Debt Recovery Tribunal has no jurisdiction when debt is not due to Banks or Financial Instituations

By | March 14, 2016
(Last Updated On: March 14, 2016)

Whether  Debt Recovery Tribunal (DRT)  will have jurisdiction to entertain an application for recovery in the case of a claim for recovery made by a debenture trustee of debentures of a company on behalf of or for the benefit of the debenture holders ?

Held

we already considered section 17 of the RDB Act. On plain and simple reading thereof a bank or a financial institution can file applications before the DRT for “recovery of debts due to such bank or financial institution”. If a bank files an application for recovery of an amount which is not due and payable to itself, the DRT will not get jurisdiction under section 17. For example, a suit filed by a bank acting as an executor of a will seeking to recover amounts due to the estate of the deceased will not come under the purview of section 17. Such proceedings will not be the one to recover the debt due and payable to the bank itself. In such a case, the jurisdiction of a Civil Court is not excluded.

Thus In the case of a claim for recovery made by a debenture trustee of debentures of a company on behalf of or for the benefit of the debenture holders, the DRT will have no jurisdiction to entertain an application for recovery.

HIGH COURT OF BOMBAY

ICICI Bank Ltd.

v.

Unimers India Ltd.

A.S. OKA, V.L. ACHLIYA AND ANUJA PRABHUDESAI, JJ.

APPEAL (L) NO. 84 OF 2015

MARCH  7, 2016

Venkatesh Dhond, Sr. Counsel, Ms. Prasad Shenoy, Gargi Bhagwat and Ms. Shivani Potnis for the Appellant. Cyrus Ardheshir, Sushrut Desai, L.A. Rubens, Sujit S. Suryawanshi, Y. Rubens, Murtuzaa Najmi and Prachi Sawant for the Respondent.

JUDGMENT

1. A Division Bench of this Court by an order dated 25th August 2015 expressed an opinion that the following questions should be decided by a larger Bench of this Court. The said three questions read thus:

“(i)Whether a debenture trustee suing on behalf of the debenture-holder for recovery of sums payable to the debenture-holder can file a suit on the original side of this Court since suit is for recovery of the debt?
(ii)Whether such proceedings can be initiated by the debenture-trustee before the Debt Recovery Tribunal?
(iii)Whether the judgment in the case of Krishna Filaments (supra) would be applicable to the facts of the present case and whether there is any difference of opinion between two judgments which are delivered by two Division Benches of this Court?”

2. The Hon’ble Acting Chief Justice by order dated 6th October 2015 directed that the present Full Bench be constituted to decide the aforesaid questions.

3. Though Larger Bench cannot decide the factual controversy, for the sake of convenience, a brief reference to the facts of the case will be necessary.

4. The appellant is a banking company incorporated under the provisions of the Companies Act,1956. It is a scheduled bank within the meaning of the Reserve Bank of India Act,1934. The appellant is the original plaintiff. For the sake of convenience, the parties are hereafter referred by their status before the learned Single Judge. The first defendant is a company carrying on business of manufacturing, producing, distributing, importing, exporting, buying, selling and dealing with all types of goods based on rubber or plastics whether for domestic or industrial use and ancillary products. The second to tenth defendants have been impleaded in the suit as they may have an interest in the properties of the first defendant that are charged to the plaintiff.

5. By an agreement 7th October 1992 executed by the first defendant in favour of the plaintiff, it was agreed that the plaintiff shall act as a trustee for the debentures (12.5% secured redeemable non convertible debentures aggregating Rs.997 lacs) issued by the first defendant. A suit was filed on 7th February 2002 by the plaintiff in its capacity as a debenture trustee for the recovery of the amounts payable by the first defendant under 12.5% secured, redeemable and non-convertible debentures aggregating Rs.997 lacs together with interest, costs and charges as well as other monies payable at the contractual rates in accordance with the terms of the issue of debentures. A Notice of Motion was taken out by the first defendant raising an issue of jurisdiction of this Court to entertain the suit and also praying for rejection of the plaint by exercising the power under Rule 11 of Order VII of the Code of Civil Procedure,1908 or in the alternative, for the return of the plaint for presentation to the appropriate Debt Recovery Tribunal(for short “DRT”). Apart from the suit filed by the present plaintiff, there were other similar suits placed before the learned Single Judge. By Judgment and Order dated 6th January 2015, the learned Single Judge upheld the contentions of the first defendant and held that this Court will not have jurisdiction to entertain and try the suits. Accordingly, the suits before him were ordered to be returned for presentation to the appropriate Debt Recovery Tribunal. The plaintiff has taken an exception to the said Judgment and Order dated 6th January 2015 by preferring the present Appeal.

6. Before the learned Single Judge, the plaintiff relied upon a decision of the Division Bench of this Court in the case ofKrishna Filaments Limited v. Industrial Development Bank of India (debenture trustees) 2004 (2) Mh.L.J. 823. The said Judgment holds that such suits will be maintainable on the Original Side of this Court. The contention before the learned Single Judge was that as the present suit was filed by a bank for the recovery of an amount above a sum of Rs.10,00,000/- and as the plaintiff was a financial institution within the meaning of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short “RDB Act”), the suit before the Civil Court was barred and only the DRT shall have exclusive jurisdiction to entertain and try the suit. The first defendant before the learned Single Judge relied upon another decision of a Division Bench of this Court in the case of Alpha and Omega Diagnostics India Limited v. Asset Reconstruction Company (P) Limited 2010 (5) All M.R. 553 by contending that in paragraphs 28 to 30 of the decision,it is held that the decision in the case of Krishna Filaments Limited cannot be said to be laying down a good law.

