio increased from 61.8 in 2005 to 75.6 in 2011) is something abnormal and how much of this would turn out to be NPAs is worth watching. With the recent switch over to computerised system to identify the NPAs, the position has been moving from bad to worse.
With the high interest rate regime, persisting inflationary and near recessionary conditions in the domestic economy, and discouraging economic scenario in the US and Europe, the chances of generation of more NPAs in the coming months cannot be ruled out.
The fact that NPAs affect the economy in general and all stakeholders of banks in particular and finally lead to bail out of banks with budget allocations has been the trend and has to be recognised and this approach to manage NPAs needs to be done away with.

NEW FUND

Time has come to give a serious thought to this NPA menace and find a lasting solution to put up with them. Since only banks and borrowers do figure in the generation of NPAs, the ideal way to come out of this problem is to have a built-in mechanism to liquidate NPAs by means of creating a Precautionary Margin Reserve Fund (PMR) involving all borrowers and banks. This has to be done on a systematic and scientific basis.
Over a period, this fund will be more than the formation of NPAs, and this approach can strengthen the vitally missing credit discipline among the borrowers. Banks will have to tighten the monitoring of accounts on a continuous basis to rate the borrowers, discipline them and levy the contribution towards the PMR Fund based on borrowers' rating.
Bankers are generally inclined to satisfy the borrowers and do not want to incur any displeasure by being strict and vigilant with them for fear of losing the account when the going is good.
Borrowers will oppose creation of this fund as it adds initially to their cost of funds and expects them to adhere to strict credit discipline though they can derive the benefit in the long term. Besides, the rating will have reputation risk with attendant consequences.
It is for the Government and the Reserve Bank to seriously view the NPA menace and introduce a solution perhaps acceptable to all stakeholders of banks other than borrowers.
This suggestion developed through a statistical model has been found workable resulting in disciplining the borrowers and making the balance sheet of the banks strong. The Government is the major beneficiary in case the solution is introduced.
(The author is a consultant and views expressed are personal)
(This article was published on December 18, 2011)

5 Signs That You’re Borrowing Too Much


Source : Time :DAN KADLEC : 

Consumer debt figures show it: we're getting tired of being so darned frugal. Here are five guidelines to keep you from borrowing too much.
They’re ba-ack. Like the ghosts in Poltergeist, shoppers have returned this holiday season and they are threatening to stir up a familiar demon—debts they can’t repay.
Black Friday sales set records. Cyber Monday sales were torrid too. Personal spending accounted for the vast majority of third-quarter growth, and spending has been up three of the past four months, reports the Wall Street Journal. The savings rate has fallen to 3.5% from 5.3%.

This is a marked turnaround from the austerity that has gripped the economy since 2008, and while this burst of consumerism seems likely to persist through year-end, it also seems likely to saddle many with a debt hangover. Things just aren’t that good out there. Household net worth is declining; unemployment is high, and German-led fiscal restraint throughout Europe all but guarantees continued headwinds.
I get it: We’re tired of being so darned frugal. Letting go a bit may make some sense.
 But before you go any further, now would be a good time for a debt checkup.
 How much debt is too much? Here are some guidelines:
  • Mortgage Not so long ago, lenders thought nothing of stretching your budget to obscene levels in order to put you in a house. They might have allowed you to commit as much as 36% of your income to a mortgage and as much as 50% of income to total debt service. More traditional limits are in force today—and should be adhered to even in the unlikely event your banker suffers a flashback. That means a mortgage payment that does not exceed 28% of take-home pay and total debt payments that do not exceed 36%. One in three mortgage holders today is above the recommended threshold, reports consulting firm Strategic Business Insights. 
  • HELOC Closely related to your first mortgage is your home equity line of credit or possibly a home equity loan. Recognize this debt for what it is—an extension of your first mortgage. How much you can safely and smartly borrow with a HELOC or second mortgage depends on how much home equity you have. Your total mortgage-related debt should add up to less than 80% of your home’s value. You’ll get the best interest rate that way, and you’ll be able to tap cash in an emergency. 
  • Student debt You’ve heard all about it: Student loans now outstrip credit card borrowing and total nearly $1 trillion. The typical grad leaves campus owing $25,000. But some owe five to 10 times that figure. Indeed, SBI reports that 2.3 million have outstanding student debts of $50,000 or more—and that includes some 21,000 who have carried this debt into retirement. A good rule of thumb is to leave campus with no more total debt than your first year’s pay, or to keep your monthly student-debt costs to less than 10% of income.
  • Credit cards Any balance that you carry from month to month constitutes excessive debt. Credit cards should be valued for their convenience and cash-back rewards as well as for the ready access to cash they afford in an emergency. If you must carry a balance, keep it under 30% of available credit on any given card to avoid a ding to your credit score.
  • Auto loans Many people overspend on a car, which they mentally place in the category of a need when it is really a want. Of course you need wheels. But you do not need a new BMW. According to Edmunds.com, the average consumer pays 11% of monthly income to own a car, which leaves little wiggle room for other borrowing—especially if you intend to buy a house. Think of 8% as a ceiling, less if you have credit card balances and student loans too.


