Lies Vs Truth Regarding Recovery Of ‘Industrial Loan’

1. The ‘Industrial Loan’ is required for an industry which is a social activity generating employment for the masses (direct as well as indirect), generation of public revenue by way of taxation for meeting public expenses through the government, making available goods indigenously and thus saving valuable foreign exchange, creating possibilities for export and thus earning valuable foreign exchange, creating wealth to improve standard of living of the citizens etc. Thus the ‘Industrial Loan’ is an object and purpose oriented loan for creating an activity for the benefit of the public. In this context, the PAYMENT OF INTEREST AND REPAYMENT OF SAID ‘INDUSTRIAL LOAN’ IS PRIMARILY, WHOLLY AND SOLELY OUT OF EARNINGS OF THE SAID INDUSTRY. In fact all the project reports and appraisal reports prepared by the banks/financial institutions show only this mode of repayment of industrial loan as well as interest. In a running unit, all the transactions ultimately leave only the net profit in the hands of the Company. Average net profit in the business is 2% to 4% of the turnover. Out of this if the Company reserves half, the balance half i.e. 1% to 2% is only available which the Company can use the way it likes say for keeping reserves for business risks, security and safety of key persons etc. ALL THESE ASPECTS OF THE ‘INDUSTRIAL LOAN’ ARE WELL KNOWN AND WELL UNDERSTOOD BY THE BANK.

2/ The ‘Working Capital’, one of the categories of ‘Industrial Loan’ is used for payment of salary and wages to the workers, purchase of raw materials, financing of stocks and bills etc. The ‘Interest on Industrial Loan’ and ‘Repayment of Industrial Loan’ is paid out of ‘Surplus Generation’ of the running of the industry. If the business generates ‘Loss’ i.e. it is ‘Sick’, neither interest can be paid nor the loan can be repaid. CONSIDERING THESE BASIC REQUIREMENTS OF THE BUSINESS AND INDUSTRY, THE RBI HAS LAID DOWN VARIOUS STATUTORY ‘RBI GUIDELINES’ SINCE 1976. ALL THESE ASPECTS ARE WELL KNOWN AND WELL UNDERSTOOD BY THE BANK AND ITS OFFICIALS. In Central Bank of India Vs Ravindra and Ors. {2001 AIR 3095, 2002(1) SCC 367, 2001(7) SCALE 351, 2001(9) JT 101; Date of Judgment: 18/10/2001} hon’ble Supreme Court of India has held that the instructions and guidelines issued by the RBI have STATUTORY FORCE, hence are of BINDING NATURE on the Banking Companies.

3/ The BUSINESSES HAVE USUAL RISK FACTORS INCLUDING SOME BEYOND CONTROL OF THE ENTREPRENEUR. IN OUR COUNTRY THERE IS NO INSURANCE FOR BUSINESS FAILURE EVEN FOR ‘NO FAULT’ ON THE PART OF THE ENTREPRENEUR OR HIS ENTERPRISE. On the other hand, the institutions like the Bank have multiple safeguards like protection of the government, mortgage of assets of the borrowing Company, collateral security, personal guarantees, margins etc. Further, there is no third party account in the event of any disputes with the Bank. All these facts and circumstances are highly against equity, justice and good conscience. The serious impact is that in the event of willful defaults of the Bank, the damages like aggravated and exemplary operate and unfold with greater force. Further, consequent on passing the Bank Nationalization Act, 1970, in the context of PROJECT ORIENTED FINANCING, there is NO REASON AND JUSTIFICATION FOR TAKING OF ANY PERSONAL GUARANTEE and / or collateral or any such security by the Bank.

4/ BUREAUCRACY IN BANKS IS NOT DECIDING AND SETTLING EVEN SIMPLE PROBLEMS OF THE BORROWERS RELATING TO REVIVAL AND REHABILITATION.

During our working we have experienced that due to artificial fear of being questioned by higher bank management, the bureaucracy in Banks is DELIBERATELY NEGLECTING STATUTORY ‘RBI GUIDELINES’ and not deciding and settling even simple problems of the borrowers relating to revival and rehabilitation, consequently, FORCING THEM TO BECOME 'NPA'. Being generally IGNORANT OF THIS ATTITUDE OF BANKS the majority of public is crying for non recovery of so called ‘PUBLIC MONEY’, losing sight of the fact that the BORROWERS ARE ALSO A VERY IMPORTANT SECTION OF PUBLIC, and intelligent persons running an industry, which generates employment and revenue through various Govt taxes and payment of huge interest and service charges to the Bank. Instead, the matter is passed on to the court of law under DRT Act, 1993 and/or Securitisation Act, 2002. The Supreme Court has criticized this attitude on several occasions, but there is no effect. In author’s view, only after few cases of counter-claim for loss and damages for wrongdoings committed by the Banks, would be decided against the banks, then only one can expect any change in the said attitude of the Banks. THE BATTLE IS LONG DRAWN, TIME CONSUMING AND EXPENSIVE.

5/  Therefore, in the event of defaults in repayment, if any, if the Bank has obtained any guarantees including personal guarantees, the said guarantors are automatically discharged. Hence the Bank and its officials have, at all time,  to take care that there is not a slight variation in the level of “DUTY OF CARE”, terms and conditions with those at the time of obtaining guarantees otherwise the guarantors are automatically discharged. Further the Bank and its officials have to be careful that they SHOULD NOT DRAFT OR FRAME SECURITY DOCUMENTS HAVING ONE SIDED TERMS AND CONDITIONS, OTHERWISE SUCH DOCUMENTS ARE HELD ILLEGAL AB INITIO AND ARE NOT BINDING EVEN IF SIGNED BY THE COMPANY AND GUARANTORS.  Such facts, circumstances and consequences are well known and well understood by the Bank and its officials.