7. When the present appeal came up before a Division Bench, it was observed in the order dated 25th August 2015 that it would be advisable if the aforesaid three questions will be decided by a larger Bench.

8. The learned senior counsel appearing for the plaintiff invited our attention to the decision of the Division Bench in the case of Krishna Filaments Limited. He pointed out that in paragraph 6, a specific point for determination was framed on the issue of jurisdiction. He pointed out that the appeal before the Division Bench arose out of suit a filed by the Industrial Development Bank of India (for short `IDBI’) as a debenture trustee. There was an agreement between Krishna Filaments Limited and IDBI. The suit was filed by the IDBI for recovery of the amounts due and payable under the debentures which were subject matter of the agreement between Krishna Filaments Limited and the IDBI. An objection to the jurisdiction of this Court to entertain the suit was raised by Krishna Filaments Limited. The said issue was answered in favour of the IDBI by the learned Single Judge and, therefore, an appeal was preferred before a Division Bench which held that all types of the suits filed by the financial institutions/banks will not lie before the DRT in view of what is provided in section 17 of the RDB Act read with the definition of Debt under clause (g) of section 2 of the RDB Act. He pointed out that the Division Bench held that a suit will lie before the DRT provided it was filed by a bank or a financial institution for recovery of the amount payable to itself. He urged that the suit filed by a bank or a financial institution as a debenture trustee will be a suit to recover the amount payable to the debenture holders. He urged that such a suit is not a suit filed by a bank for recovery of the amount payable to itself.

9. He invited our attention to the decision of the Division Bench in the case of Alpha and Omega Diagnostics India Ltd. He urged that the said decision only holds that where a securitisation or reconstruction company has acquired a debt from a financial institution/ bank in the name of the trust created by it, an action to enforce or to recover such debt can be maintained by the securitisation or reconstruction company before the DRT. He urged that what is observed by the Division Bench in paragraph 30 is required to be read in the context of the facts of the case before it and the issues framed which are reflected from paragraphs 15 and 16 of the Judgment. Inviting our attention to the facts of the case before the Division Bench in the said decision, he urged that the decision and in particular what is observed in paragraphs 28 and 30 will have to be understood in the light of the peculiar facts of the case. The learned senior counsel submitted that the decision of Krishna Filaments Limited was noted by the Apex Court in the case of Southern Petrochemicals Industries Corporation Ltd. v.Administrator of Specified Undertaking of Unit Trust of India (2007) 2 SCC 282. He urged that in the said decision, the Apex Court accepted the distinction between the financial institutions suing for the recovery of the debts due to it and the financial institutions suing to recover amounts on behalf of others/third party in the context of maintainability of action before the DRT. He urged that in the present case, the plaintiff is acting as a debenture trustee in relation to the debentures issued by a limited company (the first defendant). He urged that the plaintiff-bank is not suing to recover its own dues.

10. The learned counsel for the first defendant invited our attention to the averments made in the plaint in the present case. His basic submission is that the averments made in the plaint are completely contrary to the stand taken by the plaintiff before this Court. His submission is that the suit filed by the plaintiff in the present case is not of the category which is sought to be pleaded by the plaintiffs before the Division Bench as well as this Bench. We must note here that the submissions of the first defendant are really on the facts of the case and not on the questions framed for the determination of the larger Bench. The learned counsel for the first defendant has taken us through the assertions made in the plaint. He pointed out that there are no averments made in the plaint to show that the plaintiff is not trying to recover the debt due to itself. His submission is that it cannot be inferred that the suit is filed by the plaintiff in its capacity as a debenture trustee to recover the dues of the debenture holders. He fairly pointed out the prima facie observations in the decision of this Court in the case of Industrial Credit and Investment Corporation of India Limited v. Veena Textiles Ltd. 2001 (vol 104) Company Cases Bombay 503. He relied upon the decision of the Apex Court in the case of W.O. Holdsworth v. State of Uttar PradeshAIR 1957 SC 887. He placed reliance on the decision of the Apex Court in the case of Eureka Forbes Limited v. Allahabad Bank (2010) 6 SCC 193. He pointed out the observations made by the Apex Court in the said decision and urged that the same do not support the case of the original plaintiff. He also relied upon another decision of the Apex Court in the case ofUnited Bank of India v. Debts Recovery Tribunal (1999) 4 SCC 69. He submitted that the Apex Court has held that the expression “debt” in the RDB Act has to be given widest meaning so as to include any liability which is allegedly due from any person by a bank during the course of any business activity undertaken by the bank.

11. The learned counsel for the intervenor relied upon the decision of the Apex Court in the case of ICDS Ltd. v. Beena Shabber (2002) 6 SCC 426.

12. We have given careful consideration to the submissions. While deciding this reference, we are not concerned with the averments made in the plaint or the facts of the case. It is not necessary for us to decide the issue about the nature of the suit in the present case. The decision on the said issue will have to be left to the Division Bench which will decide the appeal. We are essentially dealing with a hypothetical case where a bank or a financial institution within the meaning of RDB Act sues as a debenture trustee for the recovery of sums payable to the debenture holders. Whether a particular suit will fall in the said category is a matter to be decided in each individual case. The question is whether such a suit can be filed on the Original Side of this Court or whether only the DRT will have exclusive jurisdiction to entertain such a suit.

