Right Of Borrower To Initiate Proceedings Against A Bank Or Financial Institution In A Civil Court ' Conflict Resolved By The Supreme Court

• Published date: 22 November 2022
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Khaitan & Co LLP
• Author: Mr Thriyambak Kannan and Aditya Mukerjee

On 10 November 2022, a three Judge bench of the Supreme Court of India ("SC") in Bank of Rajasthan Limited v. VCK Shares & Stock Broking Services Limited, 2022 SCC OnLine SC 1557, resolved the conflict regarding the position of a suit instituted by a borrower against a bank while a bank's claim was pending before DRT. The conflict arose as there where varying judicial views and hence a reference was made to a three-judge bench.

BACKGROUND

In the facts, Bank of Rajasthan Limited ("Bank") sanctioned a term loan to VCK Shares & Stock Broking Services Limited ("Borrower") in 1994. A further credit overdraft facility was granted in 1995 ("OD"). The OD was secured by the pledge of shares, stocks, and securities of various companies. Owing to the Borrower's default, the Bank instituted proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ("RDB Act") before the Debts Recovery Tribunal, Kolkata ("DRT") seeking recovery of its dues. The Borrower entered appearance before the DRT and additionally filed a civil suit before the Calcutta High Court ("HC") against the Bank seeking inter alia, a decree for sale of the pledged shares and recovery of sale proceeds. Thereafter the Bank sold the pledged shares to adjust the amounts against the dues, in response to which the Borrower filed a second civil suit before the HC seeking inter alia, a declaration that the sale of shares was void along with a decree for return of pledged shares and a declaration that no sum was payable by the Borrower to the Bank.

The Bank filed applications seeking dismissal of the suits on the ground that the suits were not maintainable and that the HC lacked jurisdiction as the same vested with the DRT. The HC, in the first instance allowed the Bank's applications, but on appeal, the finding was overturned. Aggrieved, the Bank appealed to the SC.

The reference arose in 2014 noticing an apparent conflict of views in the judgments of the SC in United Bank of India, Calcutta v. Abhijit Tea Co. Pvt. Ltd., (2000) 7 SCC 357, ("Abhijit Tea"); Indian Bank v. ABS Marine Products (P) Ltd., (2006) 5 SCC 72, ("ABS"); State Bank of India vs. Ranjan Chemicals Ltd., (2007) 1 SCC 97, ("Ranjan Chemicals") and Nahar Industrial Enterprises Ltd. v. Hong Kong and Shanghai Banking Corporation, (2009) 8 SCC 646 ("Nahar"). Abhijit Tea held that jurisdiction was conferred upon the DRT to try a counterclaim and set-off under Section 19 of the RDB Act. However, in ABS it was held that...