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Thursday, Apr 18, 2002

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Pecking order shuffled

S. Murlidharan

S. Murlidharan on the first-mover advantage in recovery proceedings

FIRST-MOVER advantage is a phrase that normally does triumphant rounds in the advertising circles, in particular, and the marketing world, in general. These days, however, it resonates either gloomily or with verve in the circle of pensive pinstripe moneylenders too. For, under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the Debt Recovery Law or DRL), the bank or financial institution that forges ahead (thanks perhaps to fortuitous circumstances) of other claimants from the same fraternity, may leave the late entrants holding the can.

In Allahabad Bank vs Canara Bank (2000 37 CLA 293), the apex court held that the bank or institution that obtains a certificate of recovery from the Tribunal need not share its good fortune with a Johnny-come-lately. What happened in the case was briefly this. Allahabad Bank and Canara Bank, amongst others, had extended credit to the discredited M. S. Shoes Ltd that was in the news in the late 1990s for the wrong reasons. Allahabad Bank approached the Debt Recovery Tribunal. So did Canara Bank not jointly but on its own. And this, in hindsight, proved to be its undoing. Allahabad Bank got the relief it wanted — it was issued the certificate of recovery.

Canara Bank demanded to share the good fortune of Allahabad Bank. But the Supreme Court rejected this claim on the ground that it was too late in the day. It was pointed out that Canara Bank could have, in terms of Section 19(2) of the DRL, joined Allahabad Bank's application, but this it should have done before the final order was passed by the Tribunal.

DRL should not play hide and seek with the harried lenders.

In the absence of conspicuous newspaper advertisements, it would be unfair to expect banks and financial institutions to apply to be impleaded in an existing pending application. At any rate, one can apply, under the DRL, only after one's dues from the defaulter have crossed the Rs 10-lakh threshold. The upshot of this dispensation could be that the DRL may quite involuntarily prefer one bank or institution to another. What is more, it may also so happen that the early bird harbouring unsecured debts may walk away with the kernel, leaving the latecomer in the lurch despite holding security. Given the absence of effective and expeditious foreclosure laws, even secured creditors have started making a beeline to Debt Recovery Tribunals, which hold the promise of quicker redressal.

True, the DRL, in terms of Section 19(19), enjoins the Tribunal not to have a blinkered view if the borrower happens to be a company. But as pointed out by the Supreme Court in the case under reference, the utility of this section is extremely limited — it helps workmen to some extent and to a lesser extent secured creditors to the extent such workmen, riding piggyback on them (thanks to Section 529A of the Companies Act), displace their security.

DRL incidentally happens to override the provisions of the Companies Act, 1956, except to the limited extent it borrows the order of preference spelt out in Section 529A. Under Section 446 of the Companies Act, in the case of companies that are being wound up, the winding up court gets the jurisdiction to try all suits against the company. This is as it should be. Because, when the liquidator attempts to put together the bits and pieces, as it were, he should not be subjected to diverse pulls and pressures from near or distant quarters. If, however, an application is pending before the Debt Recovery Tribunal in respect of a company in liquidation, the winding up court, and by extension the liquidator, can do precious little except await the order of the Tribunal.

That the order of the Tribunal may upset the pecking order of disbursements laid down for insolvency proceedings does not seem to have weighed with Parliament while making the DRL nor with the draftsman while drafting the Companies (Amendment) Bill, 2001, which among other things proposes to change the presiding deity of winding-up proceedings — the National Company Law Tribunal instead of High Courts. Sick companies, which are as it is mollycoddled by a special enactment called Sick Industrial Companies (Special Provisions) Act, 1985, will however lose their invincibility when it comes to recovery proceedings — the Bill gives a quietus to SICA that spells the end of such immunity and invincibility.

Sick industrial companies will, if and when the Bill becomes law, come under the DRL lens. But if they are indeed stretcher cases, very little can be extracted from them by the Tribunals. The Tribunals, of course, will have a tough task calling the bluff of malingerers.

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