Kotti Finance Ltd Vs Indian Bank

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 21^ST OCTOBER, 2008

PRESENT:  HON’BLE MR. JUSTICE T.V. MASILAMANI

CHAIRPERSON

RA(SARFAESI)-113/2008

(SA-178/2007 – DRT-III, Chennai)

BETWEEN –

M/s. Kotti Finance Ltd.,

No.180-181, Gandhi Road,

Kanchipuram Town,

Rep. by its Director,

Mr.S. Kamakotti

….  Appellant

AND

Indian Bank,

Circle Office,

No.510-511, Gandhi Road,

Kanchipuram,

Rep. by its Authorised Officer

….  Respondent

Counsel for Appellant – M/s. Prakash Goklaney, Rishi S. Ahuja & Harshad P. Goklaney

Counsel for Respondent Bank – M/s. Aiyar & Dolia

O R D E R

1.         The Appellant/Third party has filed this Appeal challenging the impugned Order passed by the DRT-III, Chennai, in SA-178/2007 on 10.1.2008.

2.         The facts leading to the filing of this Appeal may be set out briefly as under :-

            The Respondent Bank sanctioned the loan facilities by way of Overdraft and OCC limit to M/s. Lakshmi Vilas Silks Ltd. against collateral security of movable properties for which equitable mortgage of land and building bearing Door Nos.186C (New No.181) and 186B (New No.180) situated at Gandhi Road, Kanchipuram, was also created in favour of the Bank by the borrower.  The Directors of the principal borrowers stood as guarantors for the due repayment of the loan.  Since the account was out of order, the Bank invoked the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter called as SARFAESI Act) and issued the demand notice dated 26.12.2002, under Section-13(2) in the said Act and also took physical possession of the 1^st and 2^nd floors of the building and symbolic possession of the ground floor on 7.1.2005.  Since the borrowers have not repaid any amount, the secured property was sold by the Bank on 16.10.2006, and the same was also confirmed in favour of the highest bidder on 17.10.2006.  The Bank issued notice to the borrowers to hand over physical possession, but the Appellant, who is third party filed the said SA contending that the Appellant institution is a tenant of the ground floor in the said mortgaged property.  The Respondent Bank filed a detailed Counter Affidavit.  After hearing both sides and upon perusal of the material records, Ld. PO dismissed the Application filed by the Appellant.  Hence the Appeal.

3.         Heard Mr. Prakash Goklaney, Ld. Counsel appearing for the Appellant and Mr. Subramaniam, Ld. Counsel appearing for the Respondent Bank.

4.         Ld. Counsel for the Appellant has putforth the following contentions :- 

The Appellant is a Public Limited Company inducted into possession of the ground floor in the mortgaged property from the year 1995 under a lease deed dated 9.1.1991, and has been in occupation of the same, carrying on business including that of provision of safe deposit lockers to its customers.  The Respondent Bank is now attempting to evict the Appellant in the guise of evicting the debtor and such an action on the part of the Respondent Bank is illegal as also an abuse of process of law.  The DRT failed to note that the law of evidence is not provided in so far as the proceedings before the DRT is concerned.  The Appellant is a tenant entitled to the protection under the Tamil Nadu Buildings (Lease and Rent Control) Act, and there need not be a lease deed for the purpose of invoking the provisions under the said Act.  Similarly the DRT erred in stating that the lease was not in accordance with Section-65A of the Transfer of Property Act, which is not applicable to cases covered by the Rent Control Act.  Similarly the finding rendered by the DRT that the action on the part of the Appellant was barred by limitation has no legal basis for the reason that only when the Respondent Bank threatened to break open and take physical possession, the Appellant was constrained to institute the said proceedings. Even otherwise, the delay if any, could have been condoned by the DRT as there was sufficient cause for such delay.

5.         In the above circumstances, the points for consideration are as follows :-

1)      Whether the Appellant being a third party to the transaction is entitled to claim tenancy rights over the ground floor of the mortgaged property ?

2)      Whether the impugned Order passed by the DRT has to be set aside as prayed for ?

