Delay in sanction & disbursal of bank loan; a reason for failure of majority of projects

1. The author is mainly engaged in drafting Securitisation Applications and Counter Claims (i.e. Claims for loss and damages suffered due to wrongdoings of the Bank) under the Law of Torts against the Banks and Financial Institutions (hereinafter called ‘the Banks’) on behalf of sick companies facing coercive recovery actions underRecovery of Debts Due to Banks and Financial Institutions Act, 1993 and/or Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Therefore, the author has first hand knowledge and experience that a large majority of projects fail, firstly, due to inexcusable delay in sanction of working capital and secondly, due to inexcusable delay in disbursement of working capital by the idle bureaucracy in the Banks. As a result, one or more of following ill consequences follow:

(a) Project either fails to achieve desired commercial production on scheduled date or prematurely collapses due to cost overrun.

(b) Project fails to make delivery of goods to the buyers on time, hence orders are cancelled. This results in huge loss due to increase in dead stock, and also results in loss of reputation to the Borrower.

(c) Project fails to make payment to the supplies of raw materials, hence they stop further supplies and also blacklist the Borrower for future.

(d) In several cases Bank sanctioned only term loan for Project but refused to sanction Working Capital facilities and started recovering the loan instalments  with interest. Thus the Project, starving for working capital, failed to purchase raw material and/or failed to sell the product as it could not allow sufficient credit period to the buyers.

2. A three judge bench of Hon’ble Supreme Court in Mardia Chemicals Ltd. & Ors vsU.O.I. & Ors (AIR 2004 SC 2371; Date of Judgment: 08/04/2004) has observed in para 69 as follows.

“……..But we find that a contract which has been entered into between the two private parties, in some respects has been superseded by the statutory provisions or it may be said that such contracts are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. Hence, it cannot be pleaded that the petitioners cannot complaint of the conduct of the banking companies and financial institutions for whatever goes in between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary.”                                                                                                                                   

3. 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 pretended fear of being questioned by higher management, the bureaucracy in Banks is forcing the borrowers to become 'NPA' by deliberately neglecting statutory ‘RBI Guidelines’ and not deciding and settling even simple problems of the borrowers relating to revival and rehabilitation. Being generally ignorant of this attitude of banks, the Government and 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 Recovery of Debts Act, 1993 and/or Securitisation Act, 2002. The Supreme Court has criticized this attitude on several occasions, but there is no effect on the Banks.

For example, recently a very ambitious hospital project had 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.

4. LIMITED LIABILITY: Section 4(1)(d)(i) the Companies Act, 2013 provides that “the memorandum of a company shall state, in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them”. This means that no member and/or Director 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, 2013.

5.  Section 77(1) of the Companies Act, 2013 (Duty to register Charges, etc) is reproduced below for ready reference:

77. (1) It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation…..”

Therefore, as per the Companies Act, to secure its loan, the bank is entitled for creation of charge ‘on the company's property or undertaking’ and not on the director’s / guarantor's personal property.

6. The Banks / Financial Institutions are not above law. Strangely, in the dotted line Personal Guarantee agreement prepared by Bank, the bank specifically and deliberately excludes any and all of the rights statutorily conferred on sureties by sections 133, 134, 135, 139 and 141 of Indian Contract Act, including any Rule of Law or Equity. For further details, you may kindly refer my Article on this subject at http://www.lawyersclubindia.com/ articles/Are-the-Banks-Financial-Institutions-Above-Law--3523.asp 

7. In author’s view, only after a few cases of claim for loss and damages under the Law of Torts, 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. It is pertinent to note here that this battle is long drawn, time consuming and expensive, hence great patience is required.

 Note:

The views expressed are my personal and a view point only.

Author:

Narendra Sharma,

Consultant (Arbitration, DRT, Securitisation)

Expert (Director's Personal Guarantee)

E-mail: nkdewas@yahoo.co.in