Recovery Proceedings by DRT against the Guarantors Are Without Jurisdiction

It is submitted that the recovery proceedings under section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as “DRT Act”) against the Guarantors are absolutely without jurisdiction. As per Black’s Law Dictionary, Ninth Edition, at page 1389, “recovery” means the regaining or restoration of something lost or taken away. It follows that the DRT has no jurisdiction to proceed against the Guarantor, as he has not taken any "debt", which he has to repay. 

As per section 4 of the U.S. Statutes of Frauds, 1677 a promise ‘to answer for the debt, default or miscarriage of another person’ is a contract of guarantee. The Guarantor promises to discharge the debtor’s liability if the debtor should fail to do so. The Guarantor’s liability is, therefore, secondary to that of the principal debtor {Guild & Co. v. Conrad (1894) 2 QB 885, 896}. The concept is explained below.

(i) As per scheme of Indian Contract Act, 1872 ultimately the debt is to be recovered from the principal debtor, either primarily by the creditor or finally by the guarantor. Certainly, there is no mandate of Contract Act that finally the principal debt is to be recovered from the guarantor. (please consecutively refer sections 126, 140, 141 and 145)

(ii) The Guarantor is entitled to submit before DRT and/or Court that the personal guarantee agreement is not based upon a real consent, but was induced by undue influence by the Bank. The consent of the Guarantor having obtained by undue influence by the Bank, therefore, the personal guarantee agreement is voidable at the option of the Guarantor under section 19-A of the Contract Act.

(iii) It is undisputed that, firstly, there is such an inequality of bargaining power between the Bank and the Guarantor that the Bank can cause economic duress to the Borrower and/or Guarantor; secondly, the personal guarantee agreement is always drawn up one-sidedly, not limited to, but including the mischievous forced waiver of certain provisions of the Contract Act; thirdly, it results in inference that the personal guarantee agreement is not based upon a real consent, it is rather an imposition upon a needy person, hence the Court would regard it as opposed to public policy, therefore void under section 23 of the Contract Act; fourthly,  therefore the presumption of undue influence is bound to arise between the Bank and the Guarantor while executing the personal guarantee agreement.

(iv) Therefore, the Guarantor can claim discharge under sections 133, 134, 135 and 139, and can also claim his other rights under sections 140 and 141 of the Contract Act. However, vide Supreme Court in Nahar Industrial Enterprises Ltd vs Hongkong & Shanghai Banking Corp. {2009 (8) SCC 646; 2009 (2) DRTC 273 (SC); Decided on 29 July, 2009} admittedly no such declaratory relief of discharge of the Guarantor from liability can be granted by the Tribunal, because as held in this case the DRT is not a court having appropriate jurisdiction.

(v) The liability in terms of Section 2(g) of the DRT Act can be claimed as ‘due’ by the bank or a financial institution only from a ‘defaulting party’. There cannot be any outstanding by a guarantor as is envisaged in Section 2(g). The liability of a guarantor to repay the loan of the principal debtor arises only when an outstanding is not paid by the principal debtor.

(vi) A civil action for the recovery of money under section 19(1) of DRT Act, and a civil suit for the enforcement of any guarantee in respect of any loan, are two entirely different actions.

(vii) The Bombay High Court in Centurion Bank Ltd. vs Indian Lead Ltd. And Anr. {(2000) 100 Comp Cas 537 Bom; (1999-3) 101 Bom LR 556; Decided on 20 August, 1999} held that the civil action against the guarantor is not for recovery of debt but for enforcement of the guarantee and, therefore, declined to transfer the suit from the Court to the DRT.

(viii) The Supreme Court in Karnataka State Financial Corporation Vs N. Narasimahaiah & Ors {2008 AIR 1797, 2008 (5) SCC 176; Decided on 13/03/2008} held that ordinarily, therefore, when a guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction.

(ix) The Bombay High Court in State Bank of India vs Sagar & Others {Civil Revision Application No.33 of 2010, Nagpur Bench, Decided on 11 February, 2011} held that to decide jurisdiction of the DRT, the real test would be to find out whether the DRT under Section 17 of the Securitisation Act is empowered to hold an enquiry on a particular question and to grant the relief in respect thereof.

(x) In the year 2004, the Supreme Court in Mardia Chemicals Ltd. & Ors vs U.O.I. & Ors (AIR 2004 SC 2371; Date of Judgment: 08/04/2004) in para 53 mentioned that to consider and decide a case whether a guarantor is stand discharged as envisaged under Sections 133 and 135 of the Indian Contract Act, a civil court will have jurisdiction to entertain the case as character as a guarantor itself is denied in the Securitisation Act, 2002. By necessary implication, it can be safely understood that DRT has no jurisdiction to consider and decide a case whether a guarantor is stand discharged as envisaged under Sections 133 and 135 of the Indian Contract Act.

