Legal Defences and Arguments in DRT Recovery Proceedings

Each debt recovery claim is unique. Legal defences and counterclaims depend on many factors including documents, facts, evidence, procedural history and applicable law. No outcome can be guaranteed. Below are some of the ways lawyers may assist clients:

REVIEWING THE CLAIM FOR RECOVERY FILED BY THE BANK

The DRT considers claims filed under DRBFITA by banks and financial institutions. A financial institution generally starts a recovery proceeding by filing an application with the Tribunal claiming an unpaid debt. Applications are usually based on financial transactions such as term loans, cash credit accounts, overdrafts, corporate loans, loans against property, project financing or other facilities.

The application may include loan agreements, sanction letters, account statements, guarantees and collateral agreements supporting the claim. The bank can also request interim orders to protect assets or restrain certain transactions from taking place pending the outcome of the recovery application.

Depending on the facts of the case, defendants should have an opportunity to appear and respond to the recovery claim. Defendants can challenge the lender’s factual and legal assertions, raise objections and possibly claim a set-off or file a counterclaim.

If successful, the Tribunal will enter an order based on its findings and issue a recovery certificate. Recovery certificates can be enforced by the Recovery Officer and various modes of recovery.

Legal Foster has lawyers who understand DRT law and process. Lawyers can help borrowers defend claims filed by banks and lending institutions. Representation can include responding to applications filed by the bank, discharge of liabilities and monitoring recovery enforcement.

UNDERSTANDING THE DRT PROCESS

Debt Recovery Tribunal has been given power under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRBFITA) to try and adjudicate upon applications filed by banks and financial institutions for recovery of debts.

This includes intervention by the Tribunal where legally permissible. Clients may be able to raise a set-off or file a counterclaim against the lender. The Tribunal evaluates evidence and hears legal arguments before making an order.

Clients should first review the procedural history of the case. Applications may have been filed by banks in multiple courts and tribunals.

SET OFF AND COUNTERCLAIMS UNDER SECTION 19 OF DRBFITA

A set-off is a claim for relief made against the applicant bank or financial institution in connection with the same transaction. While made by a defendant, the set-off must also be legally enforceable by the defendant.

For example, a borrower may have suffered losses due to the lender improperly classifying the account and denying further credit. The borrower may contend that the lender is liable to pay damages and seeks to set off the recovery claim.

If the borrower is successful in establishing a right of set-off, the Tribunal shall determine the set-off claim along with the main claim and make the appropriate order. Similarly, a defendant may present a counterclaim for relief related to the subject matter of the bank’s recovery application.

Technical errors or defenses may be available to defendants. Lawywers can prepare arguments and draft responses on the defendants behalf.

If an account was never sanctioned, became overdrawn due to bank error or if payments have been improperly applied, Defendants should consult an advocate and carefully review account records and supporting documents. Failure to respond or attend Tribunal hearings may result in orders being issued against the defendant.

Defense against Recovery Certificates and Execution Proceedings

This Article discusses DRT law and legal defences that can be raised by borrowers and guarantors in response to claims filed under DRBFITA. It explains different aspects of litigation before the Tribunal and includes tips on defending recovery applications.

Legal Foster has experience placing clients with lawyers who handle disputes including one-time settlement negotiations with banks, recovery applications and recovery certificate enforcement. While every legal dispute is unique, borrowers and defendants may be able to:

DISPUTING THE CALCULATION OF AMOUNT OWED

Lawyers begin by reviewing the lenders calculation of principal due and unpaid amounts. When claiming interest, penalty charges and accumulated fees banks must also provide a calculation of how these amounts have been determined.

Clients should understand how the bank or lending institution has determined the amount claimed is due and payable. Factors that could affect the amount claimed include:

THE AMOUNT OF MONEY OR VALUE OF PROPERTY SECURED TO BE DISBURSED

This refers to the money that was initially made available to the borrower when the loan was first disbursed. Not all of the amount sanctioned will necessarily have been withdrawn by the borrower.

If the borrower has made part repayments or if payments were made towards interest and penalties, this will affect the calculation of the debt claimed.

THE CONTRACTUAL RATE OF INTEREST OR DEFAULT INTEREST

Unless the loan agreement provides otherwise, most loan facilities provide for interest to be charged on the outstanding principal balance.

Clients should review the rate of interest the bank claims is payable and whether this rate was changed during the life of the loan. The bank must also account for interest that has been paid by the borrower.

PENAL INTEREST OR DEFAULT CHARGES ARISING UNDER THE LOAN AGREEMENT OR GUARANTEE

Banks commonly add unpaid interest, fees or penalties to the outstanding principal balance. This is known as capitalizing interest.

Lawyers can explain if interest has been capitalized and whether any additional fees have been charged by the bank. All bank charges included in the recovery amount should be supported by the loan agreement, guarantee deed and bank records.

OTHER BANK CHARGES, INCLUDING SERVICE FEES, INSURANCE PREMIUMS ETC

Adjustments can be made to lending accounts for payments made towards taxes, insurance premiums and third-party fees. Account statements should clearly reflect these deductions.

LEGAL EXPENSES INCURRED BY THE BANK IN CONNECTION WITH THE RECOVERY PROCEEDINGS

Clients should request the bank provides an itemised statement of the legal expenses it claims were incurred. Law firms charging contingency fees or agreed percentages of the lenders claimed amount should provide evidence of the fee arrangement.

AMOUNTS PAID DURING LOAN RESTRUCTURING AGREEMENTS OR SETTLEMENTS

Legal counsel should determine when the borrower made all payments required under any prior restructuring agreement. Any subsequent amounts claimed by the lender must be legally enforceable and properly supported.

OVERPAYMENTS OR SHORTFALLS AFTER THE ACCOUNT WAS CLASSIFIED AS AN NPA ACCOUNT

Have all payments been applied correctly by the bank? Sometimes borrowers have made payments that were not applied by the lender. Advances withdrawn but not accounted for by the borrower can also affect the calculation of the debt claimed.

TOTAL AMOUNT CLAIMED BY THE BANK AS OF THE DATE OF FILING

Taking the above information into account the lawyer can determine whether the debt claimed by the bank is accurate.

How Can a Lawyer Help with DRT Litigation?

Every case is fact specific. Remember that arguing the debt amount is incorrect does not prohibit the Tribunal from confirming the debt and issuing a recovery certificate.

Clients should avoid admitting liability at the first meeting with the bank. Providing a written statement allows clients to understand the specifics of the claim and preserve important rights.

Clients have a responsibility to provide full and accurate information to their lawyers. Failure to disclose adverse documents or facts to a lawyer can damage the defense if those documents are produced by the bank.

Assembling The Defense And Responding To The Recovery Application

Clients should review financial statements and determine what was paid, when it was paid and whether any payments are missing from the lenders records. Defendants should avoid making assumptions about the bank’s file. Careful examination of bank records can highlight errors, omissions and potential defenses.

Written Statement to Oppose Recovery Application

The borrower should answer material questions and objections in the written statement. With respect to allegations that are not specifically denied, the borrower should generally admit the banks assertions.

Denials should be clear and relate to issues that require proof. Generic denials may not serve as an effective defense.

Advocates help ensure clients provide a reasoned response to each of the banks pleadings. The Statement of Defence should refer to supporting documents where possible. Clients should not rely on oral promises made by bank officials.

Evidence may also be collected at the Tribunal’s request. The Tribunal has powers related to examination of witnesses, production of documents and admission of evidence on affidavit. Lawyers can help clients comply with Tribunal directives while protecting their interests.