The Hindu Business Line : Why DRT legislation needs a re-think

IT HAS been a decade since debt recovery tribunals (DRTs) began operating in the country. Most banks have reported a significant decline in their non-performing assets (NPAs) during this period. The summary nature of proceedings in the DRT has reduced the litigation time and assisted in faster recoveries of dues, often sums far in excess of what was originally lent. Judged by this yardstick, the DRTs are a success.

But there is a murkier flipside to this story. Banks have not been shy of misusing the summary nature of proceedings in the DRT to cover up their employees' own acts of negligence and collusion with unscrupulous elements to harass the innocent.

There is this case where a bank lent money to a partnership firm after a minority partner with a 35 per cent share in the firm approached the bank for a Rs 6-lakh cash credit facility. The bank granted the loan without checking with the majority partners, without seeing the partnership deed, without taking any collateral and without doing a valuation of the business. All this is a matter of court record based on the evidence entered by the bank during the DRT proceedings.

Should a bank that has not taken well-established safeguards when advancing a loan be allowed the benefit of a fast-track court like the DRT? This is an important public policy issue because given the summary nature of proceedings in the DRT, the defendants have little opportunity — as they will in a regular civil court — to expose the full extent of the acts of negligence and collusion of bank officials for their own financial gain. The DRT route taken by banks often allows their officials guilty of gross misdeeds get away scot-free.

In the case cited, the bank based its decision to grant the loan solely on a General Power of Attorney (GPA) produced by the partner which claimed that the other two partners (both women) have permitted him to act on their behalf on a variety of issues relating to the firm, including taking loans.

The two women partners were shocked when the nationalised bank served them a legal notice demanding repayment of Rs 12 lakh, the principal plus accrued interest. This is when they become aware of an account existing in the name of the firm in the branch and of the bank's claim they had executed a GPA, which they denied doing. They also promptly filed a criminal complaint against their partner. When the matter went before the DRT, the partner who had borrowed the money opted out of the proceedings, and even left the city. It was left to the two women partners to defend themselves and the firm.

An examination of the account extract produced by the bank revealed that the Rs 6-lakh loan had been sucked out within two weeks of the firm's current account being surreptitiously opened and loan granted. Yet the bank waited for another two years before sending a legal notice demanding repayment. Reason: the bank was waiting for the mounting interest burden to take the dues over the Rs 10-lakh threshold so that it could file the case before the fast-track DRT rather than in the civil court. During this period the bank made no attempt whatsoever to contact the other partners.

From a public policy perspective, one way of avoiding a similar situation is for it to be made mandatory that banks inform all partners of a firm (or directors of a company) immediately when a client is in serious default. At least two warning notices ought to be served on the partners/directors before the bank serves a legal notice for recovery, which often is only done to complete a formality before approaching the DRT.

Shocking lack of answers

The account extract produced by the bank revealed that the very first debit was a "transfer to current account" to the tune of Rs 3.46 lakh. The bank's only witness, a manager who by his own admission had helped open the account and assist with its operation, first said he could not say into which account this money was transferred by the bank. When recalled to the stand again to clarify this issue — following orders secured by the women partners petitioning the High Court after the DRT refused to allow another round of cross examination citing the summary nature of proceedings — he sang a new tune saying the money had been used to settle certain overdrafts of the firm under an earlier account. But to confound matters he also stated on record that the partner concerned had not borrowed earlier on behalf of the firm. So, where did this money go? The bank simply refused to come clean on this issue.

Most of the questions put to the bank's only witness were disallowed by the DRT's presiding officer citing summary procedure. On two occasions the High Court had to be moved on grounds of denial of natural justice and the DRT was directed to rehear matters it had treated as closed. To add insult to injury, the bank which had not taken any collateral when advancing the loan got the DRT to attach the personal property of one of the women partners, claiming — believe it or not — this was necessary as it had taken no collateral while advancing the loan. A shocking case of asking to be rewarded for one's own negligence.

The policy issue this raises is: Should a bank that has not bothered to take collateral or follow standard procedures while advancing a loan be allowed to proceed against the personal property of partners who were not direct parties to the original loan transaction? Or should it be allowed to proceed only against the property of the firm and of the partners directly responsible for taking the loan?

On the request of the two women partners, the DRT sent the GPA in question (which, by the way tellingly enough, was not filed in court by the bank with its original application but had to be requisitioned separately by the defence moving an application in the DRT) for forensic examination to the government facility and it did so tagging with it the vakalatnama executed by the lady partners and the statement of objections filed by them to be used to verify their signatures. The report came back confirming the signatures on the GPA were forgeries. The prosecuting bank cross-examined the forensic expert and found little to contest this finding.

But in the final order the judge, while concluding correctly that the authenticity of the GPA was the central issue to be decided in this matter, held that the finding of the forensic expert could not be relied upon as the vakalatnama and the statement of objections could have been signed by someone other than the two women.

This despite both being court documents long before the decision to send the GPA for forensic examination was taken and based on which the entire defence had been conducted. And so it was ordered that the bank shall be paid all its dues with interest to date by the defendants jointly or severally.

An unsuccessful attempt to get the DRT to review its order later, the matter is now in the appellate tribunal where the women partners face a formidable obstacle in the form of the law which requires a substantial pre-deposit to be made before the matter is heard. Sure the DRAT has the power to reduce or even waive the pre-deposit but will it provide the opportunity to be convinced of the genuineness of their case? And will it consider the enormous hardship the two women partners have already been put through?

The summary nature of proceedings before the DRT is essential. But it should not be made blindly applicable in all cases. Where it is established that banks have been grossly negligent in taking standard precautions while granting loans, the matter should cease to be tried by the DRT.

In other words, the judge should be satisfied on this count during the admission process itself. If not, the bank should be asked to file the matter in a regular civil court where the defence would get a fair chance at exposing the bank's own acts of negligence and collusion and a fair resolution of the dispute is possible.

Justice is blind. As indeed it should be to overcome hurdles posed by problems of caste, class and other socio-economic inequities. But unless the legislation governing the functioning of DRTs is re-examined quickly to institute more safeguards to protect the interests of those who are victims of banks' own acts of negligence and collusion, there is a real danger of justice becoming deaf as well.

(The author is Editor, Capital Markets. He can be reached at thomasbinus@rediffmail.com)

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