Wednesday, December 21, 2011

Neither a borrower nor a guarantor be


The AP High Court has ruled that a bank is not obliged to return pledged goods on the borrower repaying a loan if the former had other claims against the borrower.

The court was disposing of a writ petition filed by V. Srinadha Reddy, who had pledged some gold ornaments to obtain a loan and, additionally, had stood guarantee to another borrower availing himself of a loan from the same bank.

The borrower for whom the petitioner had stood guarantee of repayment failed to repay the loan. The bank after invoking the guarantee refused to part with the jewels pledged earlier on the ground they are required to be retained as a ‘lien', even though the petitioner himself had repaid his jewel loan.

GENERAL LIEN

The court was interpreting Section 171 of the Indian Contract Act that gives banks among other institutions, a general lien over goods belonging to their borrowers lying in their possession, till the latter paid off other dues unless there is an express agreement to the contrary between the two.

The relevant section under the heading ‘General lien of bankers, factors, wharfingers, attorneys and policy brokers', reads as follows:

“Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.”

The court held that the broad sweep of such general lien against a borrower extends to goods lying in banks' possession against amounts owed in respect of guarantees extended against third-party loans that had fallen due.

The third party loan is mired in a controversy, with the Debt Recovery Tribunal adjudicating on the dispute still seized of the matter. The bank contended that till such time the dispute is finally resolved, the gold ornaments will not be returned.

D. Subba Reddy & Anr Vs IDBI Bank Ltd. & Anr



R.A:62/2011

1.         This Appeal impugns the order dated 19.1.2011 passed by the Ld. Presiding Officer, DRT Hyderabad in OA No.132/2004.

2.         The case of the appellants may be stated as follows:

It is stated that the first Respondent bank granted an Equipment Lease Assistance to the 2ndRespondent company through its Mumbai Head Office on 18.12.1995 and obtained the necessary Lease Agreement from it on 26.7.1996 and the two appellants guaranteed the repayment of the same through a Deed of Guarantee executed on the same day and first Respondent bank provided two 1250 KVA DG Sets worth Rs.125.42 lakhs to the 2nd Respondent company. It is stated that subsequently the 2nd Respondent company became a sick company and was registered as a “Sick Company” on 30.6.1999 before the BIFR, New Delhi  in Case No.22/1999.  The BIFR formed an opinion on 7.11.2000 that the 2nd Respondent Company was not viable for a revival and recommended its winding up.  It is stated that the Hon’ble High Court of Andhra Pradesh registered the BIFR reference on 27.11.2000 as RCC No. 20/2000 for winding up of the 2nd Respondent Company by passing orders for winding up of the Company on 14.2.2001 and appointed the Official Liquidator to deal with the assets and liabilities of the company. The first Respondent bank  issued a recall notice cum termination of lease dated 16.4.2001 addressed to the 2nd Respondent Company represented by the OL and marked a copy of the said recall notice to the appellants and thereafter issued another recall notice to the appellants on 9.5.2001.  It is stated that the first Respondent bank filed OA No.132/2004 before DRT, Hyderabad for a recovery of a sum of Rs.6,03,49,871/- and the same has been allowed by the Tribunal below on 19.1.2011. It is stated that the appellants aggrieved by the said order of the tribunal below have filed the present appeal.  It is stated that the OA ought not to have been allowed by the Ld. Presiding Officer against the appellants and it is prayed that the appeal may be allowed.