13. It is, therefore, necessary to consider the material provisions of the RDB Act. The preamble of the Act provides that the Act has been enacted to provide for establishment of a Tribunal for expeditious adjudication and for recovery of “debts due to banks and financial institutions” and for the matters connected therewith or incidental thereto. Sub-section 4 of section 1 is also relevant which reads thus:

“(4) The provisions of this Act shall not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or financial institutions is less than ten lakh rupees or such other amount being not less than one lakh rupees, as the Central Government may, by notification, specify.” (Emphasis Added)

14. The debt is defined in clause (g) of section 2 which reads thus:

“(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.”

15. Section 17 which provides for the jurisdiction of the DRT reads thus:

“17 Jurisdiction, powers and authority of Tribunals –

(1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions.

(2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act.” (Emphasis Added)

16. Section 18 excludes the jurisdiction of other Courts and Authorities to deal with the matters specified in section 17. Section 18 reads thus:

“18. Bar of Jurisdiction – On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in section 17:

Provided that any proceedings in relation to the recovery of debts due to any multi-State co-operative bank pending before the date of commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-State Co-operative Societies Act,2002 (39 of 2002) shall be continued and nothing contained in this section shall, after such commencement, apply to such proceedings.”

17. On plain reading of clause (g) of section 2 it appears that the word `Debt’ has been given a very wide meaning. It means any liability 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 their business activity. In the decision of the Apex Court in the case of Eureka Forbes Limited Vs. Allahabad Bank relied upon by the first defendant, it was held that the word debt in the RDB Act cannot be given a restricted meaning and the legislature has not intended to restrict it to the relationship of creditor and debtor. However, sub-section 1 of section 17 confers jurisdiction on the DRT to deal with the applications made by the banks and financial institutions for recovery of debts “due to such banks and financial institutions”. Thus, DRT can entertain an application for recovery provided the application is made by a bank or a financial institution for the recovery of debt due to such bank or financial institution. If recovery is sought of a debt which is not due to a bank or a financial institution, the DRT will not get jurisdiction under section 17.

18. It will be necessary to make a reference to the Regulations framed by the Securities and Exchange Board of India under section 30 of the Security and Exchange Board of India Act,1992. The said Regulations are the Securities and Exchange Board of India (Debenture Trustees) Regulations,1993 (for short “the Regulations”). Clause (bb) of the Regulation 2 defines a debenture trustee to mean a trustee of a trust deed for securing any issue of debentures of a body corporate. Clause (ba) of Regulation 2 defines a debenture by giving the same meaning to it which is provided in sub-section 12 of section 2 of the Companies Act,1956. Regulation 15 of the said Regulations provides for the duties of the debenture trustees which reads thus:

“Duties of the debenture trustees.

15. (1) It shall be the duty of every debenture trustee to—

(a) call for periodical reports from the body corporate;

**(b) [25]****

(c) take possession of trust property in accordance with the provisions of the trust deed;

[26][(ca) supervise the implementation of the conditions regarding creation of security

for the debentures and debenture redemption reserve, wherever applicable;]

(d) enforce security in the interest of the debenture holders;

(e) do such acts as are necessary in the event the security becomes enforceable;

(f) carry out such acts as are necessary for the protection of the debenture holders and to do all things necessary in order to resolve the grievances of the debenture holders;

(g) [27] [ascertain and satisfy itself] that the—

[28](i) in case where the allotment letter has been issued and debenture certificate is to be issued after registration of charge, the debenture certificates have been dispatched by the body corporate to the debenture holders within 30 days of the registration of the charge with the Registrar of Companies;

(ii) debenture certificates have been dispatched to the debenture holders in accordance with the provisions of the Companies Act;

(iii) interest warrants for interest due on the debentures have been dispatched to the debenture holders on or before the due dates;

(iv) debenture holders have been paid the monies due to them on the date of redemption of the debentures;

**(h)****”

” (Emphasis Added)

19. Thus, it is the obligation of the debenture trustee to enforce the security in the interest of the debenture holders. Moreover, it is the obligation of the debenture trustee to carry out such acts as are necessary for the protection of the debenture holders and to do all the things necessary in order to resolve the grievances of the debenture holders.

20. Now we turn to the decision of the Division Bench in the case of Krishna Filaments Limited. The said decision is in an appeal arising out of the order passed by the learned Single Judge of this Court on a Notice of Motion filed by the first defendant in a suit in which IDBI was the plaintiff for raising an issue of jurisdiction. The Notice of Motion was dismissed. Against the said order, an appeal was preferred. A specific contention was raised before the Division Bench that the claim made by IDBI bank was essentially to recover a debt falling within the definition provided under clause (g) of section 2 of the of the RDB Act and, therefore, DRT will have the exclusive jurisdiction to entertain and try the suit filed by IDBI. The suit was filed by the IDBI in its capacity as the trustee of debentures against the Krishna Filaments Limited for recovery of the amounts payable under the debentures. The point for determination is set out in paragraph 6 of the decision which reads thus:

“6. Thus the main point for determination arising in this appeal is whether the suit claim is for recovery of a debt due to a bank or a financial institution. An answer on this point will decide whether this Court has jurisdiction to try and entertain this suit.” (Emphasis Added)

