Recent Judgements Relevant to Bankers  (March 2004)

1. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) S 34(2). State Financial Corporation Act, 1951 (SFC Act) - Section - 32G. Uttar Pradesh Public Monies (Recovery of Dues) Act, 1972, (UP Act) - Section 3. Invoking of revenue recovery procedure under UP Act. Before the Supreme Court of India - Unique ButyleTube Industries Pvt. Ltd. vs. U.P. Financial Corporation and others (2003)113 Comp. Cas 374(SC)

Issue

Whether the certificate issued by the Uttar Pradesh Financial Corporation under the Uttar Pradesh Public Monies (Recovery of Dues) Act, 1972 is enforceable and maintainable in view of Section 34(2) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Facts

The appellant challenged the certificate issued under the Provisions of the Uttar Pradesh Public Monies (Recovery of Dues) Act, 1972 on the ground that after the enactment of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) the Proceedings under the provisions of the U.P. Act for recovery of loans were not maintainable. Also the appellant relied on the provisions of Section 32 G of the State Financial Corporation Act. The stand of the Corporation was that though alternative modes for recovery were prescribed under different statutes one cannot stand in the way of the other mode. The Division Bench of the High Court concluded the issue as follows.

"The choice is clearly left open to the Financial corporation which may proceed under the D.R.T Act or may proceed under the other modes of recovering the debts as are permissible under the S.FC. Act, i.e., it can proceed under the provisions of the U. F! Public Monies (Recovery of Dues) Act'.

Aggrieved by the said order, the appellant preferred the present appeal before the Supreme Court.

Observations of the Supreme Court

DRT Act requires the Tribunal alone to decide applications for recovery of debts due to banks and financial institutions. The jurisdiction of the Tribunal in regard to adjudication is exclusive. Basically the Tribunal is to adjudicate the liability of the defendant and then it has to issue a certificate under Section 19(22) to the Recovery Officer for recovery of the debt specified in the certificate. The Jurisdiction of any other court or authority which would otherwise have had jurisdiction but for the provisions of the DRT Act is ousted and the power to adjudicate upon the liability is exclusively vested in the Tribunal. (This exclusion does not however apply to the jurisdiction of the Supreme Court or of a High Court exercising power under article 226 or 227 of the Constitution of India). However, Section 34(2) of DIRT Act makes it clear that its provisions are applicable in addition to the Acts mentioned therein. Since SFC Act is included in Section 34(2) of DRT Act, a bank or financial institution has the option or choice to proceed either under the DRT Act or under the modes of recovery permissible under the State Financial Corporation Act. The U.P Act deals with separate modes of recovery and such proceedings are not relatable to prosecution under the State Financial Corporations Act.

As regards the intepretation of the statutes the Court observed that the primary rule of costruction is that the intention of the legislature must be found in the words used by the Legislature itself. While interpreting a provision, the Court only interprets the law and cannot legislate it. The Court held that it could not read UP Act into Section 34(2) of DRT Act and quash the proceedings initiated under the UP Act.

Decision

Appeal is allowed

2. Companies Act, 1956 -Part IX -Sections 565, 566, 575, 576, 577. Multi-State Co-operative Societies Act (the Multi-State Act), 1984, Section 17 - Banking Regulation Act, 1949 (B.R. Act) Section 22 - Society registered under Multi State Co-operative Societies Act may be converted to a company - Certificate of Incorporation of a Company issued by Registrar of Companies is conclusive - Writ does not lie to challenge that certificate -Only remedy is winding up. In the High Court of Bombay - Salim Akbarali Nanji and others vs. Union of India and others (2003) 113 Comp.Cas 141.

Issue

The main issue involved was whether the Development Co-operative Bank Ltd. (Respondent No. 10) deemed to be registered under the MultiState Act could be converted into a Joint Stock (banking) Company under the provisions of part IX of the Companies Act.