The Points :

6.         It is common ground that the Respondent Bank had taken measures under Sections-13(2) & 13(4) of the SARFAESI Act, against the principal borrower M/s. Lakshmi Vilas Silks Ltd., and the Directors of the Company, who stood as guarantors for the due repayment of the loan amount and in the process the secured property was taken possession.  Similarly it is not in dispute that the ground floor of the secured property was taken by way of symbolic possession by the Bank and in this context the Appellant has putforth the claim in the said Application in SA-178/2007 before the DRT that they are in possession of the ground floor as a tenant under the principal borrower.  In this respect, it is relevant to note that some of the Directors of the principal borrower Company are the Directors of the Appellant institution also.

7.         In the above circumstances, it has become necessary to consider whether the Appellant has proved satisfactorily that the institution is a statutory tenant of the 1^st floor of the mortgaged premises?  The Appellant has placed strong reliance on the unregistered document so as to claim the status of a statutory tenant.  In this connection, Ld. Counsel for the Respondent Bank has cited the decision, Duraisamy Naidu & Ors. Vs. Ramakrishnan & Ors.- [(2007) 1 MLJ 424], wherein the principle of law is laid down that where the lease deed is executed for a period of more than one year, it has to be mandatorily registered as per Section-17(1)(d) of the Indian Registration Act, and that such an unregistered document would be inadmissible in evidence.  Hence it goes without saying that the unregistered document relied on by the Appellant cannot be pressed into service for any purpose and therefore, this Tribunal holds that the finding rendered by Ld. PO on this aspect of the matter has to be confirmed.

8.         Though the Appellant has produced Income-tax returns of the Appellant Company with reference to financial years 1997, 1998 and 1998-1999 to show that even prior to the loan transaction between the Respondent Bank and the borrower Company, the Appellant was inducted into possession of the premises as a tenant, this Tribunal is inclined to accept the contentions of the Respondent’s Counsel that the said documents are self-serving in nature and that therefore, no reliance can be placed upon them so as to jeopardise the valuable rights of the Bank. In this context, Ld. Counsel for the Respondent Bank has cited the decision M/s. Sree Lakshmi Products Vs. State Bank of India [2007 (2) CTC 193], laying down the proposition of law that if a claim is made on the basis of an unregistered document so as to affect the rights of the secured creditor, such claimant is not a protected tenant and that the continuance of possession of such a claimant is contrary to the provision of Section-65A of the Transfer of Property Act.  Hence the Ld. Counsel for the Respondent has argued rightly in my opinion that the Appellant has no right to continue in possession of any portion of the secured property. 

9.         On the other hand, Ld. Counsel for the Appellant has placed strong reliance upon the decision Hutchison Essar South Ltd. Vs. Union Bank of India & Anr. [AIR 2008 Karnataka 14] in support of his contention that non-registration of lease agreement is not fatal and that irregularities in inducting the Appellant into possession of the premises make the occupier trespasser of the same.  However, since the said decision was rendered by the Ld. Single Judge of the High Court of Karnataka at Bangalore, inasmuch as the ratio laid down by the First Bench of the Madras High Court referred supra is binding on this Tribunal, I am unable to endorse the view projected by the Ld. Counsel for the Appellant on the basis of the said decision and it follows that the principle of law enunciated therein cannot be made applicable to the facts of the present case.

10.       Further as has been rightly pointed out by the Ld. Counsel for the Respondent Bank, the conduct of the Appellant would also assume importance while disposing of this Appeal.  The Appellant filed a Civil Suit in the Munsif Court at Kanchipuram in OS No.494/2006 and obtained interim injunction in IA-1240/2006 and after contest by the Respondent Bank, the injunction Order was vacated on merits.  Similarly, the said Order became final as the same was not challenged by the Appellant in any other forum.  Further the Directors of the Appellant Company, some of whom are Directors in the borrower Company did not disclose any such tenancy agreement between the borrower Company and the Appellant Company at the time of entering into the loan transaction with the Respondent Bank and therefore, this Tribunal is of the considered view that if really the Appellant Company was inducted into possession of the ground floor as a tenant even prior to the loan transaction, in the course of normal conduct, the Directors of the borrower Company, who are also Directors of the Appellant Company should have revealed such tenancy agreement to the Bank.  But on the other hand, in this case, the borrower Company did not come forward to putforth any contention to support the plea of tenancy projected by the Appellant Company and it follows necessarily that such conduct on the part of the Directors of both the Companies would go a long way to show that the plea of tenancy set up by the Appellant Company is purely an after thought. 

