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Monday, May 03, 2004

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Supreme Court verdict provides relief to bank borrowers

On April 8 the Supreme Court, while upholding the validity of the Securitisation Act, provided one major relief to the borrower-litigant. The earlier provision that the borrower will have to deposit 75 per cent of the disputed amount before appealing has been scrapped. Major details of the Act are discussed here.

WHILE UPHOLDING the Constitutional validity of the Securitisation Act, the Supreme Court has protected the interests of borrowers also, through its historic judgment on April 8, 2004. The Court allowed aggrieved borrowers to file their appeals before the Debts Recovery Tribunal, without any deposit money, within the limitation period of 45 days from the date of order, April 8, in (pending) cases where the banks/FIs had taken action for attachment/sale.

As per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which came into effect on June 21, 2002, banks and financial institutions were allowed to issue demand notices to defaulting borrowers and to take possession of the secured asset (property) without intervention of courts, if the dues under the notices were not fully paid, within 60 days the from date of such notice. No civil court had jurisdiction to entertain any suit or proceeding under this Act. Only after the bank/FI commenced recovery measures by taking possession of secured assets, or taking over the management of the secured assets of the borrower, including transfer by lease or sale, the borrower could prefer appeal before the Debts Recovery Tribunal, by depositing 75 per cent of the dues demanded.

While disposing of a batch of 12 appeals filed against the Securitisation Act, the three-judge bench including Chief Justice V. N. Khare, Justice Brijesh Kumar and Justice Arun Kumar, went deep into the problems of the bankers and borrowers in enforcement of the Act for recovery of dues. On receipt of the demand notices issued by the bank/FI, it was suggested, a reply may be submitted by the borrower (to the banker), explaining the reasons as to why measures may not be taken for attachment/ taking possession/sale of properties, in case of non-compliance of the notice within 60 days.

"The secured creditor (banker) must apply his mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised, rather than to ritually reject them and proceed to take drastic measures under sub-Section(4) of Section 13 of the Act... ''

Stress on principles

of fairness

The Supreme Court stipulated that the principles of fairness must be applied by the banker while dealing with their borrowers, to apprise them of the reasons for not accepting the objections or points raised in reply to the notice served upon them, before proceeding further on taking possession/sale of asset. "Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor.''

These instructions were in keeping with the concept of `right to know' and the lender's liability of fairness to keep the borrower informed particularly of the developments immediately before taking drastic measures of attachment, taking possession and sale of secured property. It was also intended to bring transparency and not secrecy on such actions by banks, so as to build an atmosphere of confidence and healthy commercial practice.

Another safeguard

The next safeguard available to a secured borrower, within the framework of the Act, is to approach the Debts Recovery Tribunal, under Sec.17 being the right to appeal; but such a right accrues only after measures are taken under Section 13(4) of the Act. For preferring appeal, as per Sec.17(2), the borrower had to deposit 75 per cent of the amount of demand notice, as a pre-condition.

The appellants contended that such an oppressive provision worked as a deterrent impeding access to a forum, meant for redressal of the grievance of a borrower. The Court expressed the view that Sub-section (2) of Sec.17 of the Act was unreasonable, arbitrary and violative of Article 14 of the Constitution. It could not be said that all those who defaulted, according to the banks/FIs, must be condemned unheard and might not deserve any hearing to place their side of the case unless they go through the crushing pre-condition of a deposit of 75 per cent of the amount demanded, in addition to their secured assets already having been taken possession of.

Removal of deposit

before appeal

The Court felt this could well be one example of hitting below the belt. Hence it struck down the pre-condition of depositing 75 per cent of the amount of demand, for appeal before the Debts Recovery Tribunal, since such provision was an oppressive, onerous and arbitrary condition against all canons of reasonableness. Since rejcovery measures were already initiated under Sec. 13(4) against many secured assets, the Court allowed such borrowers to file appeals before the Debts Recovery Tribunal under Sec.17 of the Act, within 45 days, to be counted with effect from April 8, the date of the judgment.

The Tribunal in exercise of its ancillary powers shall have jurisdiction to pass any stay/interim order subject to the condition as it may deem fit and proper to impose.

After the Securitisation Act came into effect on June 21,2002, many banks and FIs had issued numerous demand notices which created a panic wave among borrowers, mainly small borrowers, since the provisions of the Act could be invoked in cases where the dues were more than Rs. 1 lakh. The Damocles' sword hanging over the heads of smaller borrowers created a scare psychosis. The larger borrowers may not worry as most of them did not mortgage their residential properties or other valuable securities while availing the loans.

In the last decade, bankers were competing with each other for granting large corporate advances under consortium lending or multiple banking without much collateral securities, but with some paper securities such as book-debts and receivables. Such borrowers managed to obtain new credits from different banks with or without the knowledge of bank officials.

In such cases recovery of dues through provisions of the Securitisation Act is doubtful as only the secured properties could be put to sale for recovery. Hence actual recovery by invoking the provisions of the Securitisation Act may not be to the extent bankers had expected at the time of introduction of the Act.

As far as the procedure for enforcement of security interest stands now, the banker/FI has to classify the account as NPA and issue the demand notice in writing, allowing 60 days time from the date of notice, for remitting the dues.

he banker has to publish the notice in two leading newspapers, one in a vernacular language. The borrower can raise objections before the banker as to the correctness of the claim, not adjudicated by any court. (Usually the borrower is in the dark as to the actual rate of interest and penal interest charged by the banker.

Bankers also debit overheads in various names such as processing fee, up-front fee, inspection charge, legal charge and folio charge on which the borrower has no say.) The banker has to consider such objections and submit his reasons to the borrower in writing if he overrules such objections.

The provisions of the Act will not apply in case the amount due is less than 20 per cent of the principal amount and interest thereon. At this stage the borrower cannot approach any civil court.

If the borrower did not remit the full amount demanded, the banker can take possession of movable or immovable secured assets. (If aggrieved, the borrower or any affected party can file appeal before the Debts Recovery Tribunal.)

In the case of immovable property, the possession notice has to be published in two leading newspapers.

The banker has to obtain valuation of movable/immovable properties from an approved valuer and the reserve price is to be fixed in consultation with the secured creditor. He has to serve 30 days notice to the borrower before the date of sale.

Sale of properties other than by inviting tender/public auction can be only on terms settled by the parties in writing. In the case of sale of property by tender/auction, publication is necessary in two leading newspapers, one in a vernacular language, with full particulars. (For the publication itself, the banker has to spend a substantial amount, adding to the dues.)

After realising the sale proceeds, for recovery of any balance amount of the dues, the banker has to approach the DRT having jurisdiction, or a competent court.

Since a large number of appeals are expected to be filed in Debts Recovery Tribunals, adequate manpower and infrastructure facilities are urgently needed at such Tribunals.

Raju O. F.

(The writer is an advocate. He can be contacted at ofraju@vsnl.net).

Raju O. F. (The writer is an advocate. He can be contacted at ofraju@vsnl.net).

(The writer is an advocate. He can be contacted at ofraju@vsnl.net).

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