3.         The learned counsel for the  appellants submitted  that the first Respondent bank issued Exhibit A16 substituting the requirement of extension of charge on the fixed assets of the borrowing company proposed under Clause 10 (a) of Exhibit A3 i.e. the Letter of Intent (sanction letter) with the personal guarantee of the appellants and that the same was received and acknowledged by the 2nd appellant  alone in person and not by both the appellants   merely with the  endorsement “received” and without the words “accepted” and this modification is not supported by any  resolution of the borrowing company.  The Ld. Counsel drew the attention of this Tribunal to Exhibit A5 and stated that the necessary ingredients of a valid contract of Guarantee have not been brought about in the said document and Exhibit A5 being a document lacking consensus ad idem has to be brushed aside as void and further that the Exhibit A5 does not comply with Sections 10, 13, 14, 16, 18, 19 & 142 of the Contract Act and therefore unworthy of being looked into.  The Ld. Counsel submitted that the OA ought to have been filed in DRT, Mumbai and the DRT,Hyderabad ought have rejected the OA for want of jurisdiction.  Ld. Counsel submitted that a perusal of clause No.10.7 of Exhibit A4 would reveal that it confines the exclusive jurisdiction for the present cause of action at Greater Bombay in exclusion of Hyderabad and Visakhapatnam and contended that the introduction of the Applicant-oriented Rule 6(a) of the DRT (Procedure) Rules, 1993 w.e.f.21.1.2003 can have only a prospective operation in respect of all contracts executed on or after 21.1.2003 and further that the said Rule is supplementary and not in derogation of the defendant-oriented Section 19 (1) of the RDDBFI Act. The Ld. Counsel relied upon on the following decisions on the above aspect:

a)      Laxman Prasad Vs Prodigy Electronics Ltd. And Another  (2008) 1 SCC 618  
b)      Harshad Chiman Lal Modi Vs DLF Universal & Anr (2005) 7 SCC 791
c)      New Moga Transport Company, through its proprietor Krishanlal Jhanwar Vs United India Insurance Co. Ltd. And Ors. (2004) 4 SCC 677
d)      M/s. Hanil Era Textiles Ltd. Vs M/s. Puromatic Filters (P) Ltd.
(2004) 4 SCC 671
e)      Shriram City Union Finance Corporation Ltd. Vs Rama Mishra
(2002) 9 SCC 613
f)        Cholamandalam Investments & Finance Co. Pvt. Ltd. Vs Radhika Syanthetics and Anr. (1996) 2 SCC 109
g)      Angile Insulations Vs Davy Ashmore India Ltd. And Anr.
(1995) 4 SCC 153 

