Fraudulent Transactions Fall Under 'Debt' Definition: DRAT Dismisses Appeal Against South Indian Bank's Debt Recovery Case

The Allahabad Bench of Debt Recovery Appellate Tribunal (DRAT), held that amounts fraudulently withdrawn in collusion with bank officials constitute “debt” under the Recovery of Debts and Bankruptcy Act (RDB), 1993 and fall within the DRT’s jurisdiction. Further, it dismissed the appeal and allowed South Indian Bank to proceed with recovery of ₹50 crore against 27 defendants.

The appeal filed by the appellants under Section 20 of the RDB Act, 1993 challenges the order dated 29.05.2019, which rejected the appellants' objections regarding maintainability of T.A. No. 428/2018 filed by the respondent, the South Indian Bank Ltd.

The Section 20 of Recovery of Debts and Bankruptcy Act (RDB), 1993 explained that: Appeal to the Appellate Tribunal

“(1) Save as provided in sub-section (2), any person aggrieved by an order made, or deemed to have been made, by a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter.

(2) No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties.

(3) Every appeal under sub-section (1) shall be filed within a period of 1[thirty days] from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him and it shall be in such form and be accompanied by such fee as may be prescribed:

Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of [thirty days] if it is satisfied that there was sufficient cause for not filing it within that period.”

The Respondent filed an Original Application (OA) before DRT Lucknow which was later transferred to DRT Dehradun for recovery of Rs. 50 crores against 27 defendants. The bank alleged that defendants No. 3 to 27 fraudulently withdrew funds in collusion with defendants No. 1 and 2 (bank managers) through various methods over time, causing a principal loss of Rs. 30.85 crores.

Defendants No. 5 to 27 gained financial benefits from these fraudulent transactions. After summons were issued, the appellants (defendants No. 4, 6, 7, 10 and 21) filed objections challenging the maintainability of the OA, which were rejected by the DRT vide order dated 29.05.2019, leading to the present appeal.

The Counsel for the Appellant, Swayamboo Chandranshul, submitted multiple unconnected causes of action which were improperly clubbed in a single OA. Court fees paid were insufficient given the Rs. 50 crores claimed versus Rs. 30.85 crores principal loss. The respondent made fraudulent transactions without documentation, yet fails to respond to CBI enquiry.

Further, the Counsel stated that filing of an OA against a savings account customer was unsustainable and the Debt Recovery Tribunal (DRT) lacks jurisdiction over fraud matters, which must be decided by regular civil courts. Preliminary objections should be decided first, not at the final stage as indicated by the Tribunal.

On the other hand, the Counsel for the Respondent, Maneesh Mehrotra, pointed out that Defendants No. 3 to 27 fraudulently withdrew funds in collusion with defendants No. 1 and 2 (bank managers) through various methods. Investigation revealed defendants No. 5 to 27 gained financial benefits from these transactions.

Further, the Counsel observed that the OA was filed against defendants No. 1 and 2 claiming the entire amount, while specific amounts were claimed from defendants No. 5 to 27. Different claims exist against defendants No. 4, 6, 7, 10 and 21. Any amount due from business activities undertaken by a bank constitutes 'debt' under the RDB Act, making the OA maintainable.

The Tribunal consisted of Justice R.D Khare, Chairperson, heard and reviewed the matter filed by the appellants.

The Tribunal, after considering the submissions made, held that the OA was filed against defendants No. 3 to 27 and bank managers (defendants No. 1 and 2), with defendants No. 5 to 7 having gained financial benefits during fraudulent transactions in collusion with defendants No. 1 to 4. Money withdrawn through fraudulent means during banking business activities constitutes 'debt' even if obtained fraudulently, as persons taking financial benefits can be considered debtors.

Further, the Tribunal stated that the fraudulent transactions fall within the definition of 'debt' under the RDB Act and Money withdrawn without proper documentation still qualifies as 'debt.' The DRT had jurisdiction to decide such matters and a single consolidated OA against all defendants involved in the fraudulent scheme was maintainable.

Accordingly, the Tribunal pointed out that the impugned order did not warrant interference, and the appeal filed by the appellant was dismissed with no order as to costs.