Scope of Moratorium under Bankruptcy Code 2016.

Whether Section 14 of the Insolvency and Bankruptcy Code, 2016, which provides for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition, would apply to a personal guarantor of a corporate debtor?

The amended Section reads as follows:

“14. Moratorium.— xxx xxx xxx (3) The provisions of sub-section (1) shall not apply to—

(a) such transactions as may be notified by the Central Government in consultation with any financial sector regulator;

(b) a surety in a contract of guarantee to a corporate debtor.”

The Insolvency Law Committee, appointed by the Ministry of Corporate Affairs, by its Report dated 26.03.2018, made certain key recommendations like:

“…….since many guarantees for loans of corporates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under Section 10 of the Code and this may corroborate the above apprehension of abuse of the moratorium provision.

The Committee concluded that Section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in Section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only.”

The Report of the said Committee makes it clear that the object of the amendment was to clarify and set at rest what the Committee thought was an overbroad interpretation of Section 14. That such clarificatory amendment is retrospective in nature.

“In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language ‘shall be deemed always to have meant’ is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law which the Constitution came into force, the amending Act also will be part of the existing law.”

[Source: State Bnk of India vs. Ramakrishnan decided by SC on 14 August, 2018]

Sale under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Sale with symbolic possession:

In this case, the creditor did not have actual possession of the secured asset but only a constructive or symbolic possession. The transfer of the secured asset by the creditor therefore cannot be construed to be a complete transfer as contemplated by Section 8 of the Transfer of Property Act. The creditor nevertheless had a right to take actual possession of the secured assets and must therefore be held to be a secured creditor even after the limited transfer to the auction purchaser under the agreement

Thus, the entire interest in the property not having been passed on to the creditor in the first place, the creditor in turn could not pass on the entire interest to the auction purchaser and thus remained a secured creditor in the Act.

Fraud and collusion with SARFAESI purchaser:

Continue reading “Sale under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”

Redemption of mortgage subject to SARFAESI Act

Section 13(8) of SARFAESI Act.

Failure to deposit full amount dues:

In the present case, the appellant failed to comply with the provisions of Section 13(8). The statute mandates that it is only where the dues of the secured creditor are tendered together with costs, charges and expenses before the date fixed for sale or transfer that the secured asset is not to be sold or transferred. Continue reading “Redemption of mortgage subject to SARFAESI Act”

Does Arbitration bars remedy under SARAFESI Act

Effect of Arbitration Clause.

Loan agreements contained arbitration clauses which were invoked by the appellant with the filing of cases under Section 9 of the Arbitration and Conciliation Act, 1996. In view thereof, initiation of any other proceedings under the SARFAESI Act if impermissible in law?

Because arbitration is an alternative to the proceedings under the RDB Act, it would not be obligatory on the Bank/Financial Institution to withdraw the proceedings pending before the arbitrator, prior to resorting to secure its interest under the SARFAESI Act. The Bank/financial institution can simultaneously proceed before the Arbitral Tribunal for adjudication of disputes and also take recourse to Section 13 of the SARFAESI Act for enforcement of its security interest. Both the proceedings can continue parallel to each other. Continue reading “Does Arbitration bars remedy under SARAFESI Act”

Limitation for appeal u/s 30(1) of Recovery of Debts and Bankruptcy Act, 1993

Application of Section 5 of Limitation Act on RDB Act.

Condonation of delay in filing appeal against order of Recovery Officer.

The Recovery of Debts and Bankruptcy Act, 1993 Act is a special law. The proceedings are before a statutory Tribunal. The scheme of the Act manifestly provides that the Legislature has provided for application of the Limitation Act to original proceedings before the Tribunal under Section 19 only. The appellate tribunal has been conferred the power to condone delay beyond 45 days under Section 20(3) of the Act. The proceedings before the Recovery officer are not before a Tribunal. Section 24 is limited in its application to proceedings before the Tribunal originating under Section 19 only. The exclusion of any provision for extension of time by the Tribunal in preferring an appeal under Section 30 of the Act makes it manifest that the legislative intent for exclusion was express. The application of Section 5 of the Limitation Act by resort to Section 29(2) of the Limitation Act, 1963 therefore does not arise. The prescribed period of 30 days under Section 30(1) of the RDB Act for preferring an appeal against the order of the Recovery officer therefore cannot be condoned by application of Section 5 of the Limitation Act.

