The Karnataka High Court has held that proceedings initiated by Canara Bank against Rajesh Exports Limited before the Debts Recovery Tribunal (DRT) are maintainable, rejecting the company’s contention that no borrower-banker relationship existed between the parties.
The bench of Justice M. Nagaprasanna ruled that the dispute falls within the broad definition of “debt” under the Recovery of Debts and Bankruptcy Act, 1993, and therefore lies within the jurisdiction of the DRT.
A batch of writ petitions were filed by Rajesh Exports Limited and its directors challenging various actions initiated by Canara Bank, including SARFAESI proceedings, insolvency proceedings before the National Company Law Tribunal (NCLT), and wilful defaulter proceedings.
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Rajesh Exports contended that it had been associated with Canara Bank since 1989 and had maintained substantial cash deposits with the bank. According to the company, it availed Foreign Letters of Credit (FLCs) against such deposits and had not obtained any term loan or conventional credit facility from the bank. The company alleged that bank officials made erroneous entries and unauthorized foreign exchange payments, resulting in a debit balance being created in its account.
The company further alleged that instead of rectifying the errors, the bank sought recovery of amounts allegedly due and initiated proceedings under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act. Rajesh Exports challenged these actions before the High Court.
The dispute involved substantial financial claims. While Canara Bank claimed approximately ₹427.30 crore from the company, Rajesh Exports asserted a claim exceeding ₹20,456 crore against the bank. The company also pointed out that it had provided security exceeding 142% of the bank’s alleged claim through deposit of title deeds.
The principal question before the Court was whether the relationship between the parties gave rise to a “debt” recoverable before the DRT. Rajesh Exports argued that there was no borrower-banker relationship and therefore the DRT lacked jurisdiction to entertain recovery proceedings. According to the company, the transactions relating to letters of credit could not be treated as a debt under the 1993 Act.
Canara Bank, on the other hand, contended that the issuance of letters of credit involved financial exposure on the part of the bank and created enforceable liabilities. The bank maintained that the transactions clearly fell within the ambit of “debt” and were therefore recoverable before the DRT.
The High Court examined the definition of “debt” under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, which broadly covers liabilities claimed as due by a bank or financial institution. The Court noted that the provision is not confined only to conventional loan transactions but extends to various forms of financial liabilities recoverable by banks.
Justice Nagaprasanna relied heavily on the Supreme Court’s decision in Eureka Forbes Ltd. v. Allahabad Bank, where the apex court held that the definition of debt under Section 2(g) should receive a liberal interpretation and is not restricted to traditional creditor-debtor relationships.
The High Court observed that the Supreme Court had clarified that claims maintainable before the DRT are not limited to mortgage or loan transactions and that the expression “debt” is intended to be interpreted broadly to advance the objectives of the recovery legislation.
Applying the Supreme Court’s interpretation, the Court rejected Rajesh Exports’ argument that transactions involving letters of credit do not create recoverable debts. It held that financial exposure arising from letters of credit and related banking arrangements falls within the statutory definition of debt and can be pursued before the DRT.
The Court specifically held that the jurisdiction of the DRT extends beyond conventional borrower-banker disputes and covers “every other relationship of debt between the banker and its customer.” Consequently, the recovery proceedings initiated by Canara Bank could not be said to be without jurisdiction.
Having concluded that the DRT possessed jurisdiction, the High Court declined to interfere in the pending proceedings. The Court observed that if Rajesh Exports was aggrieved by orders passed by the DRT, including attachment orders affecting company shares, the appropriate remedy was to approach the Debts Recovery Appellate Tribunal (DRAT) under the statutory framework rather than invoke writ jurisdiction.
The Court therefore held that the writ petitions were not maintainable and dismissed them, leaving it open to the company to pursue remedies before the appellate forum provided under the law.
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