Lending is challenging, recovery is tricky

“We are governed by a rule of law in the country. The recovery of loans or seizure of vehicles could be done only through legal means”, said Justice A R Lakshmanan of the Supreme Court, in the case of Manager, ICICI Bank Ltd vs Prakash Kaur & Ors.

However, a question arises whether an action under the law enacted by Parliament can be characterised as abetment to suicide. This pivotal issue is under scrutiny, prompted by the suicide by art director Nitin Desai and the Raigad police registering an FIR against officials from ECL Finance and Edelweiss Group under Section 306 (abetment of suicide) of Indian Penal Code .

Undoubtedly, recovery is intertwined with lending. Ensuring loan recovery relies on due diligence, and a realistic evaluation of project and its promoter. Despite best efforts defaults can occur due to various factors. In such situations it becomes imperative for promoters and lenders to collaboratively find resolutions. Finance comes with its set of costs by way of interest and other charges. Default makes things worse as this cost, in the absence of repayment, multiplies faster. When defaults persist without remedies, legal measures often become necessary.

The emotional attachment of promoters to a failing venture is a biggest hurdle in finding a solution. A timely call to let go can spare entrepreneurs from legal actions. Entrepreneurs must comprehend that borrowing might be accessible, but businesses must be able to sustain itself and the cost of loan.

Aggressive recovery tactics by agents led to the landmark judgment of ICICI Bank vs Shanti Devi Sharma & Ors case where the Supreme Court established guidelines for recovery agents, later followed by the Reserve Bank of India (RBI) directives. In view of this, the police's act of filing FIRs against high-ranking officials of a bank and financial institution in recovery matters warrants discussion.

In 2021, the arrest of former SBI Chairman Pratip Choudhuri by Rajasthan police over an aged transaction involving a non-performing account's sale to an asset reconstruction company (ARC), received a lot of criticism. The business ecosystem thrives on both financiers and entrepreneurs, necessitating protection against high-handed attitudes, be it from lenders or State agencies. Regulatory bodies such as the vigilance commission, the CBI, the RBI, and internal bank inspection mechanisms not only question lending decisions but also initiate disciplinary actions in the absence of timely recovery initiatives.

Insite of assurances, lenders routinely face challenges when recovery actions are taken, even though apex court has clearly laid down that in case of charges under Section 306, “it would have to be objectively seen whether the allegations made could reasonably be viewed as proper allegations against the appellant/accused to the effect that he had intended or engineered the suicide of the concerned person by his acts, words etc”.

This judgment was followed by the Bombay High Court in Amit S/o Ashok Naharkar vrs State of Maharashtra, where it was observed that “an abetment involves mental process of instigating the person or intentionally aiding the person for doing of a thing. Without a positive act on the part of the accused in aiding or instigating or abetting the deceased to commit suicide, the said person cannot be compelled to face a trial”.

In another case, the Bombay High Court’s Nagpur Bench held that “the demand of outstanding loan amount from the person who was in default in payment of loan amount, during the course of employment as a duty, at any stretch of imagination cannot be said to be any intention to aid or to instigate or to abet the deceased to commit the suicide”.

In this case, Edelweiss has reportedly continued proceedings initiated by prior ARCs under the Insolvency and Bankruptcy Code, 2016 (IBC). Action under the IBC has become a common avenue to address defaults of corporates. This process allows businesses to begin anew albeit with change in management. Although the corporate resolution process under the IBC may not resolve liability of promoters under a guarantee, it can resolve their default by initiating insolvency process and embark on a fresh start post-completion of such process.

Thus, pointing fingers at lenders isn't the solution; instead, the key lies in prudent borrowing and successful resolutions.

(Mukesh Chand is Senior Counsel, Economic Laws Practice.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.