6/     ARE THE BANKS / FINANCIAL INSTITUTIONS ABOVE LAW ? Why a Bank does not agree to any of the rights conferred on sureties by section 133, 134, 135, 139 and 141 of Contract Act, and any Rule of Law or Equity? For details kindly refer my Article on this subject at http://www.lawyersclubindia.com/ articles/Are-the-Banks-Financial-Institutions-Above-Law--3523.asp

7/ LIMITED LIABILITY: Section 13 (2) of the Companies Act, 1956 provides that “The MEMORANDUM OF A COMPANY LIMITED BY SHARES or by guarantee SHALL ALSO STATE THAT THE LIABILITY OF ITS MEMBERS IS LIMITED.” This means that no member can be called upon to pay anything more than the nominal value of the shares held by him, or so much thereof as remains unpaid; and if his shares be fully paid up his liability is nil. Consequently, the BANK IS BOUND TO FOLLOW THE LAW OF THE LAND, i.e. the Companies Act, 1956.

8/ The author is mainly engaged in drafting Counter Claims (i.e. Claim for loss and damages suffered due to wrongdoings of the Bank) under the Law of Torts against Banks/Financial Institutions on behalf of sick companies facing recovery actions under DRT Act, 1993 and/or Securitisation Act, 2002. Therefore, I have first hand knowledge that MAJORITY OF PROJECTS FAIL, firstly,  due to inexcusable DELAY IN SANCTION OF LOAN and secondly, due to inexcusable DELAY IN DISBURSEMENT OF LOAN by the idle bureaucracy in the Bank.

9/ For example, recently a very ambitious HOSPITAL project namely, Saumya Medical Care & Media Ltd, Vijayawada has miserably failed due to corruption in HUDCO. The Hospital was being constructed by a NRI Doctor, who returned from USA to serve his country, however, he was not ready to pay bribe to the officers of HUDCO. The NRI Doctor had already incurred MORE THAN RS. 20 CRORES out of his hard earned savings, but could not succeed. At present, the NRI Doctor is ‘hand to mouth’, hence he has leased the Hospital building for running a college on rent, to any how earn his livelihood and facing several bogus civil / criminal litigations filed by HUDCO .

10/  Section 125 of the Companies Act, 1956 (Certain charges to be void against liquidator or creditors unless registered) provides that “(1) Subject to the provisions of this part, EVERY CHARGE CREATED on or after the 1st day of April, 1914, by a company and being a charge to which this section applies shall, so far as any security ON THE COMPANY'S PROPERTY OR UNDERTAKING is conferred thereby, be void against the liquidator and any creditor of the company, unless………..” Therefore, the bank is entitled to create charge ‘on the company's property or undertaking’ and NOT ON THE DIRECTOR’S / GUARANTOR'S PERSONAL PROPERTY AT ALL.

11/  CONCLUSION: THE GIST OF THE DISCUSSION IS AS FOLLOWS:

(a) It is explicit that said statutory provision u/s 125 of Companies Act is based on the reasoning that the BANK LOAN HAS BEEN INVESTED IN BUSINESS ASSETS of the Company and NOT IN PERSONAL ASSETS OF THE DIRECTOR / GUARANTOR. Needless to mention that the BANK ALWAYS KEEPS A CLOSE WATCH ON THE BUSINESS ASSETS OF THE COMPANY by way of Monthly Stock Statements, as well as by periodical Physical Verification.

(b) In view of the Bank Nationalization Act, 1970, in the context of PROJECT ORIENTED FINANCING, there is no reason and justification for taking of any personal guarantee and/ or collateral or any such security by the Bank.

(c) The bank is entitled to create charge ONLY ‘on the company's property’, which has been PURCHASED OUT OF THE LOAN SANCTIONED BY THE BANK.

(d) In view of  para 11(a) above, the bank is NOT entitled TO INSIST FOR and to create charge ‘on the DIRECTOR’S / GUARANTOR'S PERSONAL PROPERTY’.

(e) Before declaring NPAs, Bankers have numerous duties to perform including “Duty of Care” (a concept of law of torts) and “Rehabilitation” NOT ONLY ONCE BUT MULTIPLE TIMES.

(f) After all said and done, if unfortunately, the Company’s PROJECT FAILS, the Company will be wound-up as provided in the Companies Act, and its assets will be distributed proportionately to all the creditors, including the Bank.

(g) There is no reason, as to why the bank can insist for mortgage of personal assets / personal guarantee of DIRECTOR’S / GUARANTOR'S to secure its debts in preference to other creditors, whereas there is no such provision in the Companies Act, 1956 and/or the Bank Nationalization Act, 1970.

(h) Therefore, the inescapable conclusion is that THE BANK unlawfully and ARBITRARILY INSISTS FOR MORTGAGE OF DIRECTOR’S PERSONAL ASSETS and/or DIRECTOR’S PERSONAL GUARANTEE, which is not justified at all, only because it enjoys ‘State conferred’ monopoly status.(END)

Note: the views expressed are my personal and a view point only.

Author:

Narendra Sharma,

Consultant (Legal)

E-mail: nkdewas@yahoo.co.in