11.       Further, in support of the plea of taking possession of the secured property, the Respondent Bank filed the Memo in this Appeal along with Panchanama recorded on 15.6.2008, 11.6.2008 and 17.1.2005, which reveal that a portion of the ground floor wherein safety lockers are embedded to earth, had alone been taken possession by the Bank symbolically and the remaining portion of the ground floor as well as the other two floors of the secured building had been physically handed over to the Bank as per the Panchanama produced in this Tribunal.  In any view of the matter, both on facts and in law, the Appellant miserably failed to establish its claim of tenancy over the second floor of the secured property.  Considering the above facts and circumstances in the light of the principles of law enunciated in the said decisions referred supra, this Tribunal is of the considered opinion that there is no illegality or irregularity pointed out in the impugned Order so as to interfere with the same and it is therefore confirmed.

12.       For the aforesaid reasons, the Appeal is dismissed with cost of Rs.5000/- and consequently the impugned Order passed by the DRT-III, Chennai, in SA-178/2007 dated 10.1.2008, is confirmed.  The cost of Rs.5000/- is ordered to be paid to The Spastics Society of Tamil Nadu, Taramani Road, Chennai-600 113. Cost Memo is directed to be filed within two weeks.

(Dictated to PS, transcript corrected and order pronounced & signed by me in open court today 21.10.08)

[ JUSTICE T.V. MASILAMANI ]

CHAIRPERSON

SBI Vs V N Ananthakrishnan

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 4^TH MARCH, 2005

PRESENT:  HON’BLE JUSTICE DR. PRATIBHA UPASANI

CHAIRPERSON

RA-43/2004

(OA-866/1999-DRT, Bangalore)

BETWEEN:

State Bank of India,

Commercial Branch,

Industrial Estate, Rajaji Nagar,

Bangalore-560 044.

…  Appellant

AND

V.N. Anantha Krishnan,     

S/o. Vadiraj,

No.3, Somashekara Layout,

Basaveshwaranagar,

Bangalore-560 079.

…  Respondent

Appearances:

1.  Mr. S. Sethuraman, Advocate for the Appellant Bank.

2.  Respondent in person.

:  O R D E R  :

1.         This substantive appeal is filed by the appellant/Original applicant State Bank of India, being aggrieved by the Judgement and Order dated 29.10.2004, passed by the Learned PO of DRT, Bangalore, in OA-866/1999.  By the impugned Judgement and Order, the Ld. PO allowed the OA with cost in favour of the Bank directing defendants No.1 to 5 to personally pay to the applicant Bank jointly and severally, sum of Rs.11,19,479.19p with subsequent interest at the rate of 15.80% p.a. compounded quarterly from the date of application till the date of realisation.  He further gave direction with respect to the enforcement of securities by giving direction that the applicant Bank should cause the sale of Schedule ‘A’ hypothecated properties, Schedule ‘B’ mortgaged property belonging to defendant No.4 and Schedule ‘C’ mortgaged property belonging to defendant No.6, for the purpose of realisation of the above debt.  A further direction, thereafter, was given that the applicant Bank should proceed against the Schedule ‘C’ property of defendant No.6 only as a last resort, and it is this last direction which is hurting the applicant Bank and hence appeal to this Appellate forum on this limited issue and ground.

2.         Few facts which are required to be stated are as follows.

3.         Defendant No.1 Aparna Creations is a Partnership firm of which defendants No.2 to 5, are the partners.  Defendant No.6 is arraigned in his status as a guarantor.  Defendant No.1 firm represented by its partners approached the applicant Bank for certain credit facilities.  Accordingly, the applicant Bank on consideration of their request sanctioned Medium Term Loan of Rs.28.20 lakhs on 21.8.1996.  The defendants accepted the terms and conditions of sanction.  Defendants No.1 to 5 fully availed and utilized the said facility.  Defendants No.2 to 5, apart from being partners of defendant No.1 firm had also personally guaranteed due repayment of the debt alongwith guarantor defendant No.6.  Usual security documents were executed by the defendants.