Facts

The Petitioner was a member/Share holder of Respondent No. 10 and became a Share holder of Respondent 11 (Joint Stock Banking Company). Respondent No. 10 was deemed to be a cooperative society registered under the Multi State Act as it had branches in the States of Maharashtra and Andhra Pradesh at the time of coming into force of the Multi State Act. The respondent No. 10 converted itself into a joint stock banking company under part IX of the Companies Act by passing resolutions and obtaining the necessary certificates. According to the petitioner, conversion of Respondent No. 10 into a Joint Stock Banking Company would affect the interest of the employees and share holders of Respondent No. 10, the period of notice given by Respondent no. 10 to its shareholders to consider the conversion of Respondent No. 10 into a Joint Stock Banking Company under Part IX of the Companies Act, was extremely short, the meeting was conducted in a high-handed manner and the resolution passed, by a show of hands in the meeting held on 28th January 1995 was not proper. The Government of India conveyed their no objection for registration of Respondent No. 10 as a Company under Part IX of the Companies Act, 1956. Registrar of Companies (Respondent No. 5) issued a Certificate of Incorporation to Respondent No. 11 after its conversion. RBI granted licence under Section 22 (1) of the Banking Regulation Act, 1949 to Respondent 11 to carry on banking business in India subject to certain conditions mentioned therein. Pursuant to the licence granted by RBI, Respondent No. 11 issued a circular to all its branches informing them about the conversion and also issued a letter to all its share holders to deliver their Share Certificate issued by Respondent No. 10 for endorsement that those are now shares of Respondent No. 11. The petitioner challenged the legality and propriety of the certificate of incorporation issued by Respondent No. 5 (ROC), and inter alia, sought a direction to RBI to withdraw/ cancel the permission and further direction to Respondent No. 5 to withdraw the certificate of incorporation.

Observations of the Court

The reference made to the _expression_ 'company' in part IX of the Companies Act is to a group, assembly or association of persons which has been incorporated under an Act of Parliament or otherwise duly constituted according to law, and consisting of seven or more members. The word 'company' used in section 566 of the Companies Act includes within its purview, a co-operative society registered under any Co-operative Societies Act. As such, Respondent No. 10 could be converted into a joint stock banking company if all other criteria were fulfilled.

Though there is no express provision under the Multi State Act to allow conversion of a Cooperative Bank into a Banking Company under part IX of the Companies Act, there is no provision prohibiting such conversion in the said Act if all requirements contemplated under part IX of the Companies Act are complied with. In view of Sections 575, 576 & 577 of the Companies Act, 1956 upon incorporation of Respondent No. 11 as a Company under Companies Act, all property movable, immovable including actionable claims belonging or vested in Respondent No. 10 bank and liabilities at the date of registration passed to and vested in Respondent No. 11. Once the Company is born, the method to get it extinguished is not by assailing its incorporation as the certificate of incorporation issued ROC is conclusive but by resorting to the provisions of the Companies Act which provides for winding up of the companies. Under section 17 of the Multi-State Act, when the whole of the assets or liabilities of Multi State Cooperative Society are transferred to another entity, the registration of that Multi State Society stands cancelled and the Society shall be deemed to have been ispo facto dissolved and shall cease to exist as a corporate body. As such, the society stands dissolved on its conversion as a Joint Stock company under part IX of the Companies Act. The certificate of incorporation issued by the Registrar of Companies is conclusive and precludes a party from seeking a declaration that the registration was illegal. Once the company is incorporated, the only method of extinguishing it, is winding it up. It is not possible to challenge its incorporation in Writ Proceedings.

Decision

Petition is dismissed.

3. Deposit Scheme for Retired Government Employees 1989 (Scheme) Para 6 - Interest on deposits may be reduced in accordance with economic policy. In the High Court of Rajasthan (Jaipur) - D.B. Civil Writ Petition No. 3080 of 2000 - Dr. Balwant Singh vs. UOI, SBI & RBI (AIR 2003 RAJ 56).

Issue

Whether the rate of interest on existing deposits under the Scheme may be reduced?

Facts

Government of India notified vide notification dated 7-6-1989 the Deposit Scheme for Retired Government Employees 1989. On the basis of the said Notification, RBI advised SBI and other nationalised banks to implement the Scheme. In terms of the Scheme, the deposit made under the Scheme carried interest @9% p.a. Subsequently, by a notification dated 15-3-1993 the Scheme was modified and the rate of interest was increased to 10%, on deposits made under the scheme on or after 15th March 1993. The Scheme was further modified by a notification dated 1-1-1999 and the interest under the scheme was again fixed at 9% p.a. with effect from 1-1-1999. The Petitioner had deposited a sum of Rs. 11 lacs under the scheme in 1995 and was given the advantage of the amendment made by notification dated 15th March 1993. However, since by Notification dated 1-1-1999 the interest under the Scheme had been fixed at 9% p.a. the petitioner was paid interest @9% to his deposit of Rs. 11 lacs w.e.f. 1-1-1999.

2. In the Writ Petition, the Petitioner prayed for, inter alia, a declaration that the notification dated 1-1-1999 is illegal, unsustainable/ not applicable to the deposits made prior to 1-1-1999 and to direct the second respondent (SBI through its Chairman, Mumbai) to continue to make payment of interest to the petitioner on his deposit @ 10% as long as the deposit continues with respondent No. 4 (Manager, SBI, NCRB, Jaipur).