21. The Division Bench considered the statements of objects and reasons of the RDB Act. Paragraph 24 and 25 of the said decision read thus:

“24. On the other hand, it was pointed out that the fact remains that the amount contributed to the debentures was that of the subscribers and the debenture trustees had an obligation to act faithfully. It was submitted that this arrangement was made principally to secure the capital required by the company. At the same time, it was not required to face a litigation by each and every debenture holder. On the other hand, the debenture holders were given a protective mechanism by mortgaging the property of the company to the financial institutions and giving them the power, impliedly coupled therewith a duty to act in the interest of the debenture holders. In the present case, the predominant debenture holders were either banks or financial institutions of mutual funds or insurance companies. The respondent No. 1 was acting on their behalf. Having considered the kind of arrangement that is created, it is very clear that though certain rights and responsibilities are given to the debenture trustees, that does not mean that they become the owners of the amounts contributed. They continue to remain trustees and the amounts contributed continue to be the claims of the contributors. There can be no doubt that the suit is not for recovery of any debt due to a financial institution. An emphasis was laid on behalf of the appellant on the aspect as to who has lodged the claim in the suit and on a part of the definition of “debt” under section 2(g) of the RDB Act which states that it is a liability claimed by a bank or a financial institution. It was also emphasised that the transaction has arisen during the course of a business activity which is undertaken under a law for the time being in force. As far as this aspect is concerned, there can be no dispute about this. However, if the phrase “any liability claimed by a bank or a financial institution” is read to mean any claim by such a body even for others, then in that case all sorts of claim by such bodies would get covered under this definition. It was therefore rightly emphasised on behalf of the respondent No. 1 that under section 6(h) of Banking Regulation Act undertaking and executing trusts and section 6(i) thereof undertaking the administration of estates as executor, trustees or otherwise is a permissible business for the banking companies. Thus if a bank is collecting rents as a trustee or if it is an executor under a will and it would be collecting the amount due to the estate, such claims would also come under the definition of a “debt”.

24. Therefore, it would become relevant to examine as to what was the intention in creating the Tribunal. Was it created as a forum for all sorts of claims by banks and financial institutions or whether it was meant for claims where the recovery was due to the bank or financial institution or whether it was meant for claims where the recovery was due to the bank or financial institutions? The reference to Maxwell on interpretation in the judgment of the Apex Court in the case of Workmen of Dimakuchi Tea Estate (supra) is quite apt in this behalf. There the Apex Court has emphasised that the words of a statute are to be understood in the sense in which they best harmonise with the subject or the Act and the object which the legislature had in its mind. It is not the grammatical or the popular sense of the words which is material, but the subject of the occasion for which they are used and the object which is sought to be achieved. If we look at the Act, the preamble thereof itself declares that it is enacted to establish the Tribunals for expeditious adjudication and recovery of debts due to the banks and financial institutions. The phrase “debts due to banks and financial institutions” also occurs in section 17 of the RDB Act. Therefore, when section 2(g) uses the phrase “any liability claimed by a bank or a financial institution”, it will have to be read as a liability claimed by the bank on its own behalf and for itself. Otherwise, as stated above, all other types of suits filed by banks to recover rents and accretions to the estate as executors will also get covered.” (Emphasis Added)

22. In paragraph 26, the Division Bench proceeded to record its findings. The Division Bench interpreted section 17 of the RDB Act. The said paragraph reads thus:

“26. To further understand the intention of the legislature, if we look to the Reports of the Committees cited before us and the statement of objects and reasons, it is clear that the legislature was faced with the problem of large number of bank suits pending wherein Rs. 5622 crores of the public sector banks and Rs. 391 crores of the financial institutions were blocked as on 30th September 1990. The Reports of the Committees and the statement of objects and reasons emphasise that a separate Tribunal to recover these amounts was required to be set up so that these funds are realised for productive purposes. These documents do not in any way emphasise the role of the banks in discharge of their other activities. Besides, just as banks can be debenture trustees, under the SEBI Regulations referred to above, even the insurance companies or body corporate can be debenture trustees. Similarly, just as banks can take the responsibility of administration of estate as executors, trustees or otherwise, other individuals and body corporate can as well take such responsibility. Suits and claims by such other organizations and individuals for administration of estate as executor, trustees or otherwise would go to the normal Civil Courts. Legislature has not enacted that it wanted to treat suits by banks and financial institutions for such purpose differently only because the claims were by banks and financial institutions. The intention as seen from all the aforesaid documents in setting up of the Tribunals was only to release the blocked assets of the banks. From this point of view, the phrase “any liability claimed by a bank or a financial institution” occurring under the definition of a “debt” under section 2(g) will have to be read down to mean any liability due to a bank or a financial institution. That is also clear when we read section 17 of the RDB Act and the jurisdiction thereunder is clearly restricted for recovery of debts due to banks and financial institutions.” (Emphasis Added)

23. Thus, there is a categorical finding recorded by the Division Bench holding that the jurisdiction of the Tribunal under section 17 of the RDB Act is restricted to the applications made for the recovery of debts due to banks and financial institutions. Therefore, the Division Bench came to the conclusion that the suit filed by the IDBI cannot be said to be a suit for recovery of debt due to itself, and therefore, section 17 of the RDB Act was not attracted. On plain reading of section 17, the view of the Division Bench seems to be correct. The DRT will get exclusive jurisdiction only when a bank/financial institution claims recovery of a debt due to it. The law is well settled. The exclusion of jurisdiction of the Civil Court cannot be easily inferred.