            Defendants No.2 to 5, again approached alongwith defendant No.6, the appllicant Bank seeking grant of credit facilities.  In consideration thereof, the applicant Bank sanctioned Cash Credit (Mundy Type) of Rs.7 lakhs and Cash Credit (Receivables) of Rs.19 lakhs.  Again, security documents were executed and defendants No.2 to 5 and defendant No.6 stood as guarantors.  In addition to the primary security of hypothecated machineries, the defendants No.4 to 6 also created equitable mortgage of their property set out in Schedules ‘B’ and ‘C’ respectively, in favour of the applicant Bank towards due security of both the credit facilities.  Revival letters were also executed by defendants acknowledging the availment of credit facilities.  However, thereafter, the defendants’ account became irregular and they committed defaults.  The applicant Bank, therefore, issued legal notice recalling the outstanding amount which was due to the Bank, but there was no response.  Hence, the Bank was constrained to file the OA in DRT, Bangalore.

4.         Defendant No.1 firm remained exparte despite service.  Defendant No.4 filed Written Statement, which was adopted by defendants No.2 & 3.  Defendants No.5 & 6 filed their respective Written Statements separately. 

…4/

5.         Defendants No.2 to 4 admitted being partners of defendant No.1 firm.  Sanction of two facilities by the applicant Bank was also admitted.  It was pleaded that loans were borrowed from the applicant with complete consensus between the defendants No.4 to 6.  It was also contended that the entire transaction was carried by defendants No.5 & 6 only and that they could not turn around and repudiate their liability.  In short, it was contended that defendants No.5 & 6 were managing the affairs of the partnership firm and the transaction with the Bank, that defendant No.4 was induced by defendants No.5 & 6 to start a business with involvement of other family members with the partnership firm.  But they complained of foul play played by defendants No.5 & 6.  Thus, the thrust of the entire defence of defendants No.2 to 4 was that only defendants No.5 & 6 were liable to the Bank.

6.         Defendant No.5 filed a separate Written Statement denying that he approached the Bank for credit facilities as averred in the plaint.  He pleaded ignorance about sanction on term and conditions.  According to him, defendant No.4 was exclusively handling the loan transaction and that defendant No.1 firm had incurred loss due to mal-administration and mishandling of financial matters solely by defendant No.4 and, therefore, defendant No.5 should not be held responsible.

…5/

7.         Defendant No.6 contended that the OA was misconceived.  He admitted having stood as guarantor but his contention was that he stood as guarantor only for the 5^th defendant in respect of the business agreed to be carried on and also in accordance with the ratio (i.e. 25%) of the partnership capital under the terms and conditions of the partnership deed.  According to him, the applicant and defendants No.2 to 4 took undue advantage of his goodness and that on several nominal printed forms his signatures were obtained.  Contention is taken that applicant Bank should proceed first against the principal debtors and thereafter, for the balance amount, if any, the Bank should approach the guarantors.

8.         Parties filed their respective Affidavits and arguments of both sides were heard by the Ld. PO.  Thereafter, the Ld. PO came to the conclusion on the basis of the material placed before him that the Bank had proved its case against all the defendants.

            As far as the case of defendant No.6 was concerned, the Ld. PO observed that though the Guarantee Agreements were not disputed by any of the executants including defendant No.6, status of defendant No.6 was totally different from the status of defendants No.2 to 5.  The Ld. PO observed that defendants No.2 to 5 were not only partners but were also guarantors while defendant No.6 was an outside guarantor and that because of the negligence of the Bank with respect to the hypothecated goods, defendant No.6 was entitled to protection given by Section-139 of the Indian Contract Act.

            Observing as above with respect to defendant No.6, the Ld. PO, however, said that though defendant No.6 was entitled to be absolved from the entire guarantee liability, he could not avoid any liability with respect to mortgage because his liability as a mortgagor remained intact.  He observed that liability of defendant No.6 emanating from his position as a guarantor was not to be mixed up with his liability emanating from his status as a mortgagor.  He observed that defendant No.6 had mortgaged ‘C’ Schedule property to secure the loans given to defendant No.1.  He, however, went on to observe further that though liability of defendant No.6 was fixed in his capacity as a mortgagor, the fact remained that defendant No.6 was not the principal borrower and, therefore, he was inclined to extend the benefit of the decision given by the Karnakata High Court in 1997(2) Kar. L.J. 610, which held that surety’s asset should be sold only as a last resort.  Therefore, he gave a peculiar direction that property of defendant No.6 i.e. ‘C’ Schedule property should be taken resort to by the applicant Bank only as a last resort.

