Whether a foreign bank can invoke jurisdiction of Debt Recovery Tribunals?

PROPOSITION:-

Whether a foreign bank can invoke the jurisdiction of Debt Recovery Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993?

LEGAL PROVISIONS

The Recovery of Debts Due to Banks and Financial Institution Act, 1993-

“2. Definitions:- In this Act, unless the context otherwise requires,-

   (d)   “bank” means--

(i)          a banking company;

(ii)         a corresponding new bank;

(iii)        State Bank of India;

(iv)       a subsidiary bank; or

(v)         a Regional Rural Bank.

(e)      “banking company” shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

PROCEDURE OF TRIBUNALS-

[19. Application to the Tribunal.—(1) Where a bank or a financial institution has to recover any debt from any person, it any make an application to the Tribunal within the local limits of whose jurisdiction-

(a) the defendant, or each of the defendants where there are more than one, at the time of making the application, actually and voluntarily resides or carriers on business or personally works for gain; or

(b) any of the defendants, where there are more than one, at the time of making the application, actually and voluntarily resides or carries on business or personally works for gain; or

(c)  the cause of action, wholly or in part, arises.

BANKING REGULATION ACT, 1949­-

Section 5-

Interpretation- [In this Act], unless there is anything repugnant in the subject or context-

[(a) *******

          (i) **********

          (ii) *********

(b)      “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;

(c)      “banking company” means any company which transact the business of banking [in India}

          Explanation—Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;

(ca)    *****

(cc)    “branch” or “branch office”, in relation to a banking company, means any branch or branch office, whether called a pay office or sub-pay office or by any other name, at which deposits are received, cheques cashed or moneys lent, and for the purposes of Section 35 includes any place of business where any other form of business referred to in sub-section (1) of section 6 is transacted;]

(d)      “company” means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that Act;].

THE COMPANIES ACT, 1956-

 Section 2. Definitions-In this act, unless the context otherwise requires,-

[(1)]   “abridged prospectus” means a memorandum containing such salient features of a prospectus as may be prescribed;]

[1A)}  *****

(2)      *****

(5)      “banking company” has the same meaning as in the Banking Companies Act, 1949 (10 of 1949);

(10)    “company” means a company means a company defined in section 3;

Section 3.   Definitions of “company”, “existing company”, “private company” and “public company”.—(1) In this Act, unless the context otherwise requires, the expressions “company”, “existing company”, “private company” and “public company” shall, subject to the provisions of sub-section (2), have the meanings specified below:--

(i)       “company” means a company formed and registered under this Act or an existing company as defined in clause (ii);

(ii)      *****

(iii)        *****

(iv)       *****

PART XI

COMPANIES INCORPORATED OUTSIDE INDIA-

Section 591. Application of Section 592 of 602 to foreign companies—[(1)} Sections 592 to 602 both inclusive, shall apply to all foreign companies, that is to say, companies falling under the following two classes, namely:--

(a)         companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and

(b)         companies incorporated outside Indian which have, before the commencement of this Act, established place of business within India and continue to have an established place of business within India at the commencement of this Act.

[(2)]   Notwithstanding anything contained in sub-section (1), where not less than fifty per cent of the paid up share capital (whether equity or preference or party equity and partly preference) of a company incorporated outside India and having an established place of business of India is held by one or more citizens of India or by one or more bodies incorporate incorporated in India, or by one of more citizens of India and one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall company with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India.]

Section 592. Documents, etc., to be delivered to Registrar by foreign companies carrying on business in India.—(1) Foreign companies which, after the commencement of this Act, establish a place of business of India shall, within [thirty days] of the establishment of the place of business, deliver to the Registrar for Registration—

(a)      a certified copy of the charter, statutes, or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company; and, if the instrument is not in the English language, a certified translation thereof;

(b)      the full address of the registered or principal office of the company;

(c)      a list of the directors and secretary of the company, containing the particulars mentioned in sub-section (2);

(d)      the name and address or the names and addresses of some one or more persons resident in India, authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company; and

(e)      the full address of the office of the company in India which is to be deemed its principal place of business of India.

(2)      The list referred to in clause (c) of sub-section (1) shall contain the following particular, that is to say:-

(a)      with respect to each director--

(i)       in the case of an individual, his present name and surname in full, any former name or names and surname or surnames in full, his usual residential address, his nationality of origin, and his business occupation, if any, or if he has no business occupation but holds any other directorship or directorships, particulars of that directorship or of some one of those directorships; and

(ii)      in the case of a body corporate, its corporate name and registered or principal office; and the full name, address, nationality and nationality of origin, if different from that nationality, of each of its directors;

(b)      with respect to the secretary or where there are joint secretaries, with respect to each of them-

(i)       in the case of an individual, his present name and surname, any former name or names and surname or surnames, and his usual residential address; and

(ii)      in the case of a body corporate, its corporate name and registered or principal office;

Provided that, where all the partners in a firm are joint secretaries of the company, the name and principal office of the firm may be stated instead of the particulars mentioned in clause (b) of this sub-section.

(3)      clauses (2) and (3) of the Explanation to sub-section (1) of section 303 shall apply for the purpose of the construction of references in sub-section (2) to present and former names and surnames as they apply for the purposes of the construction of such references in sub-section (1) of section 303.

(4)      Foreign companies, other than those mentioned in sub-section (1) shall, if they have not delivered to the Registrar before the commencement of this Act the documents and particulars specified in sub-section (1) of section 277 of the Indian Companies Act, 1913 (7 of 1913), continue to be subject to the obligation to deliver those documents and particulars in accordance with that Act.