[Source: International Asset Reconstruction vs. Official Liquidator, decided by SC on 24 October 2017]

Procedure for speedy justice in matters of dishonour of cheques.

Negotiable Instruments Act, 1881

Compounding the offence under Section 138 of the Negotiable Instruments Act, 1881 on payment of the cheque amount and in the alternative for exemption from personal appearance.
How the proceedings for an offence under Section 138 of the Act can be regulated where the accused is willing to deposit the cheque amount? Whether in such a case, the proceedings can be closed or exemption granted from personal appearance or any other order can be passed?

i) Offence under Section 138 of the Act is primarily a civil wrong. Burden of proof is on accused in view presumption under Section 139 but the standard of such proof is “preponderance of probabilities”. The same has to be normally tried summarily as per provisions of summary trial under the Cr.P.C. but with such variation as may be appropriate to proceedings under Chapter XVII of the Act. Thus read, principle of Section 258 Cr.P.C. will apply and the Court can close the proceedings and discharge the accused on satisfaction that the cheque amount with assessed costs and interest is paid and if there is no reason to proceed with the punitive aspect.

ii) The object of the provision being primarily compensatory, punitive element being mainly with the object of enforcing the compensatory element, compounding at the initial stage has to be encouraged but is not debarred at later stage subject to appropriate compensation as may be found acceptable to the parties or the Court. Continue reading “Procedure for speedy justice in matters of dishonour of cheques.”

Jurisdiction for trial for dishonour of cheque

The Negotiable Instruments (Amendment) Act 2015

The Above Amendment Act came in to force with retrospective effect. According to the notification published in the official Gazette dated 26.12.2015 the Amendment shall be deemed to have come into force on the 15th day of June, 2015. Rajya Sabha passed the Negotiable Instrument (Amendment) Bill 2015 on 7th December 2015 . Lok Sabha had passed the Bill in August 2015. The Act will replace Negotiable Instrument (Amendment) ordinance which was re-promulgated on 25th September 2015. The amendment makes changes in provisions relating to the territorial jurisdiction for filing Cheque dishonour Cases in the Negotiable Instrument Act.

Effect of Amendment Act of 2015

As per the Amendment the offence under section 138 shall be inquired into and tried only by a court within whose local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

Background of Amendment Act of 2015

Continue reading “Jurisdiction for trial for dishonour of cheque”

Negotiable instruments: Dishonour of cheque trial directions by Supreme Court

Dishonour of Cheques: directions for expeditious trial of cases.

Delay in cases for dishonour of cheques:

Background for direction:
An Association 174 banks/financial institutions as its members, which functions as think tank for banks in the matters of concern for the whole banking industry, raised issue of considerable national importance owing to the reason that in the era of globalization and rapid  technological developments, financial trust and commercial interest have to be restored. According to them the banking industry has been put to a considerable disadvantage due to the  delay in disposing of the cases relating to Negotiable Instruments Act. The Petitioner banks being custodian of public funds find it difficult to expeditiously recover huge amount of public fund which are blocked in cases pending under Section 138 of the Negotiable Instruments Act, 1881. Petitioners submitted that, in spite of the fact, Chapter XIV has been introduced in the Negotiable Instruments Act by Section 4 of the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988, to enhance the acceptability of cheques in settlement of liability by making the drawer liable for penalties 2014 in case of bouncing of cheques due to insufficiency of funds, the desired object of the Amendment Act has not been achieved.
Cheque, though acknowledged as a bill of exchange under the Negotiable Instruments Act and readily
accepted in lieu of payment of money and is negotiable, the fact remains that the cheque as a negotiable
instrument started losing its credibility by not being honoured on presentation.