(xi) In the year 2009, in Nahar Industrial Enterprises case (supra) the Supreme Court held that DRT could not have granted a declaratory relief to the debtor that foreign exchange derivative contracts entered into by and between the Debtor and the Bank were void. Further held that by taking recourse to the doctrine of purposive construction another jurisdiction of granting a declaratory relief to the debtor could not have been conferred upon DRT by the Supreme Court.

(xii) In the year 2012, the Supreme Court Court in Nitin Gunwant Shah Vs. Indian Bank & Ors {(2012) 8 SCC 324; Decided on July 10, 2012} vide ALTAMAS KABIR, J. (concurring, as he then was) explicitly observed that the DRT was not competent to declare the petitioner as a trespasser in the suit property and for his eviction there from.

(xiii) In May, 2013, the Supreme Court in Bank of Maharashtra Vs Pandurang Keshav Gorwardkar & Ors. {2013 STPL (Web) 402 SC; Civil Appeal No. 7045 of 2005 with Civil Appeal No. 7046 of 2005-Decided on 07-05-2013} held that the adjudication of workmen’s claims against the debtor company is a substantive matter and the DRT has neither competence nor machinery for that. Further held that certain incidental and ancillary powers given to DRT do not encompass power to adjudicate upon or decide dues of the workmen of the debtor company.

(xiv) In April, 2014, the Supreme Court in Harshad Govardhan Sondagar Vs International Assets Reconstruction Co. Ltd. & Ors (Criminal Appeal No. 736 of 2014; Decided on 03-04-2014) held that the Chief Metropolitan Magistrate or the District Magistrate does not have any power under Section 14 of the SARFAESI Act to take possession of the secured asset from a lessee and hand over the same to the secured creditor. Firstly, because there is no provision in Section 13 of the SARFAESI Act that a lease in respect of a secured asset shall stand determined when the secured creditor decides to take the measures mentioned in Section 13 of the said Act. Secondly, there is no remedy available under Section 17 of the SARFAESI Act to the lessee to protect his lawful possession under a valid lease. It is pertinent to note here that the court has without fail examined that whether a remedy is available under Section 17 of the SARFAESI Act to the lessee to protect his lawful possession under a valid lease, apart from there being no provision in Section 13 of the SARFAESI Act for determination of a lease.

(xv) In December, 2013, the Supreme Court in Inderjeet Arya and Another Vs. ICICI Bank Limited {(2014) 2 SCC 229; 2013 STPL (Web) 1005 SC; Civil Appeal No. 11029 of 2013 (@ Special Leave Petition (C) No.35942 of 2012)-Decided on 13-12-2013} referred to actions or recovery proceedings filed by banks and financial institutions before DRT as ‘comprehensive overarching proceedings’, which is a vague description especially when the proceedings affect the guarantors. The dictionary meaning of the term ‘overarching’ is to form an arch over, to be central or dominant, affecting or including everything. It is pertinent to note here that even the Supreme Court was not clear in its analysis about the nature of proceedings affecting the guarantors filed by the banks and financial institutions before DRT.

In the present state of things, DRT is issuing the Certificate of Recovery against the Guarantor under section 19 of the DRT Act, without exception, in a routine manner, which is absolutely without jurisdiction. As per Black’s Law Dictionary, Ninth Edition, at page 1389, “recovery” means the regaining or restoration of something lost or taken away. It follows that the DRT has no jurisdiction to proceed against the Guarantor as he has not taken any "debt", which he has to repay. Further, as per Black’s Law Dictionary, Ninth Edition, at page 608, “enforcement” means the act or process of compelling compliance with a law, mandate, command, decree or agreement. It is pertinent to note here that such issue of Certificate of Recovery against the Guarantor is itself a declaratory relief namely “compelling compliance with the personal guarantee agreement”. However, vide Supreme Court in Nahar Industrial Enterprises case (supra), admittedly no such declaratory relief could be granted by the DRT against the Guarantor, because as detailed above, it is not a court having appropriate jurisdiction to enforce the guarantee against the Guarantor. By necessary implication, the logical conclusion is that the DRT shall have no jurisdiction to proceed for enforcement of the guarantee against the Guarantor.

Note 1: Readers may refer my another detailed article- ‘DRT has no jurisdiction to issue Certificate of Recovery against the Guarantor’ at following link.

(1) \http://www.lawyersclubindia.com/articles/DRT-has-no-jurisdiction-to-issue-Certificate-of-Recovery-against-the-Guarantor-5140.asp#.UIvOLG_Mjp9} OR

(2) http://taxguru.in/corporate-law/drt-jurisdiction-issue-certificate-recovery-guarantor.html

Note 2: The views expressed are my personal and a view point only.

Author:

Narendra Sharma

Consultant (Business Laws)

E-mail: nkdewas@yahoo.co.in