What is debt?

“Debt” is defined in Sec. 2(g) of RDDB & FI Act. [Same definition is assigned to SARFAESI Act vide Sec. 2(ha)]. The definition reads thus:

“2(g) ‘debt’ means any liability (inclusive of interest) which is claimed as due from any person by a bank of 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.”

The debt should be created in relation to business activity of the bank. Any amount receivable by a bank is not debt unless it has arisen during the course of business activity of the bank. Amount misappropriated by a staff member is not a debt unless it occurred in collusion with customer of the bank. Any amount claimed as compensation from a person in case of breach of supply of goods or services is not a debt. Any amount assured by insurance company is not a ‘debt’ as the same is not certain and depends upon happening of events agreed to. Debt should be certain, subsisting (whether supported by any security interest or not) and not contingent. Claim against Insurance Company or contractual amount between bank and insurance company is outside the purview of definition of ‘debt’ New Bank of India & Another Vs. Flocks (In the) Ltd. & Ors.:2006 (2) D.R.T.C. 323 DRAT, All. In case of Export Credit Guarantee (ECG) Scheme, the Supreme Court in State Bank of Bikaner & Jaipur Vs. M/s Ballabh Das & Co. & Ors. (AIR 1999 SC 3408 = 1999 (98) Comp. Cas. 219 SC) held that the contract of insurance / guarantee is between the Export Credit and Guarantee Corporation of India Ltd. and the bank and prima facie the term / condition in the said insurance cover / guarantee referred to above is for the benefit of the insurer and not for the benefit of the exporter, i.e. the borrower. It does not absolve the borrower of the liability to repay the amounts borrowed for the purpose of making exports if the foreign buyer of those goods does not make payment to the bank of the amounts payable in respect of those goods. Though the insurer / guarantor under the insurance / guarantee possibly would stand discharged from its liability to the insured on the exporters delivering the documents of export of goods to the insured, prima facie, the liability of principal debtor would still remain subsisting. Thus, the ECGC (settled / paid) amount should not be construed as debt. Further the amount paid by ECGC is refundable by the bank in certain proportion to ECGC on recovery from the borrower in legal action taken by the bank and for that reason undertaking is obtained from the bank (that the bank should take legal action against the borrower) as a condition precedent before settling the amount. If the bank does not take legal action for recovery of the debt from the borrower, then, the ECGC may recover the entire amount paid by it to the bank. Hence it is evident from this arrangement and understanding that, the amount of claim paid by ECGC is not a debt. The borrower enjoys lower rates of interest in export credit facility compared to other borrowers as his account would be covered under the ECGC scheme.

Lok Adalat award is a debt. Final order passed by the DRT based on award passed by Lok Adalat is a debt within the meaning of Sec.2(ha) of SARFAESI Act [M/s. Badma Tool Manufacturers Pvt. Ltd. Vs. Indian Bank & another: 2010-5-L.W.278(Madras High Court)]. 

Decree of a civil court is debt. Recovery certificate issued by DRT under Sec 31A of RDDB & FI Act 1993 is debt. This is clear from the words “or otherwise”  “and legally recoverable” appearing in the definition clause 2(g)/2(ha) above.

Status of the secured creditor does not change or be affected if the nomenclature of the debt changes (such as award or decree or recovery certificate).

On write off of a NPA account does not loose its character as debt as writing off  relates to internal accounting norms of the banks for the purpose of maintaining clean balance sheet. Interest accrued subsequent to classification of the account as NPA is not waived. It is calculated and maintained in 'shadow account' or 'mirror account' and claimed in the demand notice. Some times correctness of the amount debited to the account in book liability or shadow liability is seriously questioned by borrowers. In such cases the banks are bound to submit a statement of account combining both the book debt liability and the shadow liability duly certified under Banker's Book Evidence Act and Information Technology Act. It is true that the DRTs have no power to decide the quantum of amount demanded by banks under Sec.13(2). Borrower's have right to challenge every debit entry including the expenses incurred for taking action. Full Bench of Madras High Court inLaksmi Shankar Mills (P) Ltd. Vs. Authorised Officer, Indian Bank: 2008 (2) CTC 529 = AIR 2008 Mad 18held that the borrower can question each and every aspect which rendered the action taken under the Act illegal. 

There are instances where some banks claim (debit) penal interest also at compounded rate which is held as opposed to public policy by constitutional Bench of Supreme Court in para 54 of the landmark judgment in Central Bank Of India Vs. Raveendra C.T.C. 2002(2) 354 (S.C.). In such cases DRT can scale down such interest. In fact Mumbai DRTs have displayed in notice Board in 2002 advising all banks to file correct statements claiming penalty at simple rate only within the time prescribed or else warned for dismissal of OAs. Same analogy applies to action under SARFAESI Act.