4.         The Ld. Counsel for the appellants further contended that the OA filed on 5.5.2004 is time barred as the limitation period is to be calculated from 16.4.2001 of Exhibit A6 instead of 9.5.2001 of Exhibit A7 as Exhibit A6 is the termination of lease cum recall notice issued on 16.4.2001 addressed to the principal borrower with due marking of its copy to the appellants in their status as guarantors and it was not a usual debt recall notice.  He added that the repeat recall notice on 9.5.2001 would not in any way extend the period of limitation and the Notice of the termination of the lease with or without recall of outstanding dues and with marking of its copies to the guarantors is inherently possessive of the element of recalling the outstanding dues against the guarantors and is also covered under the “doctrine of constructive notice”. The Ld. Counsel contended that the ruling in the case of Syndicate Bank Vs Channaveerappa Beleri & Ors. (2006) 11 SCC 506 relied upon by the 1st Respondent Bank has no application to the present case as Exhibit A6 is considered as mere debt- recall notice not only to the Principal Borrower but also to the appellants simultaneously.  The Ld. Counsel sought the rejection of Exhibit A1 i.e. the Evidence Affidavit of AW-1 dated 13.8.2010 as the averments made therein were not on behalf of IDBI Bank Limited and as the same did not incorporate all the events of transition from the original applicant IDBI to the present IDBI Bank Limited.  The appellants further stated that the first Respondent Bank surrendered the leased assets to the OL and joined the general pool for which reason it has not only got the realizations on its secured assets to the tune of Rs.64.57 lakhs on 30.3.2005 but also received Rs.21,36,604/- from the general pool out of the amount of Rs.33,50,460/-  which is nothing but the admitted dues payable to the 1st Respondent Bank as of 14.2.2001 i.e. the date of winding up order and adjudicated  by the OL accordingly . The Ld. Counsel relied on Rule154 of Companies (Court) Rules, 1959 which reads as follows: “The value of all debts and claims against the company shall, as far as is possible, be estimated according to the value thereof at the date of the order of the winding-up of the company or where before the presentation of the petition for winding-up, a resolution has been passed by the company for voluntary winding-up, at the date of the passing of such resolution” and stated that the O.L. is reportedly holding more than Rs.1 Crore realized from the assets of the 2ndRespondent Company.  The debts and claims receivable by the 2nd Respondent Company to the extent of Rs.11.27 crores stand admitted before the OL out of which Rs.72,34,758/- is decreed and the balance are in the execution process and therefore the balance pending dues of the first Respondent to the tune of Rs.12,13,856/- are realizable from the above amounts presently lying with  the OL.  The Ld. Counsel stated that the dictum laid down in the case of Murali D. Kanuri Vs DRAT, Chennai & Ors - CDJ 2010 APHC 203 relied by the first Respondent Bank has no application to the present case as the appellants did not allege any distress sale of the company’s assets by the OL.  The Ld. Counsel stated that the liability of the appellants as guarantors is coextensive with that of the principal debtor u/s 128 of the Contract Act and therefore the dues at any rate cannot exceed Rs.33,50,460/- out of which the 1st Respondent Bank had already received and appropriated Rs.21,36,604/-.  The Ld. Counsel stated that the decision in the case of  T. Raju Setty vs. Bank of Baroda vide AIR 1992 Karnataka 108 (DB) cannot be relied upon by the 1st Respondent Bank in this case as there is no waiver of Sections 140 &141 of the Contract Act in Exhibit A5.  The Ld. Counsel added that the appellants are entitled to the securities from the first Respondent bank in terms of Section 141 of Contract Act, 1872 in the event of any amounts recoverable from them as held in the case of IFCI Vs The Cannore Spinning & Weaving Mills Ltd. – (2002) 5 SCC 54.  The Ld. Counsel stated that when once the Hon’ble High Court of Andhra Pradesh was pleased to pass an order for winding up of the second Respondent Company on 14.2.2001, the appellants as guarantors get divested of their right of subrogation available   u/s 141 r/w 140 of the Contract Act and when the appellants right over the securities is abrogated through operation of law, the corresponding obligation for the discharge of the liability stands automatically abrogated.  The Ld. Counsel submitted that the appellants are not liable even to the extent of the balance of the pending dues of Rs.12,13,856/- out of the total dues admitted before the OL.  The Ld. Counsel stated that the order under appeal is exfacie illegal and is not enforceable against them as the OA was allowed against them alone even without crystallizing the liability against the 2nd Respondent Company and without addressing the fact of the 1st Respondent Bank’s admission of the claim before OL atRs.33,50,460/-.

