“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash
Recently, The Parliament has passed “the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill” by voice vote. The Bill, approved by Lok Sabha in first week of the August, 2016 and cleared by Rajya Sabha on 10th of August, 2016, amends four laws – the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest of 2002, the Recovery of Debts due to Banks and Financial Institutions Act 1993, the Indian Stamp Act 1899 and the Depositories Act 1996.
The Bill empowers banks to confiscate security in the case of loan default, a development that assumes significance in view of the episode surrounding industrialist Vijay Mallya. In recent times, the banks have been busy with a spate of legal cases to declare Vijay Mallya and Kingfisher Airlines as wilful defaulters.
RBI norms allow banks to classify a borrower as a wilful defaulter if he defaults in loan payment despite having the capacity to pay or has diverted the funds or has defaulted in repayment and has also disposed of assets given as security without the bank’s knowledge. However, the Bill will not apply to loans for agricultural land as well as student loans.
WHEN A DEFAULTED LOAN AMOUNTS TO CRIMINAL LIABILITY
A default to honour commitments to repay borrowed funds amounts to a breach of contract. Any breach of contract to repay debt is not a crime. The only right of the aggrieved party is to approach the civil court to attach and sell securities or other unencumbered properties and recover the defaulted loan. Mere breach of contract cannot give rise to criminal prosecution under the provisions of The Indian Penal Code, 1860. If it is established that the intention of the accused was dishonest at the time of entering into an agreement, then the liability will be criminal and the accused will be guilty of cheating. But if all that is established is that the representation made by the accused has not been kept, criminal liability cannot be fastened on the accused and the only right the complainant acquires is a money decree for the defaulted loan.
Hence, in cases where borrowers have commenced business or manufacturing activity with loans from banks and if a default is due to a downturn in the economy, or failure of the business enterprise, or defect in product, or glut in the market, or any other similar reason, then such defaults will not amount to cheating.
RBI has introduced the concept of ‘wilful defaulter’ and the following categories of borrowers are treated as wilful defaulters:
- Unit defaulting inspite of having the capacity to pay; or
- Diversion of funds; or
- Transfer or disposal of assets given as security without the knowledge of the bank.
The Companies Act, 2013, has created a new offence of fraud in relation to the affairs of a company, which provides that any act or omission, concealment of any fact or abuse of position committed by any person with intent to deceive or to injure the interest of the company or its shareholders or creditors, whether or not there is a wrongful gain or loss, can be investigated by Serious Fraud Investigation Office (SFIO) established under the Companies Act and any violation is punishable with imprisonment of up to 10 years. Cases of wilful defaults can, therefore, be entrusted to the SFIO to investigate whether such default amounts to serious fraud under the provisions of the Companies Act.
RIGHTS AS A LOAN DEFAULTER, AND HOW ONE CAN SET THE SITUATION RIGHT
STEPS TO BE TAKEN: There must be reason why you have not paid your EMIs for a few months. You may have lost your job, you may have had an emergency which consumed all your savings, you may have paid a huge amount on your education, for your home, or some other urgent requirement. Whatever may be the reason, if you are unable to make your payments, you could consider one of these many options –
- Defer your payments
- Reduce your EMI
- Restructure the loan
- One-time settlement
BENEFIT OF DOUBT GIVEN TO THE DEFAULTER: All borrowers are provided the opportunity and have the right to approach the bank if there is any difficulty in repaying the instalments and to choose an option to restructure their debt to enable a smooth repayment process.
Preliminary notices are sent to the borrower mentioning the amount overdue with interest and penal interest. If the bank has reason to believe that the customer is wilfully delaying the repayment, or if the customer has not come forward with a definite plan of action to repay the dues, the bank can opt for legal proceedings. If there is a guarantor, the bank might approach him, as according to the guarantor agreement, he is supposed to pay the loan when the applicant defaults.
THE REPERCUSSION OF DEFAULT: There are two major repercussions of failing to repay your debts –
- All credit-related information of loan owners and Credit Card users is sent to credit rating agencies. They know your credit history, end to end. This will make taking loans in the future difficult.
- The property which was used as collateral for the loan can be repossessed and later auctioned by the lender after following due legal process.
The Indian Lawyer and Allied Services