9.         I have heard Mr. S. Sethuraman, Advocate for the appellant Bank and the respondent/Original defendant No.6 Mr. V.N. Anantha Krishnan, who appeared in person.  I have also gone through the proceedings and relevant case laws cited across the bar and in my view, the view taken by the Ld. PO of DRT, Bangalore, is contrary to the Judgement of the Hon’ble Supreme Court and it has to be said that the reliance placed upon by the Ld. PO on Karnataka High Court (supra), was erroneous.  Section-128 of the Indian Contract Act, 1872, lays down categorically that liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.  In AIR 1969 Supreme Court 297 (The Bank of Bihar Ltd.  Vs. Dr. Damodar Prasad & Another), this is what the Supreme Court has observed :-

“Under Section 128, save as provided in the contract, the liability of the surety is co-extensive with that of the principal debtor. The surety thus becomes liable to pay the entire amount. His liability is immediate. It is not deferred until the creditor exhausts his remedies against the principal debtor. In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against principal in some other proceedings.  Likewise, where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal.”

10.       Again, the Supreme Court in AIR 1992 SC 1740 (State Bank of India Vs. M/s. Indexport Registered & Others) stated that when the decree is a composite money decree being both personal against all the defendants including guarantor as well as mortgage decree without limitation on execution, then the decree holder cannot be forced to first exhaust remedy by way of execution of mortgage decree alone and then to proceed against guarantor. 

11.       In view of the above stated Supreme Court Judgements, the reliance placed by the Ld. PO on the Karnataka High Court Judgement reported in II (1997) BC 157 (S.V. Apparao Vs. Vijaya Bank & Another), was erroneous.  It was held by the Karnataka High Court, inter alia, in this case that liability of the surety commences when execution against principal debtor is impossible and that the precaution that the executing Court must take is to first ensure that reasonable efforts for execution have been made as against the principal debtor.  It has to be stated that the proposition of law enunciated in the Karnataka High Court judgement is not in consonance with the law laid down by the Supreme Court in the above mentioned two cases (supra) and, therefore, has to be ignored.

12.       The Ld. PO also appears to have unduly placed reliance upon the statement made by the Bank’s witness in cross-examination that the Bank was not knowing the exact hypothecation goods and hence they were not shown in the Schedule of the application.  Relying only on this statement the Ld. PO has sought to give benefit of Section-139 of the Indian Contract Act to defendant No.6.  For the sake of convenience, Section-139 of the Contract Act can be reproduced below :-

…9/

“139.   Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy – If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.”

            The proceedings, in fact, reveal that the Bank sold the hypothecated goods and secured Rs.25 lakhs.  There was no question of any negligence and the statement quoted by the Ld. PO in his impugned Judgement appears to be torn out of context.  His finding, therefore, on this point is also be to rejected.

13.       In view of the provision of law incorporated in Section-128 of the Contract Act and reiterated by the Supreme Court, the Ld. PO was not correct in giving the direction to the Bank that the Bank should proceed against the ‘C’ Schedule property of defendant No.6, only as a ‘last resort’.  In fact, it ought to have been held that property of defendant No.6 also was liable and accessible and available for execution of the decree against defendants No.1 to 5, and the decree ought to have been joint and several against all the defendants including defendant No.6.  The Ld. PO placed defendant No.6 in a special category as “outside guarantor”, when no such category exists in law.  The impugned Order will have, therefore, to be set aside and the appeal will have to be allowed.  Accordingly, following order is passed.

…10/

:  O R D E R  :

Regular Appeal RA No.43/2004, is hereby allowed in terms of Prayer Clause-6 of the Appeal Memo and the impugned Order dated 29.10.2004, passed by the Ld. PO of DRT, Bangalore, is set aside as against defendant no.6 and is substituted as follows :-

           

OA is allowed with cost and defendants No.1 to 6 are held jointly and severally liable to pay to the applicant Bank sum of Rs.11,19,479.19p with further interest at the rate of 15.80% p.a. compounded quarterly from the date of filing of the OA till realisation.