24. Now we turn to the decision of the Division Bench in the case of Alpha and Omega Diagnostics India Limited. In the said case, the challenge was to the order in appeal passed by the Debt Recovery Appellate Tribunal (for short “DRAT”). Original application was filed by Oriental Bank of Commerce before the DRT at Mumbai for recovery of the certain amount against the petitioners in the writ petition before the Division Bench. An application for amendment of the Original Application was filed by the first respondent-Asset Reconstruction Company (I) Ltd. The first respondent claimed that Oriental Bank of Commerce by an assignment agreement dated 27th June 2008 assigned all the financial assistance granted by the said bank to the petitioners together with all underlying security, interest and all its title to the first respondent. Based on the said document dated 27th June 2008, the first respondent company claimed impleadment in the Original Application and contended that it can continue the proceedings initiated by the bank. The first respondent applied for further amendment claiming that it was acting as a sole trustee of Arcil-SBPS- 024-I-trust. An objection was raised by the petitioners in the Writ petition by contending that the first respondent was not the assignee as the document of assignment was not registered. It was contended that the first respondent acting as a sole trustee was not the assignee. While considering the application for amendment, even the said contentions raised by the petitioners was taken up for consideration and the said contentions were rejected while allowing the amendment as prayed for. An appeal was preferred by the petitioners against the said order of the DRT before the DRAT which was dismissed. The challenge in the writ petition before the Division Bench was to the said orders of the DRT and DRAT. It will be necessary to consider what were the submissions made by the petitioners before the Division Bench. In paragraph 10, it is recorded thus:

“Therefore, in the submission of Mr. Samdani, it is only when the banks and financial institutions are recovering debts due to them, that, they can approach the DRT and not otherwise. In the instant case, when the first respondent is substituting itself as a Trustee of a Trust, then, it could not have invoked the jurisdiction of the DRT. It is managing and administering the affairs as a Trustee and there being no debt due to it, which it could recover, then, the application for amendment, could not have been allowed in law. In other words, when the jurisdiction of the Tribunal could not have been exercised nor had the Tribunal any power or authority in this case, then, allowing the application for amendment would mean conferring jurisdiction on a Tribunal which it does not possess in law. Mr. Samdani submits that jurisdiction cannot be conferred by consent of parties.” (Emphasis Added)

25. The issue which arose before the Division Bench has been summarized in paragraph 15 which reads thus:

“15. We are concerned only with the legal issue as to whether a “Reconstruction company” as contemplated by section 2(v) of the Securitisation Act can apply for substitution as applicant in place of the original lender bank by amending the pending Original Application No. 89 of 2005. Further, whether the substitution or implement of the reconstruction company in its capacity as a trustee is permissible under the RDB Act or not? ”

26. The Division Bench thereafter considered the amendment made to the definition of “financial institution” in clause (h) of section 2 the RDB Act by adding clause (ia) to it. The clause (ia) provided that even a securitisation company or a reconstruction company which had obtained a certificate of registration under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “the Securitisation Act”) will be included in the definition of a financial institution. The Division Bench noted that the clause (ia) was added by way of amendment to the clause (h) of section 2 of the RDB Act after the decision in the case of Krishna Filament Limited. Paragraph 18 and 19 of the decision in Alpha and Omega take a note of the definitions of Securitisation company and secured creditor under the Securitisation Act. Section 18 and 19 read thus:

“18. The sub-clause (ia) came to be inserted by the Act 30 of 2004 with effect from 11th November, 2004. The purpose for this insertion appears to be the enactment of Securitisation and Re-construction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002). This latter Act came to be enacted on 17th December, 2002 and it is to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest and for matters connected therewith or incidental thereto. Incidentally the word “debt” defined in the Securitisation Act reads thus:-

“2(ha) “debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993(51 of 1993).” Therefore, a bare perusal of this provision would indicate that the word “debt” carries the same meaning as is assigned to it in clause 2(g) of the RDB Act, 1993. The word “Asset Reconstruction” has been defined in section 2(b) of the Securitisation Act. The word “Financial Institution” is defined in section 2(m). The word “Securitisation Company” is defined in section 2(za) and reads thus:-

2(za) “Securitisation company” means any company formed and registered under the Companies Act, 1956 (1 of 1945) for the purpose of securitisation.”

19. Further, the word “reconstruction company” is defined in section 2(v). The other definition that is relevant for our purpose is definition of the term “secured creditor” appearing in section 2(zd).

“2(zd) “Secured Creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes:-

(i)debenture trustee appointed by any bank or financial institution; or
(ii)securitisation company or reconstruction company, whether acting as such or mortgaging a trust set up by such securitisation company or reconstruction company for the securitisation, reconstruction, as the case may be; or
(iii)any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance.”