Observations of the Court

The Court summed up the written submissions filed by the Bank relating to payment of interest as under: `The further submission of the RBI is that the payment of interest on the deposits by the Banks depends upon many factors relating to monetary policy besides other availability of funds to the Banks and the ability of the Banks to advance loan to the various parties at a particular rate. The payment of interest relates to monetary policy and economic policy". In view of the economic policy of the Union of India, Reserve Bank of India is competent to alter the rate of interest. The notification dated 1st January 1999 cannot be declared illegal as it is based on the economic policy of the Union of India. The said notification cannot be termed as discriminatory qua the petitioner. Till the issuance of notification the petitioner was paid interest @ 10% p.a. but he is not entitled to claim interest at this rate after issuance of the notification dated 1-1-1999. The petitioner is free to discontinue his account if he feels that the scheme is no longer beneficial to him. The petitioner is not entitled to compel the respondent to make payment of interest @ 10% so long as the deposit continues with the Respondent No. 4. The act of RBI cannot be tantamount to betrayal of the promise that was given to the depositors in the scheme. The petitioner has not been subjected to hostile discrimination as RBI reduced the rate of interest as per the economic policy and the said policy has overall effect on all the deposits. The wisdom of policy decision of RBI is not a subject matter for consideration by this Court under Article 226 of the Constitution. It did not infringe any statutory or fundamental rights of the petitioner.

Decision

The petition is dismissed.

4. Indian Contract Act 1872, Section 17 -Bankers General Lien-FDR as Surety -Recovery of time barred debt - In the High Court of Karnataka - S. Vasupalaiah vs. Vysya Bank, (2003) 113 Comp.Cas. 95

Issue

Whether fixed deposits of surety created subsequent to principal loan transaction can be adjusted against the debts of which recovery is barred by limitation.

Facts

The Plaintiff stood as a surety for the loan availed of by one Shri Ramakrishna in 1983 from the defendant bank. The Plaintiff had purchased Janatha Cash Certificate on 3-9-1985 which was due for encashment on 3-3-92. When the principal debtor did not repay the loan, the surety was informed of the same and advised to get the loan repaid. Thereafter the surety endorsed the cash certificate in favour of the defendant to enable them to adjust the amount agains the loan. When the endorsement was made, the claim against the principal debtor had become time barred. The bank adjusted the amount on the ground that the plaintiff being a guarantor his liability is coextensive with that of the Principal Debtor. The suit filed by the Plaintiff was dismissed by the Small Causes Court. Aggrieved by the order of the lower court, the plaintiff preferred the present revision petition.

Observations of the Court

Though the remedy to recover the debt from the Principal Debtor is barred by limitation, the liability still subsists and the bank is entitled to appropriate the debt due from the amounts which are in its possession either belonging to the principal debtor or the surety. The liability of the surety is coextensive with that of the principal debtor. The Court has also relied on the judgement of the Supreme Court in Punjab National Bank vs. Surendra Prasad Sinha (1992) 75 Comp.Cas 699, 701; AIR 1992 SC 1815, wherein it was held that through the remedy to recover the debt from the principal debtor is barred by limitation, the liability still subsists. In terms of the contract, the bank is entitled to appropriate the debt due. The banker has a general lien over the securities and amounts in its possession. In Syndicate Bank vs. Vijayakumar (1992) 79 Com.Cas. 597 - AIR 1992SC 1066 the Honourable Supreme Court examined various English authorities and authors and summed up the legal position and stated that the Banker's general lien extends to all forms of securities including Negotiable Instruments and fixed deposits deposited as security. The Bank has the right to use the proceeds towards adjustment of the debt due to it from the customer. The court held that bank has the right to adjust the loan amount against the maturity proceeds of the fixed deposits though it was created subsequent to the loan transaction. The fact that fixed deposit was created subsequent to the loan transaction would not make a difference.

Decision

Petition is dismissed.

5. Negotiable Instruments Act, 1881 (NI Act) - Sections 138, 141 - Criminal Procedure Code, 1973 - Section 482 - A director resigning after receipt of notice under Section 138 of NI Act regarding dishonour of cheque cannot escape liability. Before the High Court of Andhra Pradesh - Krishna Bhoopal vs. Sanam Jhansi Devi and another (2003) 113 Comp.Cas 363 A.P.

Issue

Whether the director who signed the cheque can escape criminal liability by resigning from the post of director?

