The recovery of vehicles by the financier not an offence - SC

Special Leave Petition (Crl.) No. 8907  of 2009

Anup Sarmah (Petitioner) Vs Bhola Nath Sharma & Ors.(Respondents)

The petitioner submitted that  respondents-financer had forcibly taken away the vehicle financed by them and  illegally deprived the petitioner from its lawful possession  and  thus,  committed  a crime. The complaint filed by the petitioner had been  entertained  by  the Judicial Magistrate (Ist Class), Gauhati (Assam) in Complaint Case  No.  608 of 2009, even directing the interim custody of the vehicle (Maruti  Zen)  be given to the petitioner vide order dated  17.3.2009.  The respondent on approaching the Guwahati High  Court against this order, the hon'ble court squashed the criminal  proceedings  pending   before  the  learned Magistrate.

After hearing both sides, the Hon'ble Supreme Court decided on 30th October, 2012 that the  law  can  be  summarised  that  in  an agreement of hire purchase, the purchaser remains  merely  a  trustee/bailee on behalf of the financier/financial institution and ownership remains  with the latter. Thus, in case  the  vehicle  is  seized  by  the  financier,  no criminal action can be taken against him as he is  re-possessing  the  goods owned by him.

The decision comes as a major relief to banks and financial institutions. They will not face any criminal action for taking away a vehicle anytime before it is transferred in the buyer's name after he has made full payment.

The bench pointed out that the Supreme Court had, in a number of judgments in the past, quashed criminal proceedings against financiers in such cases.

In the Trilok Singh case in 1979, the SC had quashed the criminal case against the financier who had taken away a truck from a buyer after there was a default in the payment of loan.

In 1996, the apex court went a step further and held in the K.A. Mathai case that the financier had a right to resume possession "even if the hire-purchase agreement does not contain a clause of resumption of possession".

The ruling in the Anup Sharma vs Bhola Nath Sharma & other case, will strengthen the hands of asset-financing non-banking financing companies, say industry observers.

It should be noted that while the appellants have challenged the use of 'force', the court has never referred to it. Can this be a tactit agreement to force by court?

This problem of need to recover due payments by banks and complains from the borrowers of hooliganism of their recovery agents is well known and a serious matter.

In 2007, in Manager, ICICI Bank Ltd. vs. Prakash Kaur & Ors the Supreme Court held that

...Banks have right to recover loans, but only through legal means,” the Bench comprising Justices A R Lakshmanan and Altamas Kabir made it clear, as it asked for the guidelines issued by Reserve Bank of India and Indian Bank Association on the issue of recovery of loans by defaulters.

The Bench was hearing an appeal filed by India’s largest private bank, ICICI, against an Allahabad High Court order, rejecting its plea to quash the criminal cases registered by the Uttar Pradesh Government against the managing director and other top officials for allegedly using criminal force against a loan defaulter. The case was registered at the instance of the High Court there on a complainant from an owner that the bank had sent musclemen to seize the vehicle for non-payment of loan instalments.

Coming down heavily on the recent trend of hiring musclemen and employing goondas for making recoveries at times, even forcibly taking away vehicles purchased on loans, it said: “We will have to stop this practice.”

While these sentiments are laudable, we are all aware of where the main fault lies. The legal system itself.

On a petition filed by Citicorp Maruti Finance Ltd challenging a Citicorp.Maruti Finance Ltd. vs S.Vijayalaxmi July 2007 decision of the National Consumer Disputes Redressal Commission upholding a state commission's verdict. The state commission had increased the punitive damage on Citicorp Maruti Finance Ltd from Rs 5,000, which was imposed by the district forum, to Rs 50,000.

The case related to a hire-purchase agreement between one S Vijaylaxmi and Citicorp Maruti Finance Ltd for purchase of a Maruti Omni van. When she defaulted repeatedly and failed to honour payment of even a mutually settled amount, the financier took away the van with prior information to the police. It later sold off the vehicle. Vijaylaxmi approached the district forum and complained of deficient service.

Writing the judgment for the bench Dated: 14.11.2011, Justice Kabir agreed that till the time the loans were paid in its entirety and ownership had not been transferred to the purchaser, the financier normally continued to be the owner of the vehicle.

"But that does not entitle him (the financier) on the strength of the agreement to take back possession of the vehicle by use of force. The guidelines which had been laid down by Reserve Bank of India as well as the appellant bank (Citicorp Maruti Finance Ltd) itself, in fact, support and make a virtue of such conduct," the bench said.

If any financier of a vehicle resorts to force to take back possession in violation of such guidelines or principles as laid down by the Supreme Court, "such an action cannot but be struck down", the bench said in its judgment.

