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October, 2003 |
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Legal Side |
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Blacklisting
Stricter Stricture By Anup Raj Upreti
While the Nepal Rastra Bank (NRB) is tightening the rules for blacklisting the defaulters on bank loans by issuing revised directive for this purpose, the Supreme Court seems to be taking softer stand towards the debtors. In the case of Krishna Gopal Tondon v Nepal Rastra Bank and others, the apex court of the country recently held that where a bank or financial institution has transferred on its name the property held as security against a loan, the debtor concerned cannot remain black-listed. Though the written judgment is yet to be delivered, this decision is likely to have far reaching implication on the blacklisting of creditors. This decision carries lot of weight also because this is delivered by the bench of Chief Justice Kedar Nath Upadhyaya. Unless held otherwise by a division bench on review (which is possible only after satisfying strict legal requirement), this decision stands as a law of land and overrides the provision of the NRB Directive. More importantly, this decision may very well be a first step towards holding the blacklisting provision as unconstitutional (as contended by this author in the June 2003 issue of Nubiz), especially in view of the far reaching consequences that the blacklisting provision will have on entrepreneurship development in the country. In view of the said decision of the Supreme Court, it may be difficult for this Directive of NRB to withstand the constitutionality test. New
Directives However, on September 18, 2003, NRB issued a new Directive in relation to blacklisting and defaulters list repealing previous directive on the same matter and has considerably widened its scope in relation to blacklisting. First, the threshold of outstanding credit facility for blacklisting is decreased to Rs 10 lakhs (or one million rupees) from previously Rs 20 lakhs. Second, also the scope in relation to the person who can be blacklisted is considerably widened. For example, all the shareholders of a blacklisted private limited company are to be blacklisted. The banks and financial institutions are also prohibited from extending credit facility to the joint family members of a blacklisted person. The Directive has incorporated some new provisions, such as the one for blacklisting valuators of the security if the price realizable from auctioning off such security is less than two-third of what was valuated. Similarly, certain restrictions are imposed on transfer of shares in a private limited company availing credit facilities from the banks and financial institutions. The Directive also puts certain new obligations on the banks and financial institutions. For example, they must obtain certain details relating to debtors, including the information from the Credit Information Bureau (CIB), before extending new loan. Conditions
for blacklisting Clause 4 of the Directive lists out the conditions for blacklisting. Though the Directive still contains its previous irrational provisions, some of the additional provisions should be welcomed, especially because these tries to address the financial crime. According to these new provisions, the debtor is blacklisted if (1) it is proved that the credit facility is misused; (2) the security provided is misused; (3) is held guilty by the court for fraud or attempted fraud using fake documents and instruments like fake cheque, draft, foreign currency; and (4) is proved involved in banking and financial crime. The Directive also clarifies that "proved" for the purpose of this clause means as proved by investigation team of the related banks or financial institutions or by internal or external auditor or by investigation team appointed by NRB. This provision may act as a very useful tool to deal with the financial crime, such as deflecting the credit facility for purpose other than those specified when availing it from the banks and financial institutions. However, these also suffer from certain practical difficulties due to lack of detailed provisions. Following are some of the practical difficulties: (a) In view of the wordings used in clause 4 of the Directive, it seems that no person can be blacklisted for the involvement in financial crime if the amount involved is less than Rs 10 Lakhs. (b) The Directive provides for removing a name from the blacklist only on repayment of total outstanding or on rescheduling of the credit facility or when such liability is taken over by some other person. Therefore, it seems that where a person other than the debtor is blacklisted for involvement in financial crime, he cannot be removed from the blacklist even when the original debtor's name is removed. Moreover, it also seems that if a debtor of any bank or financial institution is blacklisted for not repaying the credit facility obtained or he/she is involved in any financial crime, he/she shall be removed from the blacklist only if he/she repays all the outstanding to the banks or financial institutions. Whilst these new provisions can be useful to deal with financial crime and misuse of banks' fund, they need further refinement to be really effective. Amongst the provisions of the previous directive carried forward in the new one, special mention has to be made of the condition of insolvency of a debtor. This is in view of the new provision being made in the proposed Insolvency Ordinance 2003 which incorporates the provision for giving credit facility ("new money") to the insolvent company if required for successful implementation of the reorganization plan of such a company. Therefore, this provision in the Blacklisting Directive defeats the spirit of the proposed Insolvency Ordinance. What is worth noting here is also that the draft Insolvency Ordinance 2003 was finalized by a taskforce headed by Nepal Rastra Bank itself. Who
