Background

Section 17(1) of the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”), confers the Debt Recovery Tribunal (“DRT”) with exclusive jurisdiction, power and authority to entertain and adjudicate applications from banks and financial institutions for recovery of debts due, and claimed by such banks and financial institutions. The adjudication provided by the DRT under the RDB Act is intended to be a quicker and summary procedure, allowing for banks and financial institutions to conduct recovery proceedings against defaulters without being subjected to the lengthy procedural rigors of a civil suit.

However, lack of clarity in the definitions of ‘debt’ and ‘financial institution’ in the original RDB Act led to the exclusion of certain debt instruments from its ambit, such as debentures, and the debenture trustees empowered to initiate recovery actions thereunder. The legislature sought to address these issues in 2016 when it introduced an amendment to the RDB Act (“2016 Amendment”), which amended the definitions of ‘debt’ and ‘financial institution’, and also introduced the definition of the term ‘debt securities’. Despite this, the RDB Act still creates an artificial distinction between unlisted and listed debentures, and secured and unsecured debentures; where recovery of amounts due in respect of unlisted and unsecured debentures to be enforced by a debenture trustee is still not within the scope of the RDB Act. The same is analysed further in this article.

Position Prior To The 2016 Amendment

Prior to 2016, Section 2(g) and 2(h) of the RDB Act defined ‘debt’ and ‘financial institutions’ in the following terms:

‘debt’ – means any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application.

‘financial institution’ – means

(i) a public financial institution within the meaning of Section 4A of the Companies Act, 1956 (1 of 1956);

(ia) the securitisation company or reconstruction company which has obtained a certificate of registration under sub-section (4) of Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(ii) such other institution as the Central Government may, having regard to its business activity and the area of its operation in India, by notification, specify;

Pertinently, Section 18 of the RDB Act enacts that no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution) in relation to the matters specified in Section 17 of the RDB Act.

In the case of Krishna Filaments Ltd. v. Industrial Development Bank of India (Debenture Trustees),[1] IDBI had brought a suit for recovery of dues in respect of debentures issued by the Appellant. IDBI was a ‘financial institution’ within the meaning of the RDB Act. However, it brought a suit not for itself but in the capacity of a debenture trustee acting on behalf of the debenture holders. On these facts, the Bombay High Court held the phrase ‘any liability claimed by a bank or financial institution’ in Section 2(g) of the RDB Act must be construed to mean a claim made by the bank or financial institution on its own behalf. Accordingly, the Court held that the claim brought by IDBI as debenture trustee and on behalf of the debenture holders was not a claim by a ‘bank’ or ‘financial institution’ within the meaning of the RDB Act.

The ratio in Krishna Filaments was approved by a full bench of the Bombay High Court in ICICI Bank Ltd. v. Unimers India Ltd.[2] The full bench further observed that a debenture trustee was not included in the definition of ‘financial institution’ under Section 2(h) of the RDB Act.

Accordingly, the settled position under the RDB Act (as it then stood) as regards debentures was as follows:

1. Debentures issued to banks or financial institutions may be within the scope of the RDB Act, but a debenture trustee is not a financial institution per se, and therefore cannot file an application before the DRT under Section 17(1) of the RDB Act.
2. A financial institution acting as debenture trustee for debentures issued to persons other than a bank or financial institution will not be able to file an application before the DRT, since the debt is not one which is due to a bank or financial institution.

This position was in line with the settled law that when a statute provides for the dual requirements of both personal and subject-matter jurisdiction, the dispute thereunder cannot be adjudicated if either of the requirements is not satisfied.[3]

Position after the 2016 Amendment

The RDB Act, was amended with effect from September 1, 2016. In particular, the definition of ‘debt’ under Section 2(g) was amended in the following terms:

(g) “debt” means any liability (inclusive of interest) which is claimed as due from any person  or a pooled investment vehicle as defined in clause (da) of Section 2 of the Securities Contracts (Regulation) Act, 1956, by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application  [and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities or] [Emphasis supplied];

Further, the 2016 Amending Act introduced Section 2(ga) which defined debt securities to mean–

‘(ga) “debt securities” means debt securities listed in accordance with regulations made by the Securities Exchange Board of India under the Securities and Exchange Board of India Act, 1992;’

The definition of ‘Financial Institution’, under Section 2(h) was also amended and now reads as follows:-

(h) “financial institution” means—

(i) a public financial institution within the meaning of Section 4A of the Companies Act, 1956 (1 of 1956);

[(ia) the securitisation company or reconstruction company which has obtained a certificate of registration under sub-section (4) of Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);]

[(ib) a debenture trustee registered with the Board and appointed for secured debt securities;]

(ii) such other institution as the Central Government may, having regard to its business activity and the area of its operation in India, by notification specify;

Pursuant to the 2016 Amendment, the definition of ‘financial institution’ under Section 2(h) now includes a debenture trustees provided it meets the twin criteria of:

1. registration with the Board (viz., SEBI); and
2. Appointment in respect of secured ‘debt securities’.

The definition of ‘debt securities’ then assumes importance in this backdrop, which has been defined under Section 2(ga) to mean, ’debt securities listed in accordance with regulations made by the SEBI under the SEBI Act, 1992’.

Therefore, for a debenture trustee to be considered as a financial institution under the RDB Act, it must necessarily be appointed only for debentures which are listed and secured. This leads to an anomaly where recovery under debentures which are due to a bank or a financial institution, which would expressly fall within the scope of ‘debt’ under the RDB Act, could not be taken before the DRT, only because they are unlisted or unsecured.

The legal position that a debenture trustee for unlisted or unsecured debentures is not a ‘financial institution’ is fortified by the factum of ‘financial institution’ under Section 2(h) being a ‘means’ definition. It is settled law that the use of ‘means’ renders a definition exhaustive and no other meaning can be assigned other than as laid down in the definition.[4] Therefore all other debenture trustees are excluded from this definition.

Conclusion

In view of the statutory position as it currently stands, in case of debentures in favour of a bank or financial institution, the judicial forum for initiating recovery proceedings may be a civil court or the DRT, depending on the nature of the debentures. If the debentures are secured and listed, then the debenture trustee may initiate recovery proceedings before the DRT. If not, then the debenture trustee is constrained to approach a civil court by way of a suit for recovery of the debt due.

Footnotes:

[1] Krishna Filaments Ltd. v. Industrial Development Bank of India (Debenture Trustees), 2004 SCC OnLine Bom 14

[2] ICICI Bank Ltd. v. Unimers India Ltd., 2016 SCC OnLine Bom 258

[3] Margret v Bombay Catholic, (2012) 5 SCC 642, paragraph 27.

[4] P. Kasilingam v. P.S.G. College of Technology, 1995 Supp (2) SCC 348