Banking Law – Indian Contract Act, 1872 – Sections 23 & 24 – Public Policy – Loan Dues – Recovery Agents – Bank engaged agent to recover the dues of the loan – Agency created by the Bank for realisation of the loan dues of the borrower of the Bank is an agreement opposed to the public policy and hence not enforceable – Since one of the parties to the agreement which is found to be opposed to public policy, is a public sector bank, the registry is directed to forward a copy of this judgment to the Governor of the Reserve Bank of India to ensure that the mode of recovery as permitted in the instant case is not resorted to in future by banks and other financial institutions.
IN THE HIGH COURT OF KERALA AT ERNAKULAM
P.B.SURESH KUMAR, J.
R.S.A. No.46 of 2011
Dated 30 th March, 2016
AGAINST THE JUDGMENT IN AS. NO.165/2007 OF PRINCIPAL SUB COURT, KOZHIKODE DATED 12-08-2010. AGAINST THE JUDGMENT IN OS. NO.503/2006 OF ADDITIONAL MUNSIF COURT-I, KOZHIKODE DATED 29-06-2007
SMART SECURITY AND SECRET SERVICE AGENCY, REPRESENTED BY ITS MANAGING PARTNER
BY ADVS. SRI.K.RAMAKUMAR, SENIOR ADVOCATE. SRI.RAHUL VENUGOPAL, SRI.T.RAMPRASAD UNNI.
STATE BANK OF INDIA, COMMERCIAL BANK, REPRESENTED BY ITS ASSISTANT GENERAL MANAGER, KALOOR, ERNAKULAM, KOCHI-682 017.
BY ADV. SRI.S.EASWARAN.
J U D G M E N T
The defeated plaintiff in a suit for relisation of money is the appellant in this appeal.
2. The plaintiff is a firm engaged in detective investigation. The Managing Partner of the plaintiff firm is an Assistant Commissioner of Police retired from the service of the State Government. The defendant Bank, hereinafter referred to as ‘the Bank’ for short, has engaged the plaintiff as their agent to recover the dues of the loan disbursed to one of its borrowers. According to the plaintiff, pursuant to the said engagement, they have pressurized the borrower and on account of the pressure exerted by them, the borrower has settled the loan dues. It is the case of the plaintiff that as per the terms of the engagement, 5% of the amounts recovered by the Bank pursuant to the efforts taken by the plaintiff is to be paid to the plaintiff towards their commission and that the Bank has refused to pay the commission agreed upon after the recovery. The suit, in the circumstances, was filed for realization of a sum of Rs.72,050/- being 5% of the amount of Rs.16,41,000/- recovered by the Bank from its borrower. The Bank contested the claim of the plaintiff. According to the Bank, on the very same day on which the plaintiff was engaged by them as their agent, the borrower approached the Bank and offered to settle the dues by selling the property mortgaged by him to the Bank towards the security of the loan. It was also contended by the Bank that thereafter, as agreed, the borrower has liquidated the loan outstanding in two instalments, on 2.1.2006 and on 25.1.2006. Thus, according to the Bank, since the borrower had remitted the loan dues voluntarily, the plaintiff is not entitled to claim any amount by way of commission.
3. The trial court, on a consideration of the materials on record, found that the Bank could recover the dues of the loan from the borrower only on account of the efforts taken by the plaintiff and consequently, decreed the suit as prayed for. The Bank took up the matter in appeal. The appellate court, however, took the view that the materials on record are not sufficient to hold that the Bank could recover the loan dues from the borrower on account of the efforts taken by the plaintiff and consequently, dismissed the suit reversing the decision of the trial court. Hence this second appeal by the plaintiff.