Facts

Director of a Company who tendered resignation after receipt of the Statutory Notice of dishonour `of cheque cannot escape from his liability under Section 138 of the Negotiable Instruments Act. The fact that the resignation after its acceptance by the board of directors relates back to the date of resignation can have no relevance. If a director of a company who drew the cheque on behalf of that company thinks it fit to tender resignation after having received the notice of dishonour and demand for payment of the cheque drawn by him, can avoid criminal liability under section 138 of the Act it may result in in-congruous situations. The director appointed in his place subsequently can plead that he was not in charge of the affairs of that company when the cheque was drawn and so he cannot be made liable. In the circumstances like this, though the offence under section 138 of the Act becomes complete only if payment is not made within 15 days of receipt of the statutory notice, since the director who tendered the resignation could pay the amount covered by the dishonoured cheque and then resign, he cannot escape his liability under section 138 of the Act by tendering resignation after receipt of statutory notice of dishonour without making the payment demanded. From Section 141 of the Act, it is clear that apart from the Company, the person who has drawn the cheque also is liable for punishment under Section 138 of the N. I. Act. So merely because the Company was not shown as an accused in the complaint, it cannot be said that the complaint against the petitioner is not maintainable.

The first respondent had deposited Rs. 1,00,000 with the company and the cheque drawn by the petitioner and another was issued towards payment of the said amount. It is for the petitioner to establish that the cheque for Rs. 1,00,000 which was dishonoured, was not in fact issued towards the discharge of the legally enforceable debt or liability due to the first respondent. The question as to whether there is a legally enforceable debt or liability to the first respondent or not can be decided only after the parties adduce evidence during the trial, but not at this stage.

Decision

Criminal Revision Petition is dismissed.

6. Constitution of India - Art. 14 -Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Second) Ordinance, 2002, Sections 13,17,18, 19. In the High Court of Gujarat - M.R. Utensils vs. Union of India (2003) 113 Comp.Cas 667.

Issue

Whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Second) Ordinance, 2002 (the Ordinance) violates the provisions of Article 14 of the Constitution of India in as much as it does not provide for any remedy to the aggrieved borrower against the action taken by the secured creditor under Section 13 of the Ordinance and whether the impugned Ordinance is liable to be struck down as arbitrary and unconstitutional.

Facts

Petitioners challenged the Constitutional validity of the Ordinance though no notice has been received by the petitioners from their unidentified and undisclosed secured creditors. It was alleged that the Ordinance is arbitrary as there is no remedy to the aggrieved borrower.

Section 13 of the Ordinance provides that notwithstanding anything contained in Section 69 or Section 69A of the Transfer of Property Act, 1882, any security interest created in favour of any secured creditor may be enforced without the intervention of Court or Tribunal by such creditor in accordance with the provisions of the Ordinance Sub-section (2) of Section 13 of the Ordinance provides that action by the secured creditor against the borrower may be initiated by a notice in writing calling him to discharge in full his liabilities within 60 days from the date of notice failing which the secured creditor may exercise all or any of the rights under Sub-section (4) of the Ordinance. Under Section (4) of Section 13 of the ordinance, the secured creditor may have recourse to one or more of the following measures to recover his secured debt namely-

1. take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
2. take over the management of the secured assets ......
3. appoint any person to manage the secured assets .........
4. require at any time by notice in writing, any person who has acquired any of the securedassets from the borrower .....

Observations of the Court

The provisions regarding notice to the borrower, two appeals etc. contained in Section 13, 17, 18 and 19 of the Ordinance sufficiently and adequately take care the interest of the borrower against the action taken against him by the secured creditor under Section 13 of the Ordinance. The impugned Ordinance is not arbitrary or violative of article 14 of the Constitution of India. The provisions enabling banks and financial institutions to proceed against security without intervention of court is valid.

In the absence of any notice from the secured creditor to the petitioners, no cause of action can be said to have arisen for maintaining the instant petition. The exercise of examining the validity of the Ordinance is merely academic, and an exercise in futility. It cannot be gainsaid that the special and extraordinary jurisdiction under article 226 of the Constitution should not be exercised merely for academic purposes.

Decision

The Petition is dismissed.