5.         The appellants filed their written submissions and the same forms part of the record.

6.         The Ld. Counsel for the Respondent stated that the DRT, Hyderabad originally allowed the OA 132/2004 on 25.11.2005 setting the appellants ex-parte and later MA 114/2008 filed by the appellants for setting aside the said ex-parte order was dismissed by  DRT, Hyderabad on 19.2.2009.  The said Order was challenged by the appellants before this Tribunal through MA 93/2010 and the same was allowed  on 16.6.2010 and that thereafter the DRT, Hyderabad heard the matter at length and passed the impugned order allowing the OA.  The Ld. Counsel for first Respondent Bank opposed the  contention of the appellants about the lack of jurisdiction for the DRT, Hyderabad to the present cause of action and stated  that the introduction of Rule 6(a) of the DRT (Procedure) Rules, 1993 w.e.f.21.1.2003 overrules the Clause No.10.7 of Exhibit A4 dated 26.7.1996 and that in view of the same the DRT, Hyderabad had  the  jurisdiction and that it had correctly allowed the OA as prayed for. The learned counsel stated that the OA was filed within limitation on 5.5.2004 as calculated from 9.5.2001 being the date of Exhibit A7  and relied on the dictum laid down in the case of Syndicate Bank Vs Channaveerappa Beleri & Ors. (2006) 11 SCC 506 to show that the OA was filed within limitation. The learned counsel further contended that the appellants cannot challenge the issues of sale by the OL as decided by A.P. High Court in the case of Murali D. Kanuri Vs DRAT, Chennai & Ors - CDJ 2010 APHC 203. The learned counsel contended that the first Respondent  would not get any amounts from the Official Liquidator in the capacity as a secured creditor  as it had no charge on the fixed assets.

7.         The 1st Respondent Bank filed its detailed written submission and the same forms part of the record.

8.         The 2nd Respondent is the Company represented by Official Liquidator.  The Documents issued by the OL in respect of the admitted claim of the first Respondent Bank before it and the amounts disbursed by his office to the bank have come on record.

9.         Heard the Ld. Counsel.

10.       Exhibit A4 is the equipment lease agreement executed on 26.7.1996 between the Respondents and clause 10.7 of the said exhibit A4 reads as follows:
“It is agreed by and between the parties that the Civil Courts in Greater Bombay shall have exclusive jurisdiction in respect of any matter, claim or dispute arising out of or in any way, relating to this Agreement”.
The words civil Court in the above clause have to be deemed as the Debts Recovery Tribunals of Mumbai.  In this case the equipment lease was sanctioned by the 1st Respondent at its Mumbai Head Office, disbursed at its Hyderabad Branch and end used at Nellore, Andhra Pradesh and it can be seen that the 1st Respondent being the Applicant in the OA is to be deemed to be functioning in the jurisdictions of DRT, Mumbai, DRT, Vishakapatnam and DRT, Hyderabad and when the parties have expressly agreed to resolve their disputes within the jurisdictions of Civil Courts in Mumbai the OA ought to have been filed in the DRT at Mumbai.  It is settled law that parties by using the words exclusive have restricted the place of suing to one place in exclusion of the other courts having jurisdiction. The 1st Respondent Bank is deemed to be functioning for the present cause of action in the jurisdictions of DRT- Mumbai, DRT- Hyderabad and DRT-Visakhapatnam in terms of Rule 6(a) of the DRT (Procedure) Rules, 1993 r/w Section 19 (1) of the RDDBFI Act as it sanctioned the ELA credit facility at its Mumbai Head Office, disbursed the amount at its Hyderabad Branch and deployment of funds was occasioned at Nellore, Andhra Pradesh.  Clause No.10.7 of ExhibitA4 specifically confined the jurisdiction for the present cause of action at Greater Bombay in exclusion of Hyderabad andVisakhapatnam. It is not the case of the first Respondent bank that they had filed the OA at DRT,Hyderabad due to a mistaken impression or bonafide belief of jurisdiction there at Hyderabadand the first Respondent has vehemently opposed the contention of the appellants about jurisdiction both in the OA proceedings and in the present appeal proceedings. In such an event, as held by the Hon’ble Supreme Court in the cases of Laxman Prasad Vs. Prodigy Electronics Ltd. (2008) 1 SCC 618, Harshad Chiman Lal Modi Vs DLF Universal Ltd. (2005) 7 SCC 791,  Transport Co. vs. United India Insurance Co. Ltd. (2004) 4 SCC 677, Textiles Ltd. v. Puromatic Filters (P) Ltd. (2004) 4 SCC 671, Shriram City Union Finance Corporation Ltd. Vs Rama Mishra (2002) 9 SCC 613, Cholamandalam Investments & Finance Co. Pvt. Ltd. Vs Radhika Syanthetics and Anr (1996) 2 SCC 109 and Angile Insulations Vs Davy Ashmore India Ltd. And Anr (1995) 4 SCC 153, the present cause of action should have been adjudicated at DRT, Mumbai and its adjudication at DRT, Hyderabad is without jurisdiction. 

