" The civil courts are burdened with diverse types of cases. Recovery of dues due to banks and financial institutions is not given any priority by the civil courts. The banks and financial institutions like any other litigants have to go through a process of pursuing the cases for recovery through civil courts for unduly long periods."
They suggested three modes to recover such dues, one of which was to set up quasi-judicial bodies to deal exclusively with the recovery process of the financial sector. The Committee on financial system chaired by Shri Narasimham in its report to the Ministry of Finance, Government of India in November 1991, endorsed the views of the Tiwari Committee for setting up special legislation and special tribunals to expedite the recovery process in the financial sector. Thus came the Recovery of Debts Due to Banks and Financila Institutions Act, 1993.
Overriding effect of the Act
S 34 of the Act states:
"Act to have overriding effect -
(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made there under shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948, the State financial Corporations Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank of India Act, 1984 and the Sick Industrial Companies (special provisions) Act, 1985."
The Act has thus an overriding effect over all other legislations except for the ones mentioned in sub-clause (2), viz, the Industrial Finance Corporation Act, 1948, the State financial Corporations Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank of India Act 1984 and the Sick Industrial Companies (special provisions) Act, 1985.
Issues examined by the courtsSome of the issues that led to the evolution of the Act and its interpretation that gave the Act its present form are:
# Need for the leave of the Company Court u/s 537 of the Companies Act, 1956 (the Companies Act) before a winding up order or before the provisional liquidator is appointed u/s 446 of the Companies Act and whether the Company Court can pass orders of stay of proceedings before the Debt Recovery Tribunal ("DRT") formed under the Act.
# Position of the non-obstante clauses in the Act and the Companies Act.
# Jurisdiction of the Tribunal and the Recovery Officer
# Position of the secured creditor who stands outside the winding up provisions of the Companies Act.
# Constitutional validity of the Act
Evolution of the Recovery of Debts due to Banks and financial Institutions Act, 1993Leave of the Company Court for transfer of cases
One of the earliest cases where the aspect of the overriding effect of the Act was faintly mentioned was in Industrial Credit and Investment Corporation of India Ltd v. Srinivas Agencies [(1996) 86 Comp Cas 255 (SC)] where the issue of whether leave should be granted by the Company Court to continue proceedings in other civil courts and whether all proceedings should be transferred to the Company Court.
Shri. Slave, one of the appearing advocates, to buttress the submissions of the opposing parties stated that:
"...convenience may not be the guiding factor; whereas it was for the preservation of the integrity of the substantive right of the creditor which should be the main consideration when he referred to the Act which was then recently enacted because of the considerable difficulties faced by banks and financial institutions in recovering loans and enforcement of securities charged with them." Section 18 of the Act has barred the jurisdiction of other courts, except the writ power of the higher courts, in relation to the matters specified in section 17 the same being recovery of debts due to such institutions.
The court was of the view that the approach to be adopted by the Company court does not deserve to be put in a straightjacket formula. The discretion to be exercised has to depend on the facts and circumstances of each case. While exercising this power, the Company Court should also bear in mind the rationale behind the enactment of the Act.
The non-obstante clauseThe non obstante clause in the Act and the non obstante clause in the Companies Act were considered in Industrial Credit and Investment Corporation of India Ltd v. Vanjinad Leathers AIR 1997 Kerala 273 where the court opined that Section 18 of the Act creates a bar on jurisdiction of other authorities and courts except the Supreme Court and High Courts under Articles 226 and 227 of the Constitution. The court also stated that the Act and the Companies Act is special legislation. However since the Act was enacted after the Companies Act, 1956, the Parliament would have certainly in mind the provisions in the earlier special law namely the Companies Act. Therefore the latter special law will prevail over the former.
Courts have, from time to time, considered the effect of a special act enacted subsequent to a general act or a special act. The Supreme Court in Life Insurance Corporation of India v. DJ Bahadur & ors (1981) 1 SCC 315 held:
1. The legislature has an undoubted right to alter a law already promulgated by it through a subsequent legislation.
2. A special law may be altered, abrogated or repealed by a later general law through an express provision
3. A later general law will override a prior special law if the two are so repugnant to each other that they cannot co-exist even though an express provision is not provided for in that general law.
4. It is only in the absence of an express provision to the contrary and of a clear inconsistency that a special law will remain wholly unaffected by a later law.
The general rule to be followed in case of a conflict between two statutes is that a later statute abrogates the earlier ('leges posteriors priores contrarias abrogant') and the well-known exception is that general legislations do not derogate special legislations ('generalia specialibus non derogant')
The Supreme Court (SC) held in JK Cotton Spinning and Weaving Mills Co. Ltd v. State of U.P (1961) 3 SCR 185, 194 that when there is a conflict between a specific provision and a general provision, the specific provision prevails over the general provision. The rule applies to resolve conflicts between different statutes as also in the same statute.