27. Thereafter, the Division Bench considered the provisions of Securitisation Act. In paragraph 27, the Division Bench dealt with an argument of the petitioners based on the decision in the case of Krishna Filaments Limited. Paragraph 27 and 28 of the decision reads thus :

“27 If these provisions, bearing in mind the object of the RDB Act are perused together with the relevant provisions of the Securitisation Act, then, it will not be possible to agree with Mr. Samdani that the restricted view as taken in the case of Krishna Filaments (supra) continues to hold the field. In our view, the amendment to the definition of the term “Financial Institution” as appearing in section 2(h) of the RDB Act and bringing into force of the Securitisation Act is a development post judgment of this Court in Krishna Filaments (supra). In fact, it is precisely to get over the narrow interpretation placed on the term “debt” by this Court that the Legislature has stepped in and amended the RDB Act 1993. If there was any doubt about a debt which is assigned by a bank or financial institution, being recovered by filing an application before DRT established under section 3 of the RDB Act, that is cleared by insertion of sub-section (ia) in section 2(h) of the RDB Act. That insertion together with the wide wording of the term “debt” is enough to reach the conclusion that the securitisation company or reconstruction company contemplated by the Securitisation Act can step in and proceed with the matter/application which has been instituted by its predecessor-in-title/assignee/financial institution. If this interpretation is not placed, then, the very purpose and object of amending the definition of the word “financial institution” would be defeated. This coupled with the rights that are acquired by securitisation company or reconstruction company by virtue of section 5 of the Securitisation Act, would enable us to conclude that the narrow and restricted view no longer prevails.

28. Section 5 of the Securitisation Act has been reproduced by us precisely with this intent. Sub-section (1) thereof opens with a non obstante clause and, therefore, any agreement or law notwithstanding, the securitisation company or reconstruction company may acquire financial assets of any bank or financial institutions in the manner set out therein. It is then provided that if bank is a lender in any financial assets acquired by the securitisation company or reconstruction company, then, such company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institutions shall vest in the securitisation and reconstruction company in relation to such financial assets. Sub-section (3) of section 5 deals with the all contracts, deeds, agreements etc. Sub-section (4) of section 5 enumerates further consequences of acquisition of financial assets under section 5(1). The consequence is that any suit, appeal or other proceedings of whatever nature relating to the financial assets, if pending by or against the bank or financial institution, the same does not abate nor is discontinued. It is in no way prejudicially affected, by reason of acquisition of financial assets by securitisation or reconstruction company, as the case may be, but it shall continue and can be prosecuted and enforced by or against securitisation company or reconstruction company as the case may be. Therefore, the acquisition of rights or interest in financial assets with their legal effect and consequences is provided by section 5 of the Securitisation Act. It is with the object of giving effect to section 5 and particularly sub-sections (3) and (4) thereof that the definition of the term “financial institution” in section 2(h) of the RDB Act has been amended. Therefore, while enacting Securitisation Act the Legislature made amendment to the RDB Act simultaneously as is clear from the statements of objects and reasons and the relevant provisions of the RDB Amendment Act 30 of 2004 reproduced above. It is not as if the provisions are one sided. While it is permissible for the Securitisation or Reconstruction Company to acquire rights or interest in financial assets, the Legislature has taken care that the suits or proceedings instituted by the Bank or Financial institutions would not abate. At the same time, proceedings against the bank or financial institutions will not abate and can be continued against the securitisation or reconstruction company, as the case may be. If we do not give full effect to the legal provisions as noticed, then, we would be taking a narrow and restricted view thereof, although, they are widely worded. Once, the words are plain and clear, then, there is no scope for interpretation. It would be the duty of the Court to give effect to the words when their meaning is plain, unambiguous and clear. If this wide phraseology is ignored, we would be acting contrary to the object and purpose sought to be achieved by both enactments. Considering that they are enacted in public interest and for expeditious recovery of public dues, we cannot ignore the said statutory Mandate, and are, therefore, unable to accept the narrow and restricted interpretation placed by the petitioners herein. For this very reason, we reject the contentions of Mr. Samdaini. . . . .” (Emphasis Added)

28. In paragraph 29, the Division Bench considered the conclusion in the case of Krishna Filaments Limited which reads thus:

“29 Reliance placed by the petitioners on the decision of Krishna Filaments (supra) and particularly paras 23 to 26 thereof is misconceived. Therein, the Division Bench held that the bank IDBI acted as a Trustee for the subscribers to the debentures of the appellant company. The entire claim was on behalf of the debenture holders for the amounts that they have subscribed to the debentures. The Amount claimed was not of IDBI but the dues was of the subscribers of the debentures. It is only in the light of this factual position that the Division Bench concluded that the debt is not that of IDBI but was due and payable to the subscribers of the debentures. It is only in the light of this factual position that the Division Bench concluded that the debt is not that of IDBI but it has recovered it in Trust for the debenture holders. Therefore, the suit is maintainable on the original side of this Court. In other words, the Civil Court’s jurisdiction is not ousted by the RDB Act, is the conclusion based on this unassailable and undisputed factual position.” (Emphasis Added)

29. The Division Bench relied upon the definition of the secured creditor under section 2 (zd) of the Securitisation Act which included debenture trustee appointed by any bank or financial institution. In paragraph 30, the Division Bench observed thus:

