In a significant ruling on bank recovery proceedings, the Supreme Court set aside the Orissa High Court’s order that had drastically reduced the Trust’s liability based on a self-serving interpretation of PNB’s certificate, reiterating that borrowers cannot cherry-pick figures from bank certificates while ignoring the standard accounting treatment of interest after NPA classification. The Apex Court held that a bank is entitled to claim interest calculated and maintained in a separate suspense account, in addition to the outstanding principal loan amount, and that a certificate issued by the bank showing only the principal outstanding must be read in the context of the banking accounting system followed after NPA classification.
Further, the Court ruled that borrowers cannot be permitted to ignore standard banking accounting practices or to come up with self-serving calculations at different stages of litigation to suit their own convenience. Self-serving statements of account produced by borrowers, which contradict the bank’s own running account statement, were held to be patently erroneous and mischievous.
A Two-Judge Bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva noted that the High Court had committed a serious error by oversimplifying the calculation of the amount payable. The Bench observed that the figure of Rs. 31.99 lakhs mentioned in PNB’s certificate dated 24 December 2020 did not take into account the interest component reflected in a separate suspense account maintained by the bank. As per the standard banking accounting system and applicable RBI guidelines, once a loan account is classified as a non-performing asset, interest stops being reflected in the loan account and is instead maintained in a separate suspense account.
The Court pointed out that as on 30 June 2017, the date of NPA classification, the principal loan amount along with interest calculated up to that date stood at Rs. 1.25 crores and not at Rs. 64.25 lakhs as claimed by the Trust. The Court further observed that the Trust and its trustees could not be permitted to blithely ignore the banking accounting system and come up with different calculations at different points of time to suit their own interests. The Bench found the Trust’s self-serving statement of account, claiming a negative balance and seeking refund of excess payments, to be patently erroneous and mischievous.
The Court also noted that the Trust had taken inconsistent stands at different stages, before the DRT contending that the interest rate was excessive and that they were liable to pay only Rs. 32.63 lakhs and before the High Court contending that only Rs. 29.55 lakhs was payable based on the certificate dated 24 December 2020. Referring to Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, the Court observed that the definition of ‘debt’ expressly includes interest, leaving no room for dispute that the interest component forms part of the debt due to PNB.
The Court also relied on Section 19(20) of the Recovery of Debts due to Banks and and Financial Institutions Act, 1993, which empowers the DRT to pass orders for payment of interest from the date the amount is found due until realisation, and on Section 21A of the Banking Regulation Act, 1949, which bars courts from re-opening transactions between a bank and its debtor on the ground that the rate of interest is excessive. The Bench further reiterated that banks must plead and prove the rates of interest charged, file statements of account with particulars of debit entries, and that interest on loans may be charged on periodical rests and capitalised on the unpaid principal.
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Briefly, the dispute traces back to a loan of Rs. 5 crore sanctioned by United Bank of India to M/s. Shree Jyoti Education and Management Trust World in June 2011 for constructing a college building. The loan was disbursed over a period of two years, with the managing trustee Tara Prasad Satpathy and other trustees standing as personal guarantors. By a confirmation letter dated 22 June 2017, the bank informed the Trust that its outstanding liability stood at Rs. 1.27 crores. The account was, however, classified as a non-performing asset on 30 June 2017.
United Bank of India then approached the Debts Recovery Tribunal at Cuttack, claiming Rs. 75.56 lakhs. During the pendency of the proceedings, United Bank of India was amalgamated with Punjab National Bank with effect from 1 April 2020. Thereafter, PNB issued a certificate stating that the Trust had paid Rs. 93.31 lakhs since the NPA date and that the outstanding amount as on 13 October 2020 was Rs. 31.99 lakhs.
The DRT allowed recovery of only Rs. 1.83 lakhs along with pendente lite and future simple interest at 10% per annum. On appeal, the Debts Recovery Appellate Tribunal at Kolkata determined the dues at Rs. 54.90 lakhs with pendente lite and future simple interest at 9% per annum from 5 February 2018. PNB accepted this order and the Trust and its managing trustee moved the Orissa High Court, which directed PNB to receive Rs. 29.55 lakhs in full and final settlement.