Where both statutes are special enactments the SC held in Maharashtra Steel Tubes Ltd., v. State Industrial and Investment Corporation of Maharashtra (1993) 2 SCC 147 that the Sick Industrial Companies (Special Provisions) Act, 1985 being a subsequent enactment, the non-obstante clause therein would ordinarily prevail over the non-obstante clause found in State Financial Corporations Act, 1951 which are both special enactments for the legislature is supposed to be aware of the fact that the statute already in force contains a non-obstante clause but still incorporates such non-obstante clause in order to obliterate the effect of the non-obstante clause in the former statute.
The Patna High Court in Bihar Solex (P.) Ltd., In re [(1999) 20 Comp Cas 235 (Bihar)] on the basis the judgment in Maharashtra Steel Tubes case held that u/s 17, 18 and 34 there cannot be any doubt that the jurisdiction of the DRT to entertain and decide suits or other proceedings by banks or financial institutions is exclusive, to the exclusion of all other courts except the Supreme Court or the High Court under Art 226/227.
The SC in the Industrial Credit and Investment Corporation of India Ltd case held that there was no requirement of the leave of the leave of the Company Court for any party to proceed in the DRT and that has to be tried in the specialised machinery set up under the Act.
Another question that came before the HC of Calcutta in State Bank of India v. S.M. Oil Extraction (P.) Ltd [(1999) 21 Comp Cas 33 (Cal)] was whether the non-obstante clause contained in a different enactment that is the Act would operate to deprive or deny those rights of creditors or workers in a Company in liquidation, which were protected under the Companies Act. The Court held that the provisions of the non-obstante clause in the Act would have no effect on the procedure as contained in the Companies Act. Consequently there would be no conflict in the operation of the two clauses. For it was on record that section 446 of the Companies Act was not repealed and it could not be said with any certainty that there appeared any intention of the legislature anywhere in either of the enactments, that the later enactment would in effect operate as against the earlier clause. Had the legislators so intended, indeed appropriate provisions to that extent would have been provided for in the later or in further legislation. In those circumstances, it was held that when the rights of the creditors and workers were protected by the legislators in the Companies Act, in the absence of any specific and categorical provisions a, non-obstante clause contained in a different enactment neither could nor operate to deprive or deny any such right.
Allahabad v. Canara BankA lot of issues came for discussion in Allahabad v. Canara Bank AIR 2000 SC 1535. The issues included jurisdiction of the tribunal and the Recovery Officer under the Act, need for the leave of the Company Court, power of the Company court to stay proceedings under the Act, whether banks filing for recovery can appropriate the entire sales proceeds realized except to the limited extent restricted under section 529A of the Companies Act, position of secured creditors who participate in the winding up proceeds and those who opt to stand outside the winding up proceedings.
The jurisdiction of the tribunal with respect to adjudication was held to be exclusive. The court observed that basically the tribunal is to adjudicate the liability of the defendant and then it has to issue a certificate u/s 19(22) of the Act, which was recently amended by Ordinance 1 of 2000. U/s 18 of the Act, the jurisdiction of other courts (except that of the SC and HCs under Art 226/227) is completely ousted and the power to adjudicate is exclusively vested in the DRT.
Similarly, regarding 'execution' the jurisdiction of the recovery officer is exclusive. The Tiwari Committee, in its report mentioned that the exclusive jurisdiction of the Tribunal must relate not only to the adjudication of liability but also to the execution proceedings.
The next issue was whether the leave of the company court is required for continuing or initiating proceedings in the DRT and whether the Company Court could stay proceedings in the DRT. Questions also arose w.r.t. to priorities u/s 529, 529A, and 530. Reliance was placed on the judgment of the Supreme Court in Valji Shah v. LIC of India AIR 1966 SC 135, where the analogy between s18 of the Act and s 41 of the Life Insurance Corporation Act was brought out and the court held:
" ...just as the Company Court was held incompetent to stay or transfer and decide the claims before the LIC tribunal because the Company Court could not decide the claims before the LIC tribunal, the said court cannot decide the claims of banks and financial institutions. On parity of reasoning with the Valji Shah case, there is no need for the appellant to seek leave of the Company Court to proceed with its claim before the DRT or in respect of the execution proceedings of the recovery officer. Nor can they be transferred to the Company Court." It further held that the Act and the special provisions in it were for a superior purpose, i.e., the provisions of the act are superior to the provisions of s 442, 446, and 537 of the Companies Act.