However in a brilliantly argued judgement, the Calcutta High Court in 2009 n G.E. Capital Transportation Financial Services Ltd vs Samir Koley decided that :-

If the owner of a vehicle, a moveable property, himself by agreement conceded to give right to the financier to take possession of the same in case of default in payment of instalments and in exercise of that right, the financier takes possession without committing any offence and without violating any law of the land, the hirer cannot take the shelter of Article 300A of the Constitution of India and complain that he was deprived of his property without authority of law. The position would have been different if any specific law was enacted by the legislature providing procedure for recovery of the vehicles in this situation and in such circumstances, the hirer could complain that his vehicle should be recovered only in accordance with that provision of the Statute........Till today no such law has been enacted laying down any procedure for taking possession of the vehicle in case of default, as a result, the Supreme Court in the case of Manager, ICICI Bank Ltd. vs. Prakash Kaur & Ors. reported in 2007(1) Crimes 407(SC) expressed its desire that law should be enacted for the purpose of handling this type of disputes and a separate wing should be created wherein appropriate training should be given in accordance with the RBI guidelines which would facilitate the bank in its recovery process and also would provide more responsibilities to the persons so engaged. Notwithstanding such anxiety expressed by the Supreme Court in the said decision, till today no law has been enacted recommending any process of taking possession of the vehicle by a financier in the case of admitted default where the hirer agreed to lose his right to possess the vehicle. We, therefore, find no substance in the contention of the Mr. Roy Chowdhury that even though his clients in those two cases expressly authorised the financier to take possession in case of default, the financier cannot, except by filing a suit, recover the vehicle pursuant to the agreement.

Based on the suggestions of the Supreme Court, RBI came out with Guidelines for Loan Recovery Agents of scheduled banks.in 2008

The salient points are

>They have to undergo a mandatory training period of 100 Hours in etiquette.

>They can not call you between 7 p.m. to 7 a.m.

>They can not talk with anyone else about your loan, including your family members.

>On the phone they can call you a maximum ’1' number of times.

>They can not visit your house or make a demand for repayment if there is a function in progress in your house.

And in 2011, came out with fair practise code for NBFCs which states :-

......

As complaints from customers also include rude behavior from the staff of the companies. NBFCs shall ensure that the staff are adequately trained to deal with the customers in an appropriate manner.

(ix) Clarification regarding repossession of vehicles financed by NBFCs

NBFCs must have a built in re-possession clause in the contract/loan agreement with the borrower which must be legally enforceable. To ensure transparency, the terms and conditions of the contract/loan agreement should also contain provisions regarding: (a) notice period before taking possession; (b) circumstances under which the notice period can be waived; (c) the procedure for taking possession of the security; (d) a provision regarding final chance to be given to the borrower for repayment of loan before the sale / auction of the property; (e) the procedure for giving repossession to the borrower and (f) the procedure for sale / auction of the property. A copy of such terms and conditions must be made available to the borrowers in terms of circular wherein it was stated that NBFCs may invariably furnish a copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement to all the borrowers at the time of sanction / disbursement of loans, which may form a key component of such contracts/loan agreements.

...........

iii. Non-Coercive Methods of Recovery

As specified in the NBFC-MFIs (Reserve Bank) Directions, 2011, recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on 2 or more successive occasions.

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But however subtle it may be but loan recovery will always involve some element of pressure and coercion because it involves a borrower who has defaulted and the money has to be recovered from him. Bankers believe that without sufficient incentives and targets, the recovery procedure won't be possible at all. Loan recovery process is just like another job where targets are set and incentives are paid to those who achieve the targets. But all this should be within the legal framework and a line should be drawn between the acceptable and the avoidable.

 The RBI guidelines that every borrower should be informed about the loan recovery agents, only one number should be used to make recovery calls, borrowers shouldn't be contacted during odd hours and the process should be carried in a 'civilized' way are definitely good but leave much room for manipulation.

A defaulter will definitely avoid phone calls and will have to be pursued to get back the money. This will often involve some tracing and tracking of the borrower even if it means contacting him at odd hours. Another concern of the bankers is that willful defaulters will use these guidelines to get around the entire loan recovery process by crying foul every time they are confronted by such efforts. They can claim being harassed by the agents whenever they are reminded about overdues or default.

What needs to be understood here is that loan recovery is an essential part of lending process and adherence to the rule of law and avoidance of intimidation and questionable methods will definitely help. Properly trained loan recovery officers following the RBI's guidelines in both letter and spirit, will help rebuild the confidence among borrowers.