           

Direction given by the Ld. PO in the last two lines of the impugned Order giving direction to the Bank to proceed against the ‘C’ Schedule property of defendant No.6, only as a last resort, is hereby set aside.  Rest of the Order remains as it is.

           

Regular Appeal RA-43/2004, is disposed of in the above stated terms.

(Dictated to PS, transcript corrected, pronounced & signed by me in the open court today 2.3.2005).

                                                                                                           

                                                                                                                        Sd/-

[ JUSTICE  DR. PRATIBHA UPASANI ]

CHAIRPERSON

NPA provisioning of SBI increased three-fold between 2008-2011

Source:DRG TUESDAY, 30 AUGUST 2011 17:30

Rising bad debt has forced State Bank of India (SBI) to increase its provisioning more than 

three-fold to Rs 8,792 crore in 2010-11 from Rs 2,474 crore in 2008-09 informed the 

government.

 

Finance Minister Pranab Mukherjee while addressing through a written reply to a question raised in the Rajya Sabha said, this provision in 2010-11 includes a counter cyclical buffer of Rs 2,330 crore toward achieving the 70 per cent Provision Coverage Ratio prescribed by the Reserve Bank of India over-and-above the prudential provision.

The NPAs have gone up substantially in agriculture, small scale industries and corporates, he said. 

 

While naming the defaulter companies, he informed that, in the year 2010-11, outstanding loans of Rs 210.34 crore given by SBI to Shah Alloys Ltd turned into NPAs. At the same time, an outstanding loan of Rs 193.99 crore to Indorama Synthetics became a NPA.

 

The government has received a proposal from SBI for raising capital through various instruments -- Qualified Institutional Placement (QIP), Preferential Allotment, a Follow-On Public Offer and a rights issue. The proposal is under examination, said Minister of State for Finance Namo Narain Meena.

Banks face cautious future on NPAs in certain sectors: ASSOCHAM

Source :Indiainfoline news services:Aug 14,2011

Gross non-performing assets (NPAs) of all scheduled commercial banks now comprise two per cent of advances compared to 15 per cent in late 1990s

Though banks have shown improvement in asset quality over the years, fast changing macro-economic scenario has thrown up renewed risks of accounts going bad in certain vulnerable sectors like telecom, airlines, small and medium enterprises, and agriculture. A detailed study by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) says there still remains a considerable scope for improvement in asset quality of Indian banking institutions and regulatory norms associated with them. Gross non-performing assets (NPAs) of all scheduled commercial banks now comprise two per cent of advances compared to 15 per cent in late 1990s. In value terms, gross NPAs increased at a compound annual growth rate of less than one per cent since 2000-01 compared to 23 per cent growth in gross advances. Similarly, gross NPAs of scheduled commercial banks – which were quite high to the extent of 8.1 per cent of net advances for the year ending March 1997 – declined to 6.2 per cent in March 2001 and further to just above a per cent towards March 2009 end. Public sector banks led the improvement in NPAs, said the study conducted jointly by ASSOCHAM and investment bank Resurgent India. Investors are affected adversely if the proportion of toxic assets increases in overall asset portfolio of a company, it noted. The study analysed this further and considered data for 11 listed banks for the year ending March 2010 which showed that proportion of NPAs to total loans stood at 2.21 per cent. If the ratio of NPA to total loans was a tad lesser at exactly two per cent, the market capitalisation would have increased by 6.4 per cent. However, if the ratio is increased to 2.5 per cent, then market capitalisation would have reduced by nine per cent. With the same data set, the NPA level of 2.75 per cent – 54 basis points higher than the actual level – would have resulted in market capitalisation decreasing by 17 per cent. Existence of high NPAs in one sector can lead to drying up of credit flow to others. This obviously leads to a contagion effect on the economy as a whole – especially if it is an important sector like housing, automobile, micro-finance and financial services, said the study. The recent economic meltdown initially in the United States and then in rest of the world was a direct result of many loans going bad. Lax credit practices and availability of free credit empowered banks to lend credit to even sub-prime borrowers without sufficient checks. On top of this, bundling these mortgage loans to housing sector in the form of mortgage backed securities and collateralised debt obligations led potential bad credit out of banks’ books and never reflected in the health of banking system. But the same existed in the system through harmful and complex derivatives created by banks and credit rating agencies. As soon as these loans started going bad, banks and institutions holding these securities had to book significant mark-to-market losses which ultimately led to downfall of mighty institutions like Freddie Mae, Fannie Mac, Bear Sterns and Lehman Brothers. The world has still not been able to recover to pre-crisis levels. The study thus recommended adequate insurance schemes for SMEs and agricultural sector (being the most vulnerable) to provide a meaningful cushion if the account turns bad. It is also imperative to favour public sector banks through taking over of bad loans from these accounts and compensating for restricted lending capacities. Weather derivatives can be used for protecting crop loan portfolio. Corporate debt restructuring agencies can be established to encourage voluntary meetings between creditors and debtors, and to oversee an independent assessment of a company’s viability and worth. Debtor assistance programmes can be devised to ease burden of falling employment, rising interest rates or devaluing currencies. Such programmes tend to be very popular politically and can be as necessary as bank assistance programmes. But they can raise moral hazard and undermine a payment culture if not managed properly. Banks could be empowered to get a particular segment of clients’ business audited or verified by an independent entity to detect any possible warning signals. Also, increased participation from asset reconstruction companies is required to take toxic loans out of banks’ books. These companies need to be strengthened with capital infusion and efficient top management. The government could carve out NPAs from banks being restructured, replace bad assets with government bonds on balance sheets and have NPAs managed by an asset management company to fix the problems.

