Jurisdiction of DRT and DRAT is limited : Can not adjudicate tort based damages

Madras High Court Rules on Scope of Counter-Claims under Recovery of Debts and Bankruptcy Act in INMA International Ltd. v. Indian Overseas Bank Court holds Debt Recovery Tribunals lack jurisdiction to adjudicate tort-based damages claims, emphasizing limits on tribunal powers despite amendments allowing counter-claims.

In a landmark decision dated April 3, 2025, the Madras High Court delivered a comprehensive judgment in a batch of interconnected writ petitions filed by M/s. INMA International Limited and its directors against Indian Overseas Bank (IOB). The petitions challenged the Debt Recovery Appellate Tribunal’s (DRAT) common order modifying the Debts Recovery Tribunal’s (DRT) order on claims involving erroneous credit reporting and consequential damages.

The dispute originated when INMA International Limited, engaged in turnkey engineering projects, obtained financial facilities from IOB. Due to delayed payments by a principal contractor, INMA defaulted on its loans, which were classified as Non-Performing Assets (NPA). The bank issued notices under the SARFAESI Act and took symbolic possession of secured assets. Subsequently, it was discovered that the bank had reported an erroneously inflated outstanding amount twice to the Credit Information Bureau (India) Limited (CIBIL), adversely affecting INMA’s credit rating and ability to secure loans elsewhere.

INMA and its directors filed counter-claims in the recovery proceedings before the DRT, seeking damages of Rs. 30 crores for loss of business, reputation, and mental agony caused by the bank’s negligent credit reporting. The DRT accepted the counter-claim to the extent of waiving interest from the loan sanction date till the filing of the Original Application (O.A.) as damages compensation. The DRAT modified this, allowing the bank to recover simple interest at 9% per annum from sanction till realization, partially rejecting the waiver.

Both parties filed writ petitions before the Madras High Court challenging the DRAT order. INMA’s Resolution Professional also submitted reports alleging fraudulent conduct by the directors, complicating the factual matrix. The bank challenged the tribunal’s jurisdiction to entertain tort-based damages claims, citing recent Supreme Court precedents.

The High Court undertook an exhaustive examination of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), focusing on Section 19(8), which permits counter-claims, including damages, in recovery proceedings. The Court highlighted that while the RDB Act was enacted to expedite recovery of debts by banks and financial institutions, its jurisdiction is limited and does not extend to adjudicating damages founded in tort. The Court emphasized the distinction between contractual and tortious damages, noting that damages under Section 19(8) must arise out of contractual obligations between banks and borrowers.

Applying the mischief rule of statutory interpretation, the Court held that allowing tribunals to entertain tort-based damage claims would expand their jurisdiction beyond the statutory mandate, undermining the purpose of speedy debt recovery. The Court also found that the DRT’s order was based on a misreading of the High Court’s earlier judgment in a related writ petition and lacked evidentiary support for the damages awarded. The damages claim was held to be an afterthought, with no cogent proof of actual loss or mental anguish.

Ultimately, the High Court set aside the DRT and DRAT orders to the extent they granted damages by waiving or reducing interest. The Court affirmed the bank’s entitlement to recover dues with interest at the contractual rate and dismissed the writ petitions filed by INMA and its directors, while disposing of those filed by the bank on the same terms. The Court further imposed costs on the directors for protracting litigation.

This ruling clarifies the limited scope of counter-claims before Debt Recovery Tribunals under the RDB Act and underscores the necessity of maintaining a balance between expeditious debt recovery and due process for claims beyond contractual debts. It reiterates that tort-based damages claims must be pursued in independent civil actions and cannot be adjudicated summarily in recovery proceedings.

Statutory provision(s): Recovery of Debts and Bankruptcy Act, 1993 - Sections 17, 19(6), 19(8), 19(9), 19(10), 19(11); Insolvency and Bankruptcy Code, 2016 - Section 7; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 13(2); Code of Civil Procedure, 1908 - Section 34.

M/s.INMA International Limited v. Indian Overseas Bank, (Madras)(DB) : Law Finder Doc Id # 2718435