11.       Exhibit A5 is the guarantee bond and the circumstances preceding the execution of Exhibit A5 and the subsequent events revealing the absence of objections ever being made about the said guarantee bond by the appellants, drive this Tribunal to hold that the execution of Deed of Guarantee is valid on the ground of acquiescence by the appellants.  Similarly Exhibit A1 is also to be held valid by virtue of Section 34 of the Companies Act and also on the basis of the description of the 1st Respondent bank appearing in Exhibits A4 and A5 that cover the successors and assigns of IDBI.

12.       Exhibit A6 is the Notice of termination of the lease and it is dated 16.4.2001.  The said Notice of termination is inherently and impliedly a recall notice of dues as no further lease rentals would accrue except the interest from the date of the termination of the lease.  Moreover the copies of the same have been specifically sent to the Appellants.  Any acknowledgement of debt on behalf of the principal debtor extends simultaneously the limitation period for the principal debtors as well as the guarantors in terms of Section 18 of the Limitation Act.  The notice to the principal debtor company recalling the advance is to be considered as a deemed notice of recall of the advance to its Directors  and it is also to be considered as the invocation of the guarantees of its Directors who are claimed as the guarantors to the advance and in this case the Notice of termination dated 16.4.2001 sent to the company has also to be deemed to be the Notice of termination to upon its Directors and therefore it has to be reckoned that the period of limitation runs only from 16.4.2001 and not from 9.5.2001 being the date of the repeat Notices sent to the Appellants by the 1st Respondent Bank and such being the case it can be seen that the OA filed is barred by limitation.

13.       A perusal of clause VIII of the equipment lease agreement dated 26.7.1996 between the 2ndRespondent and the 1st Respondent reveals that the 1st Respondent was entitled to terminate the lease without any notice at any time after occurrence of any of the events stated therein.  A reading of clause 8.1.i of the agreement reveals that the 1st Respondent was entitled to the termination of the lease when the 2nd Respondent failed to pay the dues.  It is seen after the commencement of the lease for a period of 60 months from 1.1.1996, the 2nd Respondent was irregular in payment of lease rentals and did not pay any of lease rentals after 16.7.1997 and that upon such continued default in the payment of lease rentals the 1st Respondent was entitled to remove and repossess the equipment as per clause 8.2.1 of the agreement on any day after 16.7.1997 or at least after 30.6.1999 when the 2nd Respondent made a reference under Section 15 of SICA to BIFR as per the provisions of Clause 8.1.v. It can be seen that the first Respondent issued the termination of lease-cum-recall notice only on 16.4.2001 much after the Official Liquidator had taken possession of the assets of the 2nd Respondent company and that the 1st Respondent had not chosen to enforce its rights and preferred to remain quite till the year 2001 when the Official Liquidator took possession of the 2 DG sets.  In this case there is an agreement between the creditor who is the 1stRespondent herein and the sureties who are appellants with reference to the enforcement of the security and it can be seen that the 1st Respondent was bound to act in diligence in terms of the lease agreement or in other words the 1st Respondent was bound to take possession of the 2 DG sets and dispose of the same and recover its dues soon after no payments were made after 16.7.1997 and it can also further be seen that the 1st Respondent was negligent and had omitted to enforce its rights guaranteed to it under the lease agreement and by such neglect had caused a gross reduction in the value of the 2 DG sets when they were  sold much later by the Official Liquidator in addition to huge accrual of defaulted release rentals.  The omission on the part of the 1st Respondent to promptly terminate the lease on the date of default  and the further omission on its part to take possession and dispose of the 2 DG sets from 17.7.1997  till the parting of the same to the Official Liquidator in the year 2001 has enabled the sureties i.e. the appellants to claim discharge to the extent of the value of the 2 DG sets as on 17.6.1997 and therefore in view of the same it can be easily said that the appellants are entitled to a discharge under Sec. 139 of the Indian Contract Act.

