Supreme Court clarifies the jurisdiction of Civil Courts and DRT in loan recovery cases: Bank of Rajasthan vs. VCK Shares (2022)

Introduction

Date of the Judgment: November 10, 2022
Citation: 2022 INSC 557
Judges: Sanjay Kishan Kaul, J., Abhay S. Oka, J., and Vikram Nath, J.

Can a borrower initiate a separate civil suit against a bank or financial institution when that institution has already begun proceedings to recover a loan at the Debts Recovery Tribunal (DRT)? The Supreme Court of India addressed this critical question, clarifying the interplay between civil courts and DRTs in debt recovery cases. This judgment settles conflicting views and provides clarity on the rights of borrowers and the jurisdiction of different courts. The judgment was authored by Justice Sanjay Kishan Kaul, with Justices Abhay S. Oka and Vikram Nath concurring.

Case Background

The case revolves around a loan sanctioned by Bank of Rajasthan Ltd. (now merged with ICICI Bank Ltd.) to VCK Shares & Stock Broking Services Ltd. Here’s a breakdown:

• June 28, 1994: The bank sanctioned a term loan of ₹1.50 crores to the respondent, repayable in quarterly installments, with an interest rate of 19.25% per annum. The respondent provided title deeds of immovable properties as security.
• September 19, 1995: An additional credit overdraft facility of ₹5 crores was granted to the respondent, secured by the deposit of shares, stocks, and securities.
• July 1, 1997: Due to financial irregularities, the bank issued a notice to the respondent to settle both the term loan and overdraft accounts within three days.
• November 21, 1997: As the respondent failed to make the payment, the bank filed an application (OA No. 263 of 1997) before the DRT, Kolkata, under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act), seeking a recovery certificate of ₹8,62,41,973.36, including interest.
• March 6, 1998: The respondent filed a Civil Suit No. 77 of 1998 in the Kolkata High Court against the bank, seeking a decree for the sale of pledged shares, recovery of sale proceeds, and an inquiry into losses suffered by the respondent.
• March 18, 1998: The bank sold pledged shares of BFL Software Ltd. for ₹5,77,68,000 to adjust against the dues.
• March 9, 1999: The respondent filed another Civil Suit No. 129 of 1999 in the Calcutta High Court, seeking a declaration that the sale of shares was void, return of pledged shares, and a declaration that no sum was payable to the bank.
• The bank filed applications in November 2000 seeking rejection of the plaints in both civil suits, arguing that the High Court lacked jurisdiction. The Single Judge allowed these applications on September 6, 2002, leading to the dismissal of the suits.
• The respondent appealed, and the Division Bench stayed the Single Judge’s order on September 27, 2002.
• May 19, 2003: The DRT disposed of the bank’s application, stating that the bank’s claim was satisfied through the sale of pledged shares. The DRT also directed the bank to return the title deeds and ordered the bank to pay ₹6,88,187.49 to the respondent.
• The bank appealed to the Debts Recovery Appellate Tribunal (DRAT), which was dismissed on November 14, 2003. The bank then filed a petition under Article 227 of the Constitution before the Kolkata High Court, which was also dismissed on August 26, 2019.

Timeline

Course of Proceedings

The appellant bank initially filed an application before the DRT, Kolkata, for recovery of dues. The respondent, in turn, filed two civil suits in the Kolkata High Court, contesting the bank’s actions and seeking various reliefs.

The Single Judge of the High Court dismissed the civil suits, stating that the High Court lacked jurisdiction as the matter fell under the purview of the DRT. The Division Bench, however, overturned this decision, allowing the suits to proceed. This decision of the Division Bench was then challenged before the Supreme Court.

Legal Framework

The core legal framework for this case is the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act). Key provisions include:

• Section 17 of the RDB Act: This section defines the jurisdiction of the DRT, stating that the Tribunal has the authority to entertain and decide applications from banks and financial institutions for the recovery of debts due to them.
  
  “17. Jurisdiction, powers and authority of Tribunals.— (1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions.”
• Section 18 of the RDB Act: This section bars the jurisdiction of all courts and authorities, except the Supreme Court and High Courts exercising writ jurisdiction, in matters specified in Section 17.
  
  “18. Bar of jurisdiction.—On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in section 17”
• Section 19 of the RDB Act: This section outlines the procedure for making applications to the Tribunal for recovery of debts. It also includes provisions for set-offs and counterclaims by the defendant.
  
  “19. Application to the Tribunal.— (1) Where a bank or a financial institution has to recover any debt from any person, it may make an application to the Tribunal…”
• Section 19(7) of the RDB Act: This provision states that a written statement claiming a set-off has the same effect as a plaint in a cross-suit, enabling the Tribunal to pass a final order on both the original claim and the set-off.
  
  “19(7). The written statement shall have the same effect as a plaint in a cross-suit so as to enable the Tribunal to pass a final order in respect both of the original claim and of the set-off.”
• Section 19(9) of the RDB Act: This provision states that a counterclaim has the same effect as a cross-suit, allowing the Tribunal to pass a final order on both the original claim and the counterclaim.
  
  “19(9). A counter-claim under sub-section (8) shall have the same effect as a cross-suit so as to enable the Tribunal to pass a final order on the same application, both on the original claim and on the counter-claim.”
• Section 31 of the RDB Act: This section provides for the transfer of pending cases before any court to the DRT, if the cause of action falls under the jurisdiction of the DRT.
  