should be blacklisted Clause 5 of the Directive provides a long list consisting of 13 category of persons/firms/companies/corporate bodies who should be blacklisted when any of the conditions provided in clause 4 are fulfilled. Therefore, scope of this Directive is wider than that of its predecessor. Some of the new changes require the following persons/firms to be blacklisted (only some of them were required to be blacklisted by the previous directive): (i) All the partners of a partnership firm which is blacklisted (ii) All the shareholder of a private company which is blacklisted (iii) Person, firm, company or corporate body that has given guarantee for the repayment of credit facility availed by the blacklisted person or firm (iv) Shareholder holding 10% or more shares of a public limited company which is blacklisted (previously such threshold was 25%) (v) Any other non-governmental firm/company/corporate body which has, as its director, any person or representative of any firm/company/corporate body who/which is blacklisted. (vi) The person, firm, company or corporate body under the same group of business firms to which the blacklisted person or firm belongs to (vii) Any person, firm, company or corporate body that has given cross guarantee to the loan to the blacklisted debtor (barring some exceptions specified in the directive). The shareholders and their joint family members of a private limited company and public limited company are hardest hit by the new Directive. Blacklisting
security valuators Clause 9 of the Directive incorporates a new provision to blacklist security valuators. If two third of the amount on any property as evaluated by any valuators cannot be realized, such valuator has to be blacklisted on recommendation of the banks and financial institutions. Such blacklisted valuator will be barred from functioning as security valuator for any bank and financial institution. The banks and financial institutions may recommend for not blacklisting such security valuators even if the two third amount could not be realized provided that the bank feels the loss of value was due to any reason beyond control of such valuators. Such valuators shall be removed from the blacklist only when the related debtor is removed from the blacklist. Some new obligation on banks and financial institutions Apart from sending periodic information regarding credit facility extended, the new Directive puts certain additional obligation on the banks and financial institutions. For example, (1) they should obtain the credit information on debtor/prospective debtor from the CIB before extending, renewing, rescheduling any credit facility amounting more than Rs 5 Lakhs (clause 3); (2) they should obtain certain particulars of the prospective debtor, for example names and details of all the shareholder in case of a private limited company (clause 2.3); (3) they should give 35 days prior notice to the defaulting debtors before blacklisting; (4) they should obtain written consent from the debtors and their guarantors to be included in blacklist on happening of any of the conditions of clause 4 and 5; and (5) they should obtain a written undertaking from the shareholders of a private company (and/or shareholders holding 10% or more shares of a pubic company which has not issued shares to public) to the effect that they shall not transfer their shares in the company without prior approval from the bank till the currency of the credit facility. (Upreti is an
Associate with Pioneer Law Associates) by Anup Raj Upreti and Kirat Singh Nagra Since the international trade necessarily implies the participation of parties of different sovereign nations, it requires to be governed with different sets of rules as compared to domestic trade. The certainty of rights and obligation of the trading parties and mechanism with which such rights are enforced are very important in international trade. Private international law plays a very important role in international trade as the parties involved have different working cultures, different levels of understanding and are tuned to different sets of laws. A well developed regime of rules on private international law can facilitate international trade by providing for certainty in dealings and legal outcomes. Private international law is the name given to the mechanism to enforce the rulings of one country's court into the territory of another country. But the enforcement of foreign judgments has not been addressed by the Nepali laws nor have the judiciary in Nepal ventured to make rules in this regard. It is surprising how Nepal is able to do any international trade at all despite having this situation. Though more than 50% of Nepal's trade is with India, there are no arrangements or bilateral treaties between these two countries dealing