4. Heard Senior Counsel Sri.K.Ramakumar for the appellant and Sri.S.Easwaran for the Bank.
5. The fact that the Bank had engaged the plaintiff as their agent to recover the loan dues of their borrower, namely, Anilkumar is not in dispute. Likewise, the fact that the borrower had remitted the loan dues in two instalments, on 2.1.2006 and 25.1.2006 is also not in dispute. The only dispute is as to whether the settlement of the loan liability by the borrower is on account of the efforts taken by the plaintiff. While the plaintiff contends that it is due to the pressure exerted by them on the borrower that he remitted the dues to the Bank, the Bank contends that the borrower has voluntarily settled the dues. Ext.A1 is the document by which the Bank had engaged the plaintiff as their agent to recover the dues from their borrower, namely, Anilkumar. Ext.A1 authorises the plaintiff, among others, to follow up with the borrower for the purpose of recovery of the dues to the Bank, follow up the legal / Revenue Recovery / Lok Adalat cases, arrange for buyers for assets / properties pledged / hypothecated / mortgaged / or otherwise charged to the Bank, collect details of the personal properties of the borrowers/guarantors and explore the possibility of bringing them to sale and arrange for marketing Bank’s scheme for compromises/ One Time Settlement with the borrowers/guarantors. Ext.A1 clarifies that the means/procedure as stated above for recovery are indicative and the plaintiff is free to adopt any other means/procedure for effecting the recovery. The relevant terms of Ext.A1 read thus :
2. “For the purpose of recovery you may assist the Bank’s officials, at their direction from time to time, in (i) follow up with the borrower/guarantor, (ii) follow up of legal/Revenue Recovery/Lok Adalat cases, (iii) arranging for buyers for assets/properties pledged/hypothecated/ mortgaged/or otherwise charged to the Bank, (iv) collecting details of the personal properties of the borrowers/guarantors and exploring the possibility of bringing them to sale and (v) arranging for marketing Bank’s scheme for compromises/ One Time Settlement with the borrowers/guarantors.
3. The means/procedure stated in paragraph 2 above for recovery are indicative and you may use any other means/procedure for effecting the recovery. However please note that all the means/procedure adopted for recovery should be legally permissible and should not result in adverse publicity to the Bank. If any compromise or OTS is proposed, the compromise amount should be arrived at on the basis of the direction/guidelines given by the Bank and any negotiations on the compromise amount should be made only in the presence of branch officials. The recovery can be effected in lump sum or in instalments. The decision of the Bank as regards acceptance/nonacceptance of the compromise will be final.”
The plaintiff has no case that they have followed up the legal/revenue recovery/Lok Adalat proceedings initiated by the Bank against the borrower and it is on account of the said reason that the Bank could recover the loan dues. Likewise, the plaintiff has no case that they have arranged buyers for the assets mortgaged by the borrower to the Bank or otherwise charged to the Bank by the borrower and it is due to the said reason that the Bank could recover the loan dues. Similarly, the plaintiff has no case that they have collected details of the personal properties of the borrower or his guarantors and the Bank could recover the loan dues from the borrower by proceeding against his personal properties. The case of the plaintiff, as stated above, is only that they have followed up the matter with the borrower and pressurized him to settle the dues to the Bank and it is due to the pressure exerted by them that the borrower had remitted the loan dues. According to the plaintiff, as per the terms of Ext.A1, they are authorised to pressurize the borrower for the said purpose. In so far as the said clause in Ext.A1 is sought to be enforced in the suit, it is obligatory for this Court to consider whether such a clause in Ext.A1 could be enforced under law.
6. The Indian Contract Act is an amending as well as consolidating Act of the common law principles applicable in England which are consistent with the scheme of the Indian Constitution. Section 23 of the Indian Contract Act provides that consideration or object of an agreement is lawful, unless the court regards it as opposed to public policy. In other words, if the court regards the consideration or object of an agreement as opposed to public policy, the consideration or object of the agreement is unlawful. The said Section clarifies that every agreement of which the object or consideration is unlawful is void. Section 24 of the said Act further clarifies that if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object is unlawful, the agreement is void. The doctrine of public policy is a concept which is illusive, varying and uncertain. A conspectus of the various judicial pronouncements on the said concept indicates that the term ‘public policy’ is not capable of a precise definition and whatever tends to injustice of operation, restraint of liberty, commerce and natural or legal rights; whatever tends to the obstruction of justice or to the violation of a statute and whatever is against good morals can be said to be against public policy. [See
# P. Rathinam v. Union of India, (1994)3 SCC 394
The public policy thus connotes some matter which concerns the public good and the public interest. The principles governing public policy must be and are capable, on proper occasion, of expansion or modification. If there is no head of public policy which covers a case, then the court must in consonance with public conscience and in keeping with public good and public interest declare such practice to be opposed to public policy [See
# Central Inland Water Transport Corporation v. Brojo Nath Ganguly, (1986) 3 SCC 156
# State of Rajasthan v. Basant Nahata, (2005) 12 SCC 77
the Apex Court has clarified that since public policy is not capable of being given a precise definition, the courts have to determine the issue on the facts of each case having regard to the pleadings of the parties. It was also held in the said case that the pleadings of the parties and the materials on record would be relevant so as to enable the court to judge the concept as to what is for public good or in the public interest or what would be injurious to or harmful to the public good or to the public interest at the relevant point of time as contra distinguished from the policy of a particular Government.