14.       It is a settled position of law that where the right of the surety against the principal debtor is impaired due to any action or inaction of the creditor, the surety is discharged to that extent under the combined effect of Section 139 and 141 of the Indian Contract Act.  It can be seen from the above that due to the inaction on the part of the first Respondent bank the rights of the appellants have been impaired and therefore the appellants are entitled to a discharge under the combined effect of Section 139 and 141 of the Indian Contract Act. Further Section 139 of the Indian Contract Act is a residuary section, the object of which is to ensure that no arrangement different from that contained in the surety’s contract is forced upon the surety and if the surety pays the debt, he has the benefit of every remedy which the creditor had against the principal debtor which in this case is not available to the appellants as the principal debtor company had already been taken over by the Official Liquidator. 

15.       It is also seen that the 1st Respondent has already recovered Rs.64.57 lakhs on 30.3.2005 out of the net sale proceeds of the leased assets carried out by the Official Liquidator.  After adjusting the same, it has admitted before the Official Liquidator the net dues payable at Rs.33,50,460/- being the outstanding amount in the ELA account as of 14.2.2001 i.e. the date of winding up order. Out of the said amount, which stand as adjudicated dues payable by the 2nd Respondent company, the 1st Respondent has already received a sum of Rs.21,36,604/- from the Official Liquidator and that a sum of Rs.1 crore  lying in deposit and readily available with the Official Liquidator would eventually enable the 1st Respondent bank to realize its adjudicated dues and as per Rule 154 of the Companies (Court) Rules, 1959, the liability of the 2nd Respondent Company is crystallized at the level of amount admitted and adjudicated by the Official Liquidator which can be deemed as the full and final settlement.  In the case of Union Bank of India vs. Chairperson DRAT & others - (2011) 167 Comp Cases 1 (All) it has been laid down that whena Bank accepts certain amount in full and final settlement of the claim from Liquidator, it cannot proceed again against the guarantors for the balance amount and therefore the guarantors automatically stand discharged.  In the present case, the appellants cannot be held liable even to the extent of balance of the dues of Rs.12,13,856/- from the amount admitted before and adjudicated by OL due to the abrogation of rights available to them in terms of Sections 140 ,141 and 145 of the Contract Act and when once the second Respondent borrower company comes under the ambit of Section 456, 535, 536 & 537 r/w 441of the Indian Companies Act, 1956.

16.       Therefore from the fact that the OA has been filed by the 1st Respondent Bank against the appellants after the prescribed period of limitation, from the fact that the OA was adjudicated by DRT, Hyderabad without jurisdiction, from the fact that the secured creditor has acted in a manner not consistent with the rights of the surety, from the fact that by the inaction of the 1st Respondent bank the eventual remedy of the surety against the principal debtor had been impaired, from the fact that there is every possibility of the first Respondent realizing the dues admitted before and adjudicated by the Official Liquidator and from the fact that the appellants are entitled to a discharge by virtue of operation of Sections 139 and 141 of the Indian Contract Act this tribunal is driven to conclude that the order of the tribunal below allowing the OA claim against the appellants is liable to be set aside.

17.       Accordingly the order of the Ld. Presiding Officer, DRT, Hyderabad dated 19.1.2011 passed in OA 132/2004 is hereby set aside and consequently the OA filed against the appellants in OA 132/2004 on the file of DRT, Hyderabad is hereby dismissed. 

18.       In the result the Appeal is allowed. No costs.

19.       The Ld. Presiding Officer, DRT, Hyderabadis directed to recall the Recovery Certificate issued against the appellants.


The Chair Person of DRAT Chennai passed this order on 16th DEC2011