  “31. Transfer of pending cases.—(1) Every suit or other proceeding pending before any court immediately before the date of establishment of a Tribunal under this Act, being a suit or proceeding the cause of action whereon it is based is such that it would have been, if it had arisen after such establishment, within the jurisdiction of such Tribunal, shall stand transferred on that date to such Tribunal”

Arguments

The appellant bank argued that the RDB Act provides a complete scheme for handling claims, counterclaims, and set-offs, and that the DRT should have the exclusive jurisdiction to try such matters. They contended that allowing parallel proceedings in civil courts would lead to multiplicity of actions and conflicting decisions. The bank also argued that the inherent powers of the court under Section 151 of the Code of Civil Procedure, 1908 (CPC) could be used to consolidate the suits without the consent of the parties.

The respondent argued that the RDB Act was enacted to provide a summary procedure for banks to recover their dues and does not bar the jurisdiction of civil courts to entertain suits filed by borrowers. They also contended that the DRT is a creature of statute and does not have the inherent powers of a civil court. The respondent relied on previous judgments of the Supreme Court, particularly Indian Bank v. ABS Marine Products (P) Ltd., to support their argument that borrowers have the option to file separate suits in civil courts.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether an independent suit filed by a borrower against a Bank or Financial Institution, which has applied for recovery of its loan against the plaintiff under the RDB Act, is liable to be transferred and tried along with the application under the RDB Act by the DRT?
2. If the answer is in the affirmative, can such transfer be ordered by a court only with the consent of the plaintiff?
3. Is the jurisdiction of a Civil Court to try a suit filed by a borrower against a Bank or Financial Institution ousted by virtue of the scheme of the RDB Act in relation to the proceedings for recovery of debt by a Bank or Financial Institution?

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered various cases and legal provisions in its judgment:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court overruled United Bank of India, Calcutta v. Abhijit Tea Co. Pvt. Ltd. And Others, stating that it did not lay down the correct legal proposition. The court clarified that the DRT does not have the jurisdiction to try independent suits filed by borrowers.
• The Supreme Court followed Indian Bank v. ABS Marine Products (P) Ltd., affirming that the jurisdiction of civil courts is not barred in regard to suits filed by borrowers against banks.
• The Supreme Court overruled State Bank of India vs. Ranjan Chemicals Ltd. and Another, stating that it did not lay down the correct legal proposition. The court clarified that the civil court cannot transfer a suit to DRT without the consent of the parties.
• The Supreme Court affirmed Nahar Industrial Enterprises Ltd. v. Hong Kong and Shanghai Banking Corporation, reiterating that a suit filed by a borrower against a bank is not barred before the Civil Court.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Preservation of Civil Court Jurisdiction: The Court emphasized that civil courts have jurisdiction to determine all disputes of a civil nature unless expressly or impliedly excluded. The Court leaned towards upholding the jurisdiction of civil courts.
• Objective of the RDB Act: The Court noted that the RDB Act was enacted to provide a summary remedy for banks and financial institutions to recover their dues expeditiously. It was not intended to bar borrowers from seeking redressal in civil courts.
• Borrower’s Choice: The Court recognized that a borrower should have the option to either file a counterclaim before the DRT or pursue a separate civil suit. This choice should not be restricted.
• Lack of Transfer Power: The Court found that there is no specific power in the RDB Act or the Code of Civil Procedure that allows a civil court to transfer an independent suit to the DRT.
• DRT’s Limited Powers: The Court reiterated that the DRT is a creature of statute and does not have the inherent powers of a civil court.
• No Impeding of DRT Proceedings: The Court clarified that the filing of a separate civil suit by a borrower should not impede the proceedings before the DRT.

Logical Reasoning:

The Court considered the arguments for and against the transfer of suits, and concluded that there is no legal basis for such transfer. The Court also addressed the concern that borrowers might use civil suits to delay DRT proceedings, clarifying that DRT proceedings should continue without impediment.

The majority opinion was delivered by Justice Sanjay Kishan Kaul, with Justices Abhay S. Oka and Vikram Nath concurring.

The court quoted from the judgment:

“We are thus of the view that there is no provision in the RDB Act by which the remedy of a civil suit by a defendant in a claim by the bank is ousted, but it is the matter of choice of that defendant.”

“We certainly would not like that the process envisaged under the RDB Act be impeded in any manner by filing of a separate suit if a defendant chooses to do so.”

“The suit would take its own course while a petition before the DRT would take its own course. We appreciate that this may be in the nature of parallel proceedings but then it is the defendant’s own option.”

Key Takeaways

• Borrowers’ Right to Sue: Borrowers have the right to file independent civil suits against banks even if the bank has initiated recovery proceedings at the DRT.
• No Transfer of Suits: Civil courts cannot transfer suits filed by borrowers to the DRT.
• Choice of Forum: Borrowers have the option to file a counterclaim at the DRT or pursue a separate civil suit.
• DRT Proceedings Unaffected: The filing of a civil suit by a borrower should not impede or stay the proceedings at the DRT.
• Parallel Proceedings: The judgment clarifies that parallel proceedings in civil courts and DRTs are permissible, and it is the borrower’s choice to initiate such parallel proceedings.

Directions

The Supreme Court did not issue any specific directions in this case other than dismissing the appeal. The court clarified the legal position regarding the jurisdiction of civil courts and DRTs, and left the parties to proceed accordingly.

Conclusion

The Supreme Court’s judgment in Bank of Rajasthan Ltd. vs. VCK Shares & Stock Broking Services Ltd. provides much-needed clarity on the interplay between civil courts and DRTs in debt recovery cases. The Court has affirmed that while the RDB Act provides a summary procedure for banks to recover their dues, it does not bar borrowers from filing independent suits in civil courts. This judgment ensures that borrowers have a fair opportunity to seek redressal of their grievances, and it balances the interests of both banks and borrowers. The decision also clarifies that the DRT and civil courts can function in parallel, with borrowers having the choice of forum for their claims.