Central Bank of India Vs Premier Paper Products

IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

DATED THE 15^TH SEPTEMBER, 2004

PRESENT:  HON’BLE JUSTICE DR. PRATIBHA UPASANI

CHAIRPERSON

RA-12/2004

(IA-474/2003 in TA-1458/2002-DRT, Coimbatore)

BETWEEN:

Central Bank of India,

Variety Hall Road,

Coimbatore.

…  Appellant

            (Counsel:  Mr. S. Kothandaraman)

AND

1.  M/s. Premier Paper Products,

     By its Partner P. Nagarajan,

     (Now known as Premier Plass Pak Ltd.)

    

2.  P. Nagarajan

3.  P. Rajarathinam

4.  P. Ramamurthy

(Address of Respondents 1 to 4:  231, Pollachi Road, Coimbatore-641 021).

…  Respondents

            (Counsel:  Mr. M. Rajan for M/s. K. Chandrasekaran)

:  O R D E R  :

1.         Bank filed Suit OS No.454/1995 in the Sub-Court, Coimbatore, in the year 1995 which came to be transferred to DRT, Chennai, upon the establishment of DRTs under the RDDB&FI Act, 1993 and again re-transferred to DRT, Coimbatore, and re-numbered as TA No.1458/2002.

…2/

2.         This Appeal is filed by the appellant/Original applicant Central Bank of India being aggrieved by the judgement and Order dated 25.2.2004 passed by the Learned PO of DRT, Coimbatore, in IA-474/2003 in TA-1458/2002.  By the impugned Order the Ld. PO allowed the IA-474/2003 taken out by the defendants and disposed of finally the TA No.1458/2002 in view of the direction given by him in the IA. 

3.         Few facts which are required to be stated are as follows.

4.         Original Suit OS No.454/1995 was filed by the Bank against four defendants for recovery of amount to the tune of Rs.4,27,16,228.77p payable by the defendants to the applicant Bank for granting certain credit facilities to the defendants.  The defendants executed various security documents on several dates.  The defendants created mortgage by deposit of their title deeds on their properties with intent to create equitable mortgage as a security for due return of the loans availed by the defendant No.1 firm and its partners.  Since the defendants did not regularise their account the Suit as mentioned above, came to be filed by the Bank.  During the pendency of the proceedings, at one point of time, the defendants had given a proposal for settling the claim by offering Rs.464 lakhs but the settlement proposal did not come through.  One more attempt for settlement also failed.  Thereafter, the Reserve Bank of India came out with certain guidelines for settlement of NPA accounts.  In pursuance to the said guidelines the defendants submitted a revised proposal offering Rs.317.73 lakhs in full and final settlement of the Bank’s claim.  The proposal of the defendants was not accepted by the Bank and they were asked to improve their offer.  A revised offer was made of Rs.326.88 lakhs.  However, the revised proposal is still pending.  As per the Bank’s case, even that offer made by the respondents was subsequently withdrawn by them and another revised proposal was given by them on 30.4.2003 offering Rs.317.73 lakhs and to show their bonafides, deposited Rs.70 lakhs plus Rs.15 lakhs.  The said amount of Rs.70 lakhs was since withdrawn before the impugned Order dated 25.4.2004 came to be passed by the Ld. PO of DRT, Coimbatore.

