ACKNOWLEDGEMENT OF DEBT – HOW (IR) RELEVANT

 

The more I think of it the more it seems farcical to me that one’s debt needs to be acknowledged at specified intervals. The following illustrations lend credence to my contention.

CASE – 1 – ‘A’ borrows money from a bank. In the interest of both, they execute a legally enforceable deed of agreement for having borrowed/lent money. ‘A’ does not repay the loan despite being in a position to settle the dues. Neither does ‘A’ acknowledge his liability. By the time the bank seeks the help of a court, the documents get time barred. And the court decides the case against the bank on the ground that documents are not in force.

Here ‘A’ ought to have acknowledged his liability within three years. That the bank has failed to obtain such acknowledgement from ‘A’ within the specified time takes away its right to seek court’s help. Had the bank obtained AOD from ‘A’ within three years, the case would have been decided in the bank’s favor, assuming other legal aspects to be in order. That the right to seek justice through law should be restricted by a time limit is hard to understand. Why this law of limitation at all? Is it to keep the lender on his toes? Does this law not give an advantage to the borrower which he does not deserve? In reality it is the banker who should be given all the opportunities to recover the dues because it is he who has taken the risk in advancing money. It might be argued that the element of risk is balanced by the amount of interest that the borrower has agreed to pay. However, it must be remembered that it is the primary responsibility of the borrower to repay his borrowings and that he cannot disown this responsibility at any time, law of limitation notwithstanding. The primary responsibility to fulfill one’s obligation alone should be the deciding factor in cases involving financial disputes specially.

What is the legal explanation behind framing of this law? Just why this law at all? In the above illustration ‘A’ is an intentional defaulter. Yet he is absolved of his liabilities. Legal termination of liability despite ‘A’ having executed the very documents prescribed by law. And this very law brands it obsolete after sometime. Recognize the irony?

On the one hand, the law defines the legally enforceable documents for any financial transaction and on the other it holds them out-dated because these documents needed to be kept alive by obtaining suitable acknowledgements at specified intervals. This appears incongruous.

On one side of the scale, is the banker who has inadvertently slipped in obtaining AOD and who has failed to initiate recovery steps legally on time due to reasons beyond his control and on the other is the ruthless borrower taking shelter under this law of limitation and whose denial of liability is prompted solely by this law. Whose lapse deserves greater condemnation? Is it the banker’s who is only human? Or is it the borrower’s?

A debt is always a debt. Banker’s right to recover it must not be curtailed by a law called Limitation Act.

CASE-2

Let us consider a case of a tem loan repayable in monthly installments. Let us further assume that the loan turns sticky and that by the time suit is filed two installments get time-barred. The court awards the decree in bank’s favor sans two installments. The judgment debtor pays the decretal dues as per decree terms. Here is a case where the judgment debtor is ready to pay the decree amount and not the amount that is actually due to the bank! And banker has little choice but to accept payment. It would be naïve to believe that the judgment debtor has the capacity to pay only the decree amount and not the entire amount-(decree amount + 2 installments)! Judgment debtor has the capacity to pay and yet does not pay, thanks to law of limitation. If this is not incongruous, I wonder what else is?

CASE-3

Now let us move on to a situation that is almost entirely opposite of the above cases. Loan arranged on 31.8.73 and still managing to find a place in bank’s books, thanks to a thing called AOD.

While the law requires the debt to be acknowledged periodically, it does not restrict the number of acknowledgements of debt a banker can obtain. As long as the documents are in force a banker has the option to defer filing a suit. There are instances where legal action has not been initiated despite the loans becoming highly overdue. It appears there is nothing to compel the banker to take legal action as long as the documents are in force. And the borrower is quite pleased-in fact immensely so-to execute one AOD after another. The result-public money is allowed to be blocked, thanks to a thing called AOD.

While a lapse on the part of the banker to file suit on time invites a punishment so severe as to disallow its claim-entirely or partially, the law does little to prevent recovery action being deferred. The knowledge of a law called limitation act provides an opportunity for the banker/borrower to defer legal action, reasons for which are difficult to comprehend.

The question is: should the borrower be allowed to acknowledge debt and avoid legal action for unreasonably long time?

Even as the law compels the banker to file suit on time to seek legal remedy, it allows the banker to defer legal action by merely obtaining AOD. Don’t you think that this provision is incongruous?

In the first case, the bank had to forego its claim. True, bank has failed in its duty. At the same time, it should be remembered that borrower too has grossly violated the terms of repayment. That the law should ignore the default of the borrower while disallowing the bank’s claim is hard to understand. The borrower who has defaulted goes scot free and the banker is heavily punished. Admittedly, the banker has erred. But in disciplining the banker, the law gives an unreasonable gift to the borrower by waiving his liability. Should the borrower be benefited thus? Does the law, by doing so not encourage default?

Here, both the banker and the borrower have failed in their duty. And both must be disciplined. But in disciplining one the other should not be benefited. Unfortunately, this is exactly what is happening, thanks again to  law of limitation.

It could be argued, once the debt gets time barred, the bank only loses its right to seek legal help and that dues could be still recovered from the borrower. It must be remembered that banks have framed various precautionary steps that require to be taken once it has lent money. They include personal inspection, contacting borrowers, discussing and rendering technical advice where required, issuing notices, rephasing loans where desirable etc. It is only after exhausting all these options that the banks seek legal assistance to recover dues. Now to say that the bank has lost only the legal remedy upon a debt becoming time barred is to imply that there exists many options to the bank for recovering dues. What then are the other options left to the bank? Unlike private money lenders who use fair and unfair means to recover their dues, banks have to work within the framework of certain guidelines. To a bank legal assistance is the last course of action available. And to know that a lapse on the part of the bank attracts so severe a penalty as rejection/reduction of its claim is a big blow.

Since banks cannot use unfair means, “legal remedy is lost” can only mean one thing; that bank cannot recover the dues once it becomes time barred. The more I think of it the more I am convinced that this law called limitation act requires a close look.

What then is the solution? Abolish this law called limitation act. Fix a reasonable period within which legal help should be sought. If suit is not filed within reasonable period it must be held contempt of court, and suitable action taken against the erring bank. Any delay in filing suit should be properly justified to the satisfaction of the court. If the court feels that delay is unjustified, it may order the bank to fix responsibility on the staff responsible for the delay and it should in no way diminish the relief sought by the banker in the plaint. In other words, courts should not absolve the defendants of their liability to the bank.

It is important to note that the reasonable period alluded to is different from the law of limitation. Law of limitation requires the debt to be acknowledged periodically and there is every possibility of debt becoming barred by limitation. Once the debt becomes time barred, legal remedy cannot be sought.

Reasonable period also prescribes the time within which suit has to be filed. But the difference is that if for any reason suit is not filed within reasonable period, debt does not become time barred and the banker’s right to recover remains intact.

What then is reasonable period? I would suggest a period of one year from the date default occurs to constitute reasonable period. This way the incongruities mentioned in the above cases, which are becoming alarmingly frequent, can be taken care of