Thursday, May 6, 2010

The Meaning of a "Debt"

We have discussed the role of the Debt Recovery Tribunal on this blog, and noted the Supreme Court’s decision in Nahar holding that an “independent suit” filed by a borrower is maintainable in civil court, despite the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDB Act”). This Monday (May 3), the Supreme Court considered another crucial issue in this context – the meaning of a “debt” and the range of disputes the Debt Recovery Tribunal has jurisdiction over. The decision is Eureka Forbes Ltd. v. Allahabad Bank, and is available here.

The case arose out of a dispute that began in 1988, when Eureka Forbes granted two companies [“licensees”] a licence to occupy certain premises it owned in Calcutta, which the licensees intended to use for their business operations. On account of heavy losses, however, the licensees were unable to pay the licence fee regularly, and their stock remained unsold. Consequently, three years after entering into the original licence agreement, the licensees offered to vacate the property, and proposed that Eureka Forbes sell their unsold stock and adjust the proceeds towards the unpaid licence fee. However, this stock had been hypothecated by the licensees to Allahabad Bank, a fact of which Eureka Forbes claimed to be unaware. The Allahabad Bank filed suit against Eureka Forbes, which was eventually transferred to the Debt Recovery Tribunal after the RDB Act was enacted. An ex parte decree was passed against Eureka Forbes and, after several rounds of litigation, Eureka Forbes approached the Supreme Court.

An important question of law arose as to whether the claim of the Bank was a “debt” for the purposes of the RDB Act, and whether the DRT could consequently assume jurisdiction. The definition of “debt” in s. 2(g) of the RDB Act is as follows:

(g) “debt” means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application;

(emphasis mine)

It was argued in this case that the Bank’s claim against Eureka Forbes was one of tort, and that there existed no privity of contract between the two parties. The Supreme Court rejected these submissions for two reasons. First, the Court found that the language of s. 2(g) is of “wide amplitude” and is intended to provide banks with an efficacious remedy to recover debts. Secondly, the Court found, on facts, that Eureka Forbes was aware of the hypothecation and proceeded nevertheless to dispose it of, and held that it “should not be permitted to take advantage of his wrong or manipulations”.

The following observations are apposite:

There is no occasion for the Court to restrict the meaning of the word `any liability', `any person' and particularly the words `in cash or otherwise'. Under Section 2 (g), a claim has to be raised by the Bank against any person which is due to Bank on account of/in the course of any business activity undertaken by the Bank. In the present case, Bank had admittedly granted financial assistance to respondent nos. 2 and 3, who in turn had hypothecated the goods, plants and machinery in favour of the Bank. There cannot be any dispute before us that the goods in question have been sold by the appellant without the consent of the Bank. Respondent nos. 2 and 3 have hardly raised any dispute and resistance, to the claim of the Bank.”

With respect, it is submitted that these observations appear to have been too widely stated. In support of this wide construction of s. 2(g), the Court cited, inter alia, its decision in Union of India v. Raman Iron Foundry, (1974) 2 SCC 231. It does not appear to have been brought to the Court’s notice that this judgment was subsequently overruled in Kamaluddin Ansari v. Union of India, (1983) 4 SCC 417. While the Court rightly pointed out that other definitions of “debt” are narrower and incorporate explicit restrictions, the scope of s. 2(g) depends ultimately on its own terms and context. In addition, one may ask whether the DRT was ever intended to resolve complex commercial disputes of the sort it will confront if the definition of “debt” is widened. In this respect, the more appropriate view seems to be that of the Madras High Court, which held in Rajshree Sugars that a “debt” must be created during the course of a “banking activity” as defined in s. 6 of the Banking Regulation Act.

In sum, the scope of the DRT’s jurisdiction is once again in some doubt, and it may require clarification from the Court in the near future.

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