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5.         While the OA was still pending, the defendants made an application being IA No.474/2003 to the DRT praying for a declaration that they were entitled to the benefits of the RBI circular/guidelines and praying that the applicant Bank be compelled to accept the offer made by them of Rs.317.73 lakhs under the One Time Settlement (OTS) as per the Scheme of RBI. 

6.         The Bank’s contention was that the RBI guidelines were in the nature of guiding and not for governing.  The contention of the Bank was that the guidelines were not binding on the Bank.  It was contended that the guidelines are not issued under Section-21 (1) of the Banking Regulation Act, 1949 or under Section-47-A (1) (b) of the said Act.  It was contended on behalf of the Bank that in view of this, the Bank could not be compelled to accept the proposal made by the defendants.

7.         The Ld. PO of DRT, however, held that the guidelines were binding on the Bank and passed an Order directing the Bank to accept a sum of Rs.317.73 lakhs in full and final settlement of the Suit claim being the minimum of the NPA as mentioned in the guidelines dated 29.1.2003.  IA-474/2003 which was made by the defendants was accordingly allowed and since direction was given to the Bank to accept the said amount of Rs.317.73 lakhs in full and final settlement, without adjudication the Learned PO closed and disposed of the TA in view of the direction given by him in IA-474/2003. 

8.         I have heard Mr. S. Kothandaraman, Advocate for the appellant Bank and Mr.M. Rajan, Advocate for the respondents.  I have also gone through the proceedings and the Case law which was submitted across the bar, and in my view, the Ld. PO has committed an error in holding that the guidelines given by the RBI under the OTS Scheme are binding on the bank.

9.         I find myself in agreement with the submission made by the Advocate appearing for the Bank that the guidelines are there to guide and not to govern.  Reference can be usefully made to the decision of the Allahabad High Court reported in 2004(3) CCC 165 (AIL) (Sardar Prem Singh Vs. Bank of Baroda).  The Division Bench of the Allahabad High Court in this case has held that the guidelines for recovery of non-performing assets do not confer right on a party to get one time settlement and that guidelines are purely administrative instructions which are not enforceable by Court of law.

10.       I am in respectful agreement with the observations made by the High Court. Reference can be also usefully made to the judgement delivered by the previous Chairperson of this Appellate Tribunal in Appeal RA No.7/2003 in Appeal-1/2002 in OA-878/1995 (Sri Raghavendra Theatre Vs. Bank of India).  In this matter, the late Justice Smt. A. Subbulakshmy has observed that if default is committed by the appellant in terms of the compromise then the compromise has to be treated as broken and the terms of the compromise is no longer binding on the Bank.

11.       In the present case at hand also, the respondents defendants have not kept their words by abiding to the terms of the compromise proposal.  The payment was not made in time and as observed earlier, it cannot be said that the guidelines are binding upon the Bank even though they are prejudicial to its interests.  The Ld. PO ought not to have compelled the Bank to accept the proposal and dispose of the TA itself without adjudicating upon it.  The impugned Order will have, therefore, to be set aside and the appeal filed by the Bank will have to be allowed.  Accordingly, following Order is passed.

12.       Appeal RA-12/2004 filed by the Central Bank of India is allowed.  The matter is remanded back to the Learned PO of DRT, Coimbatore, for deciding the OA in accordance with law on its own merits.

(Dictated to PS & the transcript corrected, pronounced & signed by me today the 15^th September, 2004).

                                                                                                                        Sd/-

[ JUSTICE  DR. PRATIBHA UPASANI ]

CHAIRPERSON