with enforcement of each other's judgments. Nepali rules Under the existing law in Nepal, there are no specific legislation dealing with the enforcement of foreign judgment in Nepal except in cases of foreign arbitral award. The enforcement of foreign arbitral award is provided under the Arbitration Act 2056 (1999) which can be enforced on the basis of reciprocity and after satisfying other conditions prescribed by the said Act. The urgent need to develop internationally well-defined rules on enforcement of foreign judgment in Nepal is growing as more and more agreements entered between the Nepalis and the foreigners have incorporated a foreign jurisdiction as the choice of forum for the settlement of their disputes. This is more common in agency, distribution, trademark assignment agreements. Moreover, the Foreign Investment and Technology Transfer Act 2049 (1992) permits the parties to choose a foreign jurisdiction for the settlement of dispute in relation to joint-venture agreement if the investment is more than Rs. 500 million. In fact, many agreements have in practice incorporated foreign jurisdiction as a choice of forum to settle the dispute. The existing law, however, does not provide any mechanism for the enforcement of foreign judgment. Any right which cannot be enforced is meaningless. This undesirable state of Nepali law will be illustrated by an example. Suppose, an agreement between a Nepali party and an Indian party provides for the Indian court as a choice of forum for the settlement of disputes. Then any dispute under the said agreement would be brought in the appropriate court in India. If the defendant resides in Nepal or the subject matter of enforcement lies in Nepal, any judgment by the Indian court is meaningless because it cannot be enforced in Nepal. The only option left for such party would be to file a suit in Nepal. However, the Nepali courts are most likely to rule that Nepali courts do not have jurisdiction over such case as the agreement expressly provides for the Indian jurisdiction. The effect of lack of enforcement mechanism of foreign judgment in Nepal has also to be looked into from the point of view of enforcing Nepali judgment in foreign jurisdiction. Jurisdictions like India, enforce foreign judgment on the basis of reciprocity. Since Nepal does not allow the enforcement of any foreign judgment, India will not enforce the Nepali judgment though such judgments may have strong evidentiary value. Now let us assume that such agreement provides for Nepali courts to assume the jurisdiction. Then in case of a dispute, the action would be brought in Nepal. But if the subject matter for enforcement lies in India, the judgment has to be enforced in India. However, since Indian courts enforce foreign judgment on the basis of reciprocity and Nepali courts do not enforce Indian judgments, the Indian court is unlikely to enforce Nepali judgment. Therefore, the option left would be to initiate a fresh action in India. However, Indian courts are unlikely to entertain the matter due to lack of jurisdiction as the agreement provides for Nepali courts to have the competent jurisdiction. Indian rules India takes its cues in this realm of law from the well established and well settled English principles of private international law. And India can boast of having a statutory mechanism in this regard, as contained within the Code of Civil Procedure, 1908 (CPC). There has been considerable amount of judicial activism in this field of law and thus it is well matured practice. India is also a signatory to the Convention on Recognition and Enforcement of Foreign Arbitral Awards, in pursuance of which the Foreign Awards (Recognition and Enforcement) Act, 1961 has been enacted by her in respect of enforcement of foreign arbitral awards. Indian law allows for recognition of foreign decisions provided they meet certain formal procedural and substantive requirements as contained in a statutory framework for the enforcement of foreign judgments in India, which finds its rightful place in the CPC. The mechanism therein is however found to be restrictive in nature, in that only judgments of a country, meting out reciprocity to India in terms of enforcement of Indian judgments, will find enforcement and execution in and by Indian Courts. This means that the foreign judgment, for example the judgment made by Nepali courts, would be enforced in India only if Nepali courts enforce the judgment made by Indian courts. Apart from the reciprocity criteria for the enforcement of foreign judgment in India, certain additional conditions also have to be fulfilled. The Indian courts will look into the such factors as whether the foreign court had the competent jurisdiction and whether due regard has been given to the natural justice. The Indian courts also look into whether or not the said judgment is in breach of any law in India. In Renusagar Power Co. Ltd. v. General Electric Co., the Supreme Court of India has held that in the field of private international law, Indian courts can refuse to apply a rule of foreign law or recognize a foreign judgment or a foreign arbitral award if it is found that the same is contrary to the public policy of India. ( Upreti is an
Associate with Pioneer Law Associates. Nagra is practicing law in New
Delhi and is an Associate with Amarchand & Mangaldas) |
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