Directions by Supreme Court about trial:

(1) Metropolitan Magistrate/Judicial Magistrate (MM/JM), on the day when the complaint under Section 138 of the Act is presented, shall scrutinize the complaint and, if the complaint is accompanied by the affidavit, and the affidavit and the documents, if any, are found to be in order, take cognizance and direct issuance of summons.

(2) MM/JM should adopt a pragmatic and realistic approach while issuing summons. Summons must be properly addressed and sent by post as well as by e-mail address got from the complainant. Court, in appropriate cases, may take the assistance of the police or the nearby Court to serve notice to the accused. For notice of appearance, a short date be fixed. If the summons is received back un-served, immediate follow up action be taken.

(3) Court may indicate in the summon that if the accused makes an application for compounding of offences at the first hearing of the case and, if such an application is made, Court may pass appropriate orders at the earliest.

(4) Court should direct the accused, when he appears to furnish a bail bond, to ensure his appearance during trial and ask him to take notice under Section 251Cr.P.C. to enable him to enter his plea of defence and fix the case for defence evidence, unless an application is made by the accused under Section 145(2) for re- calling a witness for cross-examination.

(5) The Court concerned must ensure that examination-in-chief, cross- examination and re-examination of the complainant must be conducted within three months of assigning the case. The Court has option of accepting affidavits of the witnesses, instead of examining them in Court. Witnesses to the complaint and accused must be available for
cross-examination as and when there is direction to this effect by the Court.

[Source: Indian Bank Association vs. Union of India (Supreme Court of India)]


Strict liability of Banks towards forged cheques.

Bank’s duty to detect forgery:

Withdrawal of amount on the basis of forged cheques:

The respondent-company had a current account with the appellant-bank in its Mangalore Builder Branch. The Managing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account. The second defendant was attending to the maintenance of accounts of the respondent-company and was also in charge and had the custody of the cheque book issued by the Bank to the respondent-company. During the process of bringing the accounts upto date certain irregularities were noticed in the account and on verification it was found that cheques purporting to bear the signature of the Managing Director were encashed, though they did not bear ‘his signature. A complaint was lodged by the respondent Company with the police and a special audit of the company’s accounts for the years 1957-58 to 1960-61 by a firm of Chartered Accountants disclosed that the second defendant had withdrawn a sum of Rs.3,26.047.92 under 42 cheques. A suit was filed for the recovery of the said amount on the plea that the amounts as per the forged cheques were not utilised for the purpose of the respondent company. that they were not authorised ones. that there was no acquiescence or ratification open or tacit on the part of the respondent company and that the respondent was unaware of the fraud till the new accountant discovered it.

Defence of the Bank about forged cheques:

The appellant-bank resisted the suit on the grounds:

(1) that the cheques were not forged ones;
(2) that even if they were forged cheques the company was not entitled to recover the amount on account of its own negligence;
(3) that there was settlement of accounts between the parties from time to time and as such. the company was not entitled to reopen the same and claim the sums paid under the cheques; and
(4) that the suit was barred by limitation.

The second defendant pleaded that the forged cheques were utilised for the purpose of the company. The trial Court negatived the contentions of the bank and passed a decree in respect of forged cheques, for the sum claimed with interest at 6%. In appeal the Division Bench confirmed the judgment of the trial court but as the case involved substantial questions of law of general public importance it granted a certificate to file the appeal.

Appeal to Supreme Court by Bank:

In the appeal before Supreme Court it was contended on behalf of the appellant that:

(1) after reasonable opportunities are given to the customer to examine the bank statements, its debit entries should be deemed to be final and will not be open for reconstruction to the detriment of the bank;

(2) a representation may be made either by statement or by conduct, and conduct included negligence, silence, acquiescence or encouragement, and if a customer of a bank, by his negligence, to give timely information of forged cheques, allows amount to be drawn on such cheques. the debit will stand for the whole amount and the consumer will be estopped from claiming the amount; and

(3) inaction for a long period would amount to such negligence as would persuade a court to impute to the customer with knowledge or at any rate constructive knowledge, to decline him relief in an action for recovery of amounts which would be to the detriment of an innocent party, namely, the bank.