As far as priorities for creditors are concerned, the Tiwari Committee had stated:
"The Adjudication Officer will have such power as to distribute the sale proceeds to the banks and financial institutions being secured creditors in accordance with inter-se agreements / arrangement between them and to other persons entitled thereto in accordance with the priorities in Law." The above recommendations have been brought in to the act with greater clarity u/s 19(19) as substituted by Ordinance 1 of 2000.
Position of secured creditors standing outside winding up.
There are in fact two categories of secured creditors during winding up proceedings. First, are those who go before the Company Court by relinquishing their security in accordance with s 529 of the Companies Act that refers to Insolvency Rules contained u/s 45 to 50 of the Provincial Insolvency Act where the secured creditor who wishes to come before the Official Liquidator has to prove his debt and he can prove his debt only if he relinquishes his security for the benefit of the general body of creditors. Second, are those who come under s 529A(1)(b) read with the proviso to 529(1). These creditors are the ones who opt to stand outside winding up proceedings to realise their security.
U/s 529(1)(c) of the Companies Act the priority of the secured creditor who stands outside winding up is confined to the 'workmen's portion' as defined in section 529(3)(c). 'Workmen's portion' means the amount which bears to the value of the security, the same proportion which the amount of workmen's dues bears to the aggregate of (a) the workmen's dues (b) the amounts of the debts due to all the creditors. The court held that the words 'so much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso' as provided in the first part of the said proviso (c) to s 529(1) obviously means the amount taken away from the private realization of the secured creditor by the liquidator by way of enforcing the charge for workmen's dues under clause (c) of the proviso to s 529(1). To that extent the secured creditor who has stood outside the winding up and who has lost a part of the monies otherwise covered by security can come before the DRT to reimburse himself from out of other monies available in the tribunal, claiming priority over all creditors by virtue of s 529A(1)(b).
Constitutional validity of the ActAfter 9 years of evolution of the Act was challenged for its constitutional validity in Union Of India & Another v. Delhi Bar Ass. & Others (2002) 4 SCC 275.
The Constitutional validity of the Act was challenged on grounds of unreasonableness & that it is violative of Art14 of the Constitution and that the same is beyond the legislative competence of the Parliament.
The validity of the Act was firstly challenged before the Delhi High Court in Delhi Bar Ass. & Others v. UOI & Another AIR 1995 Del 323. The Delhi High Court held that the DRT could be constituted by the Parliament even though it was not within the purview of Articles 323A and 323B of the Constitution of India and that the expression 'administration of justice ' as appearing in List IIA of the Seventh Schedule to the Constitution includes Tribunals as well as 'administration of justice'; the impugned Act was unconstitutional as it erodes the independence of the judiciary and was irrational, discriminatory, unreasonable, arbitrary and was hit by Art 14 of the constitution. It also quashed the appointment of the Presiding Officer of the Tribunal. The aforesaid conclusions were on the basis that the Act in particular, s 17 did not have a provision for a counter claim as provided in the CPC and was irrational and arbitrary. The Act lowered the authority of the HC on the basis of the pecuniary jurisdiction and eroded the independence of the judiciary since the jurisdiction of the civil courts had been truncated and vested in the Tribunal.
The court referred to DK Abdul Khader v. UOI AIR 2001 Kant 176 where it was held that a Tribunal could not be constituted for any matter not specified in Art 323A & 323B of the Constitution.
Findings of the SCIt was held by the SC that "While Articles 323A and 323B specifically enable the legislature to enact laws for the establishment of tribunals, in relation to the matters specified therein, the powers of the Parliament to enact a law constituting a tribunal like a banking tribunal is not taken away"
It was further specified that the recovery of dues is an essential function of any banking institution. In exercise of its legislative powers relating to banking, parliament can provide the mechanism by which monies due to banks and financial institutions can be recovered
The preamble to the Act states
"... for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto' this would squarely fall within the ambit of entry 45 of List I of the Constitution.
The SC disagreed with the view taken by the Delhi High Court that the provisions of the Act are in any way arbitrary or bad in law. In fact it held that the Act has been amended and whatever lacunae or infirmities existed have now been removed by the amending Act with the framing of more rules.
The view taken by the Delhi High Court was that the Act eroded the independence of the judiciary since the jurisdiction of the civil courts had been truncated and vested in the Tribunal. The SC held that the decision of the Delhi High Court proceeds on the assumption that it is an absolute right of anyone to demand that a civil court adjudicate his dispute. Where Arts 323A &323B contemplate establishment of Tribunals and this does not erode the independence of the judiciary, there is no reason to presume that the banking tribunals and the appellate tribunals so constituted would deny justice to the defendants or that the independence of the judiciary would stand eroded.
All these issues came before various courts after the introduction of the Act nine years ago. Now, almost all issues have come to rest and the Act is all set to take its vengeance on defaulters of loans and debts owed to banks and financial institutions.
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