<b>M J Antony:</b> The long road to debt recovery

Both lenders and borrowers use legal armoury to serve their interests

In a detailed judgment last month, the Supreme Court (SC) lamented the plight of debt recovery tribunals (DRT) that are set up in almost every sector, and then left to fend for themselves. The government does not release funds, and the tribunals are in a state of suspended animation without enough members, staff or buildings. In a triumph of hope over experience, the SC set forth a series of measures for the government to make these bodies functional (Union of India vs DRT Bar Association).

Last week, the SC came across a 12-year-old litigation, described as a "classic case" of debt recovery. The judgment said it showed "how the parties can protract proceedings in fiscal matters. Parties as well as the system have contributed to the delay. At every state of the proceedings, there was delay" (T P Vishnu Kumar vs Canara Bank).

In 2002, the bank moved DRT, Coimbatore, for the recovery of debt from a firm. The debtors asked the bank to produce extracts of accounts and transactions relating to banking transactions. The bank opposed the request, arguing that it was not germane to the dispute. The tribunal rejected the demand for documents observing that it was meant to delay the proceedings. Already five years had gone by. The borrowers moved the Madras High Court. One bench found the request of the borrowers reasonable. On appeal, a division bench found the other bench wrong. Three more years had rolled by. The appeal in the Supreme Court took another three years.

It was not curtains for the litigation, however. The judgment said: "The case stands at the stage at which it was filed, not an inch forward." Now, Canara Bank does not have to produce the documents. But the main issues will have to be argued from page one.

Tracing the history of debt recovery laws, the Supreme Court recalled that DRTs were created by the Recovery of Debts due to Banks and Financial Institutions Act in 1993. Civil courts were found unable to handle the millions of cases coming up before them. At the time of setting up the tribunals, there were more than 1.5 million cases filed by public sector banks and 304 moved by financial institutions. They involved Rs 5,622 crore then. Non-performing assets have doubled from 2009 to 2012. Ingenuity of borrowers and their lawyers also kept pace.

Courts have contributed their share to the chaos. In the Canara Bank case, the high court interfered with the tribunal's order rejecting the demand of the borrowers for a series of documents from the bank. The high court has no power to do so. The Supreme Court chastised the high court for interfering with the interim order of DRT. If the high court interferes in every interim order of DRT, the purpose of establishing such tribunals will be lost. "Owing to the intervention of the writ court, the matter got delayed for four years, defeating the very purpose and object of the Act," the judgment said.

The Debt Recovery Act empowers banks and financial institutions to move the tribunal in the interest of speedy proceedings. However, the borrower can raise disputes over their claims in a civil court. Whether the civil case can be transferred to the tribunal or not is a question on which the Supreme Court has given two contrary judgments three years ago. Thus, the issue can be further complicated by borrowers.

When the Act was found inadequate to meet the ingenuity of borrowers, Parliament passed the Securitisation and Reconstruction of Financial Assets and Security Interest Act in 2002. The provisions are so harsh that financial institutions can play Shylock. In a recent judgment (Palpap Software International vs Indian Bank), the Madras High Court described the case before it as "a classic example of misuse of the provisions of the Act by the secured creditor". The auction of the mortgaged property was reduced to a "mockery".

The judgment said: "The bank is expected to conduct the procedure in a bona fide manner. The attempt of the bank should be to auction property for the maximum amount and adjust it towards the dues, and refund the excess to the borrower."

Cases involving debt recovery are flooding the courts, despite the new laws. Often such litigation is intertwined with other legislation like the Sick Industries Act, which has been found to be amenable to gross misuse, the Negotiable Instruments Act dealing with bounced cheques and liquidation proceedings. These laws are used more as battering rams against each other than for settling disputes. The whole thing can be made into a knotty bundle by lenders and borrowers, which the hierarchy of courts would take years to unscramble. In their minds, the judges might be repeating Shakespeare's line, "Neither a borrower nor a lender be."