“30. In the view that we have taken and finding that the law laid down in Krishna Filaments cannot be said to be any longer valid and good in the light of the statutory provisions that the further issue, about correctness of the conclusions recorded by Division Bench in paras 25 and 26 and the interpretation placed on the definition of the word “debt”, need not be considered. Now, the bank or financial institution as an assignee can proceed under the Securitisation Act, so also under the RDB Act. The term “debt” as appearing in section 2(g) would have to be considered in the light of the broad interpretation that we have placed on the provisions of the Securitisation Act. The distinction that is drawn by Mr. Samdani is no longer valid. Even if the bank or financial institution is acting as a Trustee as suggested, it can take recourse to the RDB Act. That is clear from a reading of the definition of the term “secured creditor” as defined in section 2(zd) of the Securitisation Act. That term includes debenture trustee appointed by the Bank or financial institution or securitisation company or reconstruction company, where acting as such or managing a trust set up by such securitisation company or reconstruction company for securitisation or reconstruction company as the case may be or any other trustee as contemplated by section 2(zd)(iii). The term security interest is defined in section 2(zf) of the Securitisation Act and it means right, title and interest of any kind whatsoever of property created in favour of any secured creditor and includes any mortgage, charge, hypothecation and assignment. Therefore, when the bank or financial institution as in the case of Krishna Filaments is acting as a debenture Trustee, then, it will not be required to approach the ordinary Civil Court but can take recourse to the Securitisation Act and consequently, as permissible therein, the RDB Act as well. If the arguments to the contrary are accepted that would mean ignoring and brushing aside the inclusive definitions as noticed by us. Therefore, we are of the view that in the present case, considering the definition of the term “debt” and “financial institution” appearing in the RDB Act, 1993 and the relevant provisions of Securitisation Act so also to give full effect to the same, it will have to be held that it was permissible for parties such as Arcil to apply for amendments to the Original Application No. 89 of 2005.” (Emphasis Added)

30. We have already considered section 17 of the RDB Act. On plain and simple reading thereof a bank or a financial institution can file applications before the DRT for “recovery of debts due to such bank or financial institution”. If a bank files an application for recovery of an amount which is not due and payable to itself, the DRT will not get jurisdiction under section 17. For example, a suit filed by a bank acting as an executor of a will seeking to recover amounts due to the estate of the deceased will not come under the purview of section 17. Such proceedings will not be the one to recover the debt due and payable to the bank itself. In such a case, the jurisdiction of a Civil Court is not excluded. After the decision of the Division Bench in the case of Krishna Filaments, section 17 has not undergone any amendments. The definition of financial institution was amended for including therein a securitisation company or a reconstruction company which has obtained a certificate under section 3(4) of the Securitisation Act. It will be necessary to note section 5 of the Securitisation Act which read thus:

“5. Acquisition of rights or interest in financial assets. – (1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any securitisation company or reconstruction company may acquire financial assets of any bank or financial institution,-

(a)by issuing a debenture or bond or any other security in the nature of debenture, for consideration agreed upon between such company and the bank or financial institution, incorporating therein such terms and conditions as may be agreed upon between them; or
(b)by entering into an agreement with such bank or financial institution for the transfer of such financial assets to such company on such terms and conditions as may be agreed upon between them.

(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section (1) by the securitisation company or the reconstruction company, such securitisation company or reconstruction company shall, on such acquisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets.

(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers of attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or otherwise and other instruments of whatever nature which relate to the said financial asset and which are subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to which the concerned bank or financial institution is a party or which are in favour of such bank or financial institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour of the securitisation company or reconstruction company, as the case may be, and may be enforced or acted upon as fully and effectually as if, in the place of the said bank or financial institution, securitisation company or reconstruction company, as the case may be, had been a party thereto or as if they had been issued in favour of securitisation company or reconstruction company, as the case may be.

(4) If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of Section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the securitisation company or reconstruction company, as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the securitisation company or reconstruction company, as the case may be.

(5) On acquisition of financial assets under sub-section (1), the securitisation company or reconstruction company, may with the consent of the originator, file an application before the Debts Recovery Tribunal or the Appellate Tribunal or any court or other Authority for the purpose of substitution of its name in any pending suit, appeal or other proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or court or Authority shall pass orders for the substitution of the securitisation company or reconstruction company in such pending suit, appeal or other proceedings.”

31. When a securitisation company or a reconstruction company acquires financial assets of a bank or a financial institution, by virtue of sub-section 2 of section 5, it steps into the shoes of the bank or the financial institution, as the case may be and becomes a lender for all purposes. Therefore, when such securitisation company or reconstruction company files an application for recovery of an amount advanced by a bank or a financial institution whose assets have been acquired by it by assignment or otherwise in a manner provided under section 5 of the Securitisation Act, such a securitisation company or a reconstruction company sues for the debt due to it. The reason is that such a company on the basis of the assignment becomes a lender and steps in the shoes of the assignor bank. Sub section (5) of section 5 therefore provides that a securitisation company or a reconstruction company can apply for substitution in pending proceedings before the DRT on the basis of such assignment. That is the reason why in the case of Alpha and Omega, the Division Bench rejected the argument of the borrower which is noted in paragraph 10 of the said decision. It is in this context that the following observations in paragraph 27 have been made.

