Loss from Employee Fraud Not a 'Debt' under Recovery Act: DRAT Dismisses Tamilnad Mercantile Bank's Appeals [Read Order]
The court reasoned that 'debt' refers to a liability arising from a transaction with a customer, such as a loan, and not to a loss from an employee's criminal misconduct
The Debts Recovery Appellate Tribunal ( DRAT ) in Chennai has dismissed four appeals filed by Tamilnad Mercantile Bank against several individuals, including a former Branch Manager holding that the bank could not recover losses from an alleged fraud committed by its own employee under the provisions of the Recovery of Debts and Bankruptcy (RDB) Act, 1993.
The bank alleged that its former Branch Manager (Respondent No. 2 or 3 in the respective cases) had actively colluded with borrowers to defraud the bank. In four separate instances, the manager was accused of sanctioning overdraft loans against proposed LIC policies as security.
The bank claimed the manager assured LIC that premium cheques would be honored, leading to the issuance of policies, but the cheques subsequently bounced due to insufficient funds. Despite the lapsed security, the manager allegedly authorized the immediate disbursement of loan funds, which were then transferred out by the borrowers, causing a significant monetary loss to the bank.
Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here
The central legal issue was whether the monetary loss resulting from the alleged fraud and misappropriation by the employee constituted a 'debt' as defined under Section 2(g) of the RDB Act, and if the bank could initiate recovery proceedings against its official.
The bank's counsel argued for a broad interpretation of 'debt,' citing precedents to claim that any liability arising from the bank's business activities, including fraud by employees, was recoverable under the Act. In contrast, the manager's counsel contended that loss from an employee's actions was not a 'debt' in the context of a lender-borrower relationship and was therefore outside the tribunal's jurisdiction.
The DRAT, after considering various judicial precedents, sided with the manager. The tribunal relied on judgments, including observations from the Supreme Court and High Courts, which have consistently held that misappropriation of funds by a bank employee is an internal matter and does not constitute a 'debt' under the RDB Act.
The court reasoned that 'debt' refers to a liability arising from a transaction with a customer, such as a loan, and not to a loss from an employee's criminal misconduct. The tribunal noted that the bank had not produced evidence of a criminal conviction against the manager and found the cases cited by the bank's counsel to be distinguishable from the present matter.
Concluding that the loss from the alleged employee fraud could not be classified as a 'debt' recoverable through the DRT, the tribunal upheld the original orders of the Debts Recovery Tribunal. All four appeals filed by Tamilnad Mercantile Bank were consequently dismissed, with each party directed to bear their own costs.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
