What is the best legal defence in DRT cases?

In Debt Recovery Tribunal (DRT) cases, the primary objective of the tribunal is to expedite the recovery of debts by banks and financial institutions. However, a borrower or guarantor facing proceedings in the DRT has several legal defenses available to contest the claims made by the creditor. The best legal defense in a DRT case depends on the specific facts of the case, but key strategies include challenging the validity of the loan, disputing the amount claimed, and highlighting procedural lapses. Below is a detailed explanation of various defenses that can be employed in DRT cases:

1. Challenge the Validity of the Loan Agreement

A borrower can question the enforceability of the loan agreement by highlighting any defects in the execution of the contract. The following are common defenses:

• Lack of proper documentation: If the creditor has not provided the proper loan documentation, this can be a strong defense. For instance, missing or incorrectly executed loan agreements, guarantees, or other essential documents can challenge the creditor's claim.
• Fraud or Misrepresentation: If the loan was obtained through fraud or misrepresentation, or if the bank engaged in any unethical practices during the process, the borrower can use this as a defense.
• Unfair Terms or Vitiated Consent: A borrower can argue that the loan agreement contained unfair terms or that the contract was signed under duress or undue influence, making the contract voidable under Indian Contract Law.

2. Dispute the Amount Claimed

One of the most effective defenses in a DRT case is to contest the quantum of the amount claimed by the creditor. This can be done in several ways:

• Incorrect Calculation of Interest: Banks and financial institutions often make mistakes in calculating the interest owed. If the borrower can show that the bank’s interest calculation is incorrect, the amount claimed can be significantly reduced.
• Unreasonable Fees and Charges: Many banks levy high processing fees, penalty interest, or late payment fees. Borrowers can challenge these as unreasonable or exorbitant, which can also reduce the amount claimed.
• Repayments not accounted for: If the borrower has made payments toward the loan that the bank has not acknowledged, this can be used as a defense. Proper documentation, such as bank statements, can be essential here.

3. Non-Compliance with SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is one of the primary laws banks use to recover debts by selling the borrower’s secured assets without approaching the courts. If the creditor has initiated proceedings under this law, the borrower can challenge non-compliance with the procedural requirements of the SARFAESI Act:

• Invalid Notice under Section 13(2): The bank must serve a valid demand notice under Section 13(2) of the SARFAESI Act, allowing the borrower 60 days to repay the dues. Any defect in the notice (such as incorrect amounts or improper delivery) can invalidate the entire process.
• Improper Asset Valuation: When secured assets are sold to recover the debt, they must be sold at fair market value. Borrowers can challenge the sale process if the assets were undervalued or not sold in a transparent manner.
• Lack of opportunity for a hearing: The borrower must be given an opportunity to respond to the bank’s claims and present their case. If the bank denies this opportunity, it is a violation of the borrower’s rights.

4. Dispute the Legitimacy of the Recovery Process

There are specific legal guidelines that banks and financial institutions must follow when initiating recovery proceedings. Any deviation from these guidelines can be a valid defense:

• Statutory Time-Barred Debt: Under the Limitation Act, 1963, if a creditor fails to file a recovery suit within three years from the date when the debt became due, the debt claim becomes time-barred. A borrower can challenge the claim if the creditor files the case beyond this limitation period.
• Abuse of Process: Borrowers can also raise defenses based on the abuse of process by the bank, such as harassment, threatening behavior, or forcing early foreclosure of loans in a manner not compliant with laws or contractual terms.

5. Insolvency Defense

A borrower can file for insolvency under the Insolvency and Bankruptcy Code (IBC), 2016, as a defense to DRT proceedings. If a borrower is declared insolvent, the creditor's claim can be stayed, and the matter would then proceed under the IBC framework, where the borrower can propose a resolution plan for repayment.

6. Lack of Proper Authorization for Filing the DRT Application

Sometimes, the recovery application is filed by unauthorized officers of the bank or financial institution. It is mandatory for the creditor to authorize a competent officer to file the case on behalf of the institution. Borrowers can question the authority of the person filing the application if there is no proper authorization, which could lead to the dismissal of the case.

7. Defense Based on Violation of RBI Guidelines

The Reserve Bank of India (RBI) periodically issues guidelines that banks must follow, especially concerning non-performing assets (NPA), loan recovery methods, and settlement processes. If the bank has violated any of these guidelines, such as failing to follow proper procedures for declaring an account as an NPA, this can be raised as a defense.

• Failure to Restructure Loan as per RBI Circulars: Borrowers can also defend against DRT claims by arguing that the bank failed to consider restructuring or settlement proposals as mandated by RBI guidelines for stressed assets.

8. Counterclaims Against the Bank

In some cases, borrowers may have valid counterclaims against the bank for damages or other causes. For example, if the bank’s actions resulted in significant harm to the borrower’s business, the borrower can file a counterclaim for damages. A strong counterclaim can often lead to a settlement or even dismissal of the DRT application.

9. Settlement or One-Time Settlement (OTS) Offers

If a borrower has made an offer for a one-time settlement (OTS) that the bank has not considered, this can be used as a defense. Courts may consider that the borrower acted in good faith to repay the loan, but the bank was unreasonable in rejecting the offer.

10. No Default or Full Payment Defense

In some instances, a borrower may have already repaid the loan amount in full, or there may be no default. The borrower can argue that the creditor’s claim is frivolous or baseless.

11. Non-Secured Assets

If the loan is unsecured, the bank cannot invoke SARFAESI for the recovery of the dues. The borrower can argue that the bank cannot proceed against unsecured loans under this law and must instead proceed with traditional debt recovery proceedings.

Conclusion

The best legal defense in a DRT case depends on the facts of each case. Borrowers should carefully analyze the loan agreement, repayment records, the actions of the creditor, and compliance with relevant laws. Engaging an experienced lawyer who understands DRT proceedings is critical to mounting an effective defense. By challenging the validity of the loan, disputing the amount claimed, highlighting procedural lapses, and possibly filing counterclaims, borrowers can improve their chances of success in defending against debt recovery proceedings in the DRT.

Disclaimer: This information is intended for general guidance only and does not constitute legal advice. Please consult with a qualified lawyer for personalized advice specific to your situation.

Adcocate J.S. Rohilla (Civil & Criminal Lawyer in Indore)

Contact: 88271 22304

www.jsrohilla.com