7. In the light of the principles aforesaid, I shall proceed to decide whether the clause in Ext.A1 document authorising the plaintiff to recover the loan dues is a clause enforceable by law. As noted above, the clause in Ext.A1 authorising the plaintiff to follow up with the borrower for the purpose of recovery of the loan dues was understood by the plaintiff as a clause authorising them to put pressure on the borrower. What was the contemplation of the Bank while authorising the plaintiff to follow up with the borrower for recovery of its loan dues is the core question. If as a matter of fact, the intention of the Bank was only to authorise the plaintiff to make periodical requests to the borrower to remit the loan dues, then I do not think that the Bank would have entered into an arrangement in the nature of Ext.A1 with the plaintiff offering a fabulous commission of 5% of the total loan dues, for, the officials of the Bank themselves could have done that over telephone or otherwise. Then it is to be presumed that the Bank had contemplated the agent to do something other than the mere requests. The said contemplation of the Bank is evident from Ext.A1 itself. As noted above, Ext.A1 cautions the agent that he/she shall not do anything which would result in adverse publicity to the Bank. In other words, it is evident that the Bank was conscious of the fact that the acts authorised to be performed by the agent are likely to create adverse publicity to the Bank. It is, therefore, not very difficult to infer that the Bank had authorised the agent to do everything so as to compel the borrower to pay the loan dues to the Bank which do not result in any adverse publicity to the Bank. It is thus clear that the engagement of this nature is certainly to harass and intimidate the borrower, especially in a case of this nature where the Bank has chosen a retired Police Officer to do the follow up work. The larger question now is as to whether in a civilized society like ours, a public sector Bank can resort to such activities. In
# Manager, ICICI Bank Ltd. v. Prakash Kaur, 2007 (1) KLJ 846 (SC)
in the context of engaging recovery agents for repossessing the vehicles purchased with the bank finance, the Apex Court has observed that the practice of hiring recovery agents who are muscle men needs to be discouraged and that the Bank should resort only to procedure recognized by law to take possession of vehicles in cases where the borrowers commit default in payment of the loan instalments. In a democratic country having a well established independent judiciary and having various laws, if muscle men are engaged to recover dues to the Bank, there is no doubt that it will create lawlessness. True, all these attempts are made on the pretext that the justice delivery system prevalent is a slow process. But, lawlessness cannot be encouraged on that ground. In a country governed by rule of law, the recovery of loans bybanks and other financial institutions cannot be done otherwise than by due process of law. Taking resort to strong arm tactics is not only unlawful, but also unethical and opposed to public policy as also against protection of public interest. I have, therefore, no hesitation to hold that the agency created by the Bank in favour of the plaintiff as per Ext.A1 for realisation of the loan dues of the borrower of theBank is an agreement opposed to the public policy and hence not enforceable.
In the result, the impugned decision is liable to be confirmed, though on a different ground. The appeal is, accordingly, dismissed. Since one of the parties to the agreement which is found to be opposed to public policy, is a public sectorbank, the registry is directed to forward a copy of this judgment to the Governor of the ReserveBank of India to ensure that the mode of recovery as permitted in the instant case is not resorted to in future by banks and other financial institutions.