7. Jurisdiction and Scope of DRT and BOS :Recovery of Debts Due to Bank and Financial Institutions Act, 1993 (DRT Act) - Section 19 - Banking Regulation Act, 1949 ? Section 35A-Pendency of complaint of the customer before the Banking Ombudsman does not come in the way of the continuation of the proceedings initiated by the bank before the Debt Recovery Tribunal. In the High Court of Allahabad - Hindustan Ferru and Industries Ltd. and another vs. Debt Recovery Tribunal and another (2003) 113 Comp. Case 58

Issue

Whether a borrower is entitled to seek stay of the recovery proceedings initiated against him by the bank under DRT Act before the Tribunal on the ground that the complaint against the bank filed by him before the Banking Ombudsman is pending?

Facts

An agreement was executed by the petitioner in 1990 with the 2nd respondent, State Bank of India for grant of credit facility on hypothecation of stock, stores, spares, finished goods etc. This apart U.P Financial Corporation Ltd. and another have also granted term loans to the Petitioners and they have the first priority/charge to claim fixed assets of the company such as land, building, plant, machinery etc. The bank had charged Rs. 20 lacs as interest, as the Company could not pay off the loan amount. It became a sick unit in 1998. Thereafter, the promoters took over the company and the bank had issued a clean credit to a tune of Rs. 70 lacs, to the Promoters. The Petitioners have repaid an amount of Rs. 46,56,565/-. As the bank continued to charge interest the petitioners preferred a complaint to the Banking Ombudsman. During the pendency of the matter before the Banking Ombudsman, the bank issued a notice to the petitioners to make payment within 10 days from the date of receipt of the notice. As the petitioners failed to make payment, the bank moved an application before the Debt Recovery Tribunal (DRT) under Section 19 of the DRT Act for recovery of Rs. 39,24,379.51. The application moved by the petitioners before the DRT for stay of the proceedings a/s 19 of the DRT Act on the ground that the matter is subjudice before the Banking Ombudsman was rejected by the DRT vide order dated 1-12-2000. In the present Writ Petition the petitioners have prayed for quashing of the order dated 1-12-2000 and for a direction in the nature of mandamus comnanding Respondent No. 2 to stay the proceedings till the complaint filed before the Banking Ombudsman is finally decided.

Observations of the Court

The scope, object and purpose of the Banking Ombudsman Scheme (the Scheme) formulated by RBI under the provisions of Banking Regulation Act and that of the (DRT Act) are entirely distinct and different. The object of the scheme is to enable resolution of complaints relating to provisions of banking service and to facilitate the satisfaction or settlement of such complaints. Whereas the purpose of the Act is to provide for the establishment of tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto. The scheme has nothing to do with the proceedings for recovery of debts due to banks and financial institutions. The scheme cannot override or nulify the provisions of the Act.

Decision

Writ Petition is dismissed.

8. Negotiable Instruments Act, 1881-Section 138. Post dated cheque is a bill of exchange till the date mentioned in the cheque and section 138 of NI Act is not applicable to it till them. On the date mentioned in the postdated cheque, it becomes a cheque. If the cheque is presented within a period of six months from the date mentioned on the cheque, section 138 is attracted. In the High Court of A.P. - Sheelam Raji Reddy vs. Samudrala Bixmaiah and another (2003) 113 Comp. Cas 517.

Issue

Whether the period of limitation of six months prescribed by Section 138 of the Negotiable Instruments Act, 1881 (NI Act) begins from the actual date of drawal of the cheque or from the date which is found on the cheque?

Facts

The respondent filed a complaint under Section 138 of the NI Act before the Magistrate Court, Nalgonda against the Petitioner alleging that on 7th July 2000 the petitioner issued two post-dated cheques dated 28-3-2001 for Rs. 75,000/each. On 28-3-2001 when he presented the cheques for encashment those cheques were returned for want of funds. Thereafter the respondent has initiated proceedings under Section 138 of the NI Act 1881. This petition is filed to quash the proceedings before the Magistrate on the ground that the complaint is barred by time because the cheques admittedly issued on 7-7-2000, were in fact presented on 283-2001 which is beyond the period of 6 months contemplated by Section 138 of the NI Act.

Observations of the Court

The Supreme Court in Ishar Alloy Steels Ltd. vs. Jayawals NECO Ltd. (2001)105 Comp. Cas 1 has held that a post dated cheque becomes a cheque for the purpose of section 138 of the Act only on the date mentioned thereon. Till that date it is only a bill of exchange. The period limitation mentione in Section 138 of the Act begins to run only from the date mentioned in the cheque but not the date of drawal of the cheque. Accordingly tha period of six monhts has to be reckoned from the date 28-3-2001 and not from the date of issue of the cheques. Hence, it is clear that the cheques were presented within the period mentioned in Section 138 of the Act and therefore, there are no grounds to quash the complaint against the petitioner.

Decision

Petition is dismissed.