Banks’ non-performing assets are reported to be rising and are anywhere within range of Rs 31,400 crore. There are a number of laws with jaw-breaking names to enable lenders to recover the loans — the Recovery of Debts Due to Banks and Financial Institutions Act 1993, the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.
However, the ingenuity of wayward borrowers, assisted by counsel adept at finding loopholes, often surpasses the provisions of law. Earlier, when the only remedy was through civil courts, the financial institutions could be stymied by delays and repeated appeals. In 1993, two laws were passed to fast-track loan recovery and the debt tribunals were set up.
With time, as the Supreme Court observed, the proceedings before the tribunals became “synonymous with those of the regular courts and the lawyers representing the borrowers and defaulters used every possible mechanism and dilatory tactic to impede the expeditious adjudication of such cases” (United Bank of India vs Satyawati Tondon).
The court, in this recent judgment, also blamed the government’s “flawed appointment procedure” for the impasse.
Then came the Securitisation Act of 2002. After long litigation in the Supreme Court, the Act became operative in 2004. Even then, the high courts interfered with its functioning by passing injunctions and interim orders. This prompted the Supreme Court to remark that “it is a matter of serious concern that despite repeated pronouncements of this court, the high courts continue to ignore the availability of statutory remedies under the Debt Recovery Act and the Securitisation Act and exercise writ jurisdiction for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover the dues. We hope and trust that the high courts will exercise their discretion in such matters with greater caution, care and circumspection.”
In this case, the bank proceeded against a guarantor of a term loan under the Securitisation Act. She moved the Allahabad High Court pleading that the bank should have taken action against the borrower first before moving to take over her mortgaged property. The bank countered it arguing that she could not move the high court straightaway without approaching the special forums set up for loan recovery.
The high court agreed with the guarantor and restrained the bank from taking over her property. According to the high court, the bank should have proceeded against the borrower and exhausted all the remedies against him and only then could it have proceeded against the guarantor. Therefore, the bank appealed to the Supreme Court and succeeded in vacating the injunction.
It is well-known that the liability of the guarantor and principal debtor is co-extensive and the creditor has the right to proceed against either for recovery of dues. Therefore, the Supreme Court stated that the high court had “completely misdirected itself” by asking the bank to recover the dues from the borrower instead of the surety. The Securitisation Act also gives the creditor this choice.
Secondly, the high court should not ordinarily entertain petitions for injunction when other remedies are available for the aggrieved parties. This rule, said the Supreme Court, applied “with greater rigour” in matters involving recovery of taxes, cess, fees, other types of public money and the dues of banks and other financial institutions. “In our view,” the court added, “while dealing with the petitions involving challenge to the action taken for recovery of public dues, the high court must keep in mind that the legislation enacted by Parliament and legislatures for recovery of such dues are a code unto themselves inasmuch as they not only contain comprehensive procedure for recovery of the dues but also envisage constitution of quasi-judicial bodies for redressal of the grievance of any aggrieved person. Therefore, in all such cases, the high court must insist that before approaching it, a person must exhaust the remedies available under the relevant statute.”
In another recent judgment involving the Foreign Exchange Management Act, the Supreme Court emphasised this view saying that “when a statutory forum is created by law for redressal of grievance and that too in a fiscal statute, a writ petition should not be entertained ignoring the statutory dispensation.” (Raj Kumar vs Directorate of Enforcement). It admonished the high court again in Modern Industries vs SAIL.
It was these repeated errors made by the high courts that prompted the Supreme Court to warn them that stay orders granted would have “serious adverse impact on the financial health of such institutions and prove detrimental to the economy of the nation”.