“In our view, the amendment to the definition of the term “Financial Institution” as appearing in section 2(h) of the RDB Act and bringing into force of the Securitisation Act is a development post judgment of this Court in Krishna Filaments (supra). In fact, it is precisely to get over the narrow interpretation placed on the term “debt” by this Court that the Legislature has stepped in and amended the RDB Act 1993. If there was any doubt about a debt which is assigned by a bank or financial institution, being recovered by filing an application before DRT established under section 3 of the RDB Act, that is cleared by insertion of sub-section (ia) in section 2(h) of the RDB Act. That insertion together with the wide wording of the term “debt” is enough to reach the conclusion that the securitisation company or reconstruction company contemplated by the Securitisation Act can step in and proceed with the matter/application which has been instituted by its predecessor-in-title/assignee/financial institution. If this interpretation is not placed, then, the very purpose and object of amending the definition of the word “financial institution” would be defeated. This coupled with the rights that are acquired by securitisation company or reconstruction company by virtue of section 5 of the Securitisation Act, would enable us to conclude that the narrow and restricted view no longer prevails.” (Emphasis Added)

According to the Division Bench, the expanded definition of “debt” under RDB Act is by virtue of the amendment to the definition of “financial institution” by inclusion of securitisation companies and reconstruction companies in it. The argument of the petitioner before it is negatived by the Division Bench in paragraph 28 by relying upon section 5 of the Securitisation Act and by holding that the Assets Reconstruction Company (I) Limited – the first respondent steps into the shoes of Oriental Bank of Commerce (the applicant before the DRT) which can continue to prosecute the application for recovery before the DRT by virtue of assignment by the said bank. The reason is that the said reconstruction company becomes a financial institution due to inclusion of clause (ia) in clause (h) of section 2 of the RDB Act. In the facts of the case before it, the Division Bench rightly dismissed the Writ Petition.

32. In paragraph 30 in the case of Alpha and Omega, the Division Bench referred to definition of “secured creditors” appearing in section 2 (zd) of the Securitization Act which reads thus:

“(zd) “secured creditor” means any bank or financial institution or any consortium or group of banks or financial institutions and includes-

(i)debenture trustee appointed by any bank or financial institution; or
(ii)securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or
(iii)any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance.”

33. With greatest respect to the Division Bench, we must mention that the definition of the secured creditor does not include a debenture trustee appointed by a company in terms of the said Regulations. It includes debenture trustees appointed only by a bank or financial institution. Moreover, the said definition in clause (zd) of section 2 is a part of the Securitisation Act. The definition of financial institution in RDB Act has not been amended to include therein “secured creditors” within the meaning of the Securitisation Act. The Division Bench completely ignored that in case of Krishna Filaments, the debenture trustee was not appointed by a bank or financial institution. The debenture trustee in the said case was not covered by the definition of “secured creditor” under section 5(zd) of the Securitisation Act. Therefore, we do not agree with the observations made in paragraph 27 and 30 that the decision in the case Krishna Filaments is no longer a good law. Though the definition of debt in the RDB Act may have been expanded, the section 17 thereof is not amended. Therefore, when a debenture trustee of the kind referred in the case of Krishna Filament wants to file a proceedings for recovery of the amounts payable to the debenture holders or for the benefits of debenture holders, section 17 will not apply and hence, the jurisdiction of regular civil court is not excluded. The reason is that in such a case, the bank which is a debenture trustee does not claim recovery of a debt due to itself.

34. Therefore, what follows is that in the case of a claim for recovery made by a debenture trustee of debentures of a company on behalf of or for the benefit of the debenture holders, the DRT will have no jurisdiction to entertain an application for recovery. Hence, the law laid down in the case of Krishna Filament continues to be a good law and to that extent, the observations made as regards the said decision in the case of Alpha and Omega are not correct.

35. The decisions of the Apex Court in the case of United Bank of India and Eureka Forbes Limited lay down that the expression debt has to be given a very wide meaning. In paragraph 15 of the decision in the case of United Bank of India, the Apex Court observed thus:

“15. In the case in hand, there cannot be any dispute that the expression “debt” has to be given the widest amplitude to mean any liability which is alleged as due from any person by a bank during the course of any business activity undertaken by the bank either in cash or otherwise, whether secured or unsecured, whether payable under a decree or order of any court or otherwise and legally recoverable on the date of the application. In ascertaining the question whether any particular claim of any bank or financial institution would come within the purview of the tribunal created under the Act, it is imperative that the entire averments made by the plaintiff in the plaint be looked into and then find out whether notwithstanding the specially-created tribunal having been constituted, the averments are such that it is possible to hold that the jurisdiction of such a tribunal is ousted. With the aforesaid principle in mind, on examining the averments made in the plaint, we have no hesitation to come to the conclusion that the claim in question made by the plaintiff is essentially one for recovery of a debt due to it from the defendants and, therefore, it is the Tribunal which has the exclusive jurisdiction to decide the dispute and not the ordinary civil court. In this view of the matter the High Court was in error to hold that the dispute in question is not entertainable by the Tribunal under Section 17 of the Act.” (Emphasis Added)

Thus, the test applied by the Apex Court is whether the plaintiff is seeking recovery of the debt due to it from the defendant. The paragraph 49 of the decision in the case of Eureka Forbes Limited records that the DRT and DRAT have been established with a view to provide expeditious mode of recovery of “dues to banks and financial institutions”. Hence, both the decisions support the view which we have taken above.

36. It is not necessary for us to go into the factual submissions made by the learned counsel for the first defendant as the concerned Division Bench will have to go into the aspect whether the suit in the present case is the one covered by the category of suits to which the decision in the case of Krishna Filaments Limited will apply. Hence, it is not necessary for us to answer the first part of the third question framed by the Division Bench.

37. Accordingly, the first question is answered in the affirmative and the second question is answered in the negative. The second part of the third question is answered accordingly.

38. Place the Appeal before the appropriate Division Bench.

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