Duty of Bank towards customer:

Forged cheque is without mandate:

1. When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by the cheque. However. if the signature on the cheque is not genuine. there is no mandate on the bank to pay. The bank. when it makes payment on such a cheque, cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it. This is because a document in cheque form. on which the customer’s name as drawer is forged. is a mere nullity.

Relationship between the customer and bank:
2. The relationship between the customer of a bank and the bank is that of a creditor and debtor. When a cheque presented for encashment contains a forged signature the bank has no authority to make payment against such a forged cheque. The bank would be acting against law in debiting the customer with the amounts covered by such cheques. When a customer demands payment for the amount covered by such forged cheques, the bank would be liable to pay the payment to the customer. The bank can succeed in denying payment only when it establishes that the customer is disentitled to make a claim either on account of adoption, estoppel or ratification.
Negligence, Estoppel, acquiscence or ratification about forged cheques:
For negligence to constitute an estoppel. it is necessary to imply the existence of some duty which the party against whom estoppel is alleged owes to the other party. There is a duty of sorts on the part of the customer to inform the bank of the irregularities when he comes to know of it. But by mere negligence. one cannot presume that there has been a breach of duty by the customer to the bank. The customer should not by his conduct facilitate payment of money on forged cheques. In the absence of such circumstances. mere negligence will not prevent a customer from successfully suing the bank for recovery of the amount.
4. In order to sustain a plea of acquiescence, it is necessary to prove that the party against whom the said plea is raised. had remained silent about the matter regarding which the plea of acquiescence is raised. even after knowing the truth of the matter.
Inaction by customer is irrelevant:
5. There is no duty for a customer to inform the bank of a fraud committed on him, of which he was unaware. Nor can in-action for a reasonably long time in not discovering fraud or irregularity be made a defence to defeat a customer in an action for loss.
6. There is no duty on the part of the customer to intimate the banker about any error that may be seen in the pass book and he will be entitled to claim any amount paid on a forged cheque though there may be some negligence or in-action on his part in not being careful to discover the errors in the pass book or other documents.
7. Banks do business for their benefit. Customers also get some benefit. If banks are to insist upon extreme care by the customers in minutely looking into the pass book and the statements sent by them, no bank perhaps can do profita- ble business. It is common knowledge that the entries in the pass books and the statements of account sent by the bank are either not readable. decipherable or legible. There is always an element of trust between the bank and its customer. The bank’s business depends upon this trust.
Knowledge of customer about forgery:
8. Whenever a cheque purporting to be by a customer is presented before a bank it carries a mandate to the bank to pay. If a cheque is forged there is no such mandate. The bank can escape liability only if it can establish knowledge to the customer of the forgery in the cheques. In-action for continuously long period cannot by itself afford a satisfactory ground for the bank to escape the liability.

Knowledge about forged cheques:

9. In the present case. during the relevant period when 42 cheques were encashed, the company did not know anything about the sinister design of the second defendant. Since the bank had not proved to the satisfaction of the court that the company had with full knowledge acknowledged the correctness of the accounts for the relevant period the case of acquiescence cannot be flourished against the company. There is no evidence to show that any one other than the second defendant knew that the forged cheques had been encashed. After the matter was discovered immediate action was taken. Therefore, in the absence of any evidence of the respondent-company’s involvement. it cannot be non-suited on the ground of negligence or in-action. Unless the bank is able to satisfy the court of either an express condition in the contract with its customer or an unequivocal ratification it will not be possible to save the bank from its liability.

[Source: Canara Bank vs Canara Sales Corporation, AIR 1987 SC 1603, 1987 SCR (2)1138.(Supreme Court of India)]