Section 593. Return to be delivered to Registrar by foreign company where documents, etc., altered.—If any alteration is made or occurs in—

(a)      the charter, statutes, or memorandum and articles of a foreign company or other instrument consisting or defining the constitution of a foreign company; or

(b)      the registered or principal office of a foreign company; or

(c)      the directors of secretary of a foreign company [****] or

(d)      the name or address of any of the persons authorised to accept service on behalf of a foreign company; or

(e)      the principal place of business of the company in India;

The company shall, within the prescribed time, deliver to the Registrar for registration a return containing the prescribed particulars of the alteration.

Section 594.         Accounts of foreign company. – (1) Every foreign company shall, in every calendar year, -

(a)      make out a balance sheet and profit and loss account in such form, containing such particulars and including or having annexed or attached thereto such documents (including, the particular documents relating to every subsidiary of the foreign company) as under the provisions of this Act it would, if it had been a company within the meaning of this Act, have been required to make out and lay before the company in general meeting; and

(b)      deliver three copies of those documents to the Registrar:

          Provided that the Central Government may, by notification in the Official Gazette, direct that, in the case of any foreign company or class of foreign company the requirements of clause (a) shall not apply, or shall apply subject to such exceptions and modifications as may be specified in the notification.

          (2)      If any such document as is mentioned in sub-section (1), is not in the English language, there shall be annexed to it a certified translation thereof.

          (3)      Every foreign company shall send to the Registrar with the documents required to be delivered to him under sub-section (1), three copies of a list in the prescribed form of all places of business established by the company in India as at the date with reference to which the balance sheet referred to in sub-section (1), is made out.

Section 595.         Obligation to state name of foreign company, whether limited, and country where incorporated. – Every foreign company shall -

(a)      in every prospectus inviting subscriptions in India for its shares or debentures, state the country in which the company is incorporated;

(b)      conspicuously exhibit on the outside of every office or place where it carries on business in India, the name of the company and the country in which it is incorporated, in letters easily legible in English characters, and also in the characters of the language or one of the languages in general use in the locality in which the office or place is situate;

(c)      cause the name of the company and of the country in which the company is incorporated, to be stated in legible English characters in all business letters, bill-heads and letter paper, and in all notices, ¹[***] and other official publications of the company; and

(d)      if the liability of the members of the company is limited, cause notice of that fact –

(i)       to be stated in every such prospectus as aforesaid and in all business letters, bill-heads, letter paper, notices, advertisements and other officials publications of the company, in legible English characters; and

(ii)      to be conspicuously exhibited on the outside of every office or place where it carries on business in India, in legible English characters and also in legible characters of the language or one of the languages in general use in the locality in which the office or place is situate.

Section 596.         Service on foreign company. – Any process, notice, or other document required to be served on a foreign company shall be deemed to be sufficiently served, if addressed to any person whose name has been delivered to the Registrar under the foregoing provisions of this Part and left at, or sent by post to, the address which has been so delivered:

          Provided that –

(a) where any such company makes default in delivering to the Registrar the name and address of a person resident in India who is authorized to accept on behalf of the company service of process, notices or other documents; or

(b) if at any time all the persons whose names and addresses have been so delivered are dead or have ceased so to reside, or refuse to accept service on behalf of the company, or for any reason, cannot be served;

A document may be served on the company by leaving it at, or sending it by post to, any place of business established by the company in India.

Section 597.         Office where documents to be delivered. – (1) Any document which any foreign company is required to deliver to the Registrar shall be delivered to the Registrar having jurisdiction over New Delhi, and references to the Registrar in this Part [except in sub-section (2)] shall be construed accordingly.

          (2)      any such document as is referred to in sub-section (1) shall also be delivered to the Registrar of the State in which the principal place of business of the company is situate.

          (3)      if any foreign company ceases to have a place of business in India, it shall forthwith give notice of the fact to the Registrar, and as from the date on which notice is so given, the obligation of the company to deliver any document to the Registrar shall cease, provided it has no other place of business in India.

Section 598.         Penalties. – If any foreign company fails to comply with any of the foregoing provisions of this Part, the company, and every officer or agent of the company who is in default, shall be punishable with fine which may extend to ¹[ten thousand rupees], and in the case of a continuing offence, with an additional fine which may extend to ²[one thousand rupees] for every day during which the default continues.

Section 599.         Company’s failure to comply with Part not to affect its liability under contracts, etc. – Any failure by a foreign company to comply with any of the foregoing provisions of this Part shall not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued in respect thereof; but the company shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until it has complied with the provisions of this Part.

INTERPRETATION AND SUBMISSIONS:-­-

1.       It is stated that in order to address the issue “whether a foreign bank can invoke the jurisdiction of the Debt Recovery Tribunals under the Recovery of Debt Due to Banks and Financial Institutions Act, 1993(hereinafter referred as ‘The Act’)”, it is indeed important to configure that who all can invoke the jurisdiction of the Learned Debt Recovery Tribunal under the Act. As provided under Section 19 of the Act, a Bank or a Financial Institution can make an Application to recover any debt from any person, and thereby invoking the jurisdiction of the Learned Debt Recovery Tribunal under the Act.

2.       It is pertinent to appreciate the meaning of the word “Bank”. As defined under Section 2(d) of the Act, a “Bank” means a banking company, a corresponding new bank, State Bank of India, a subsidiary bank or a regional rural bank. It is further stated that the Banking Company is defined under the Banking Regulation Act, 1949, as “any company which transact the business of banking in India”. A ‘company’, as defined under the Banking Regulation Act, under Section 5(d) means any company defined under Section 3 of the Companies Act, 1956, and includes a foreign company, as defined under the Companies Act, 1956.

3.       As per Part-XI- under title “Companies incorporated outside India” of the Companies Act, a foreign company is classified into two classes namely-

(a)         companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and

(b)         companies incorporated outside India which have, before the commencement of the Companies Act established a place of business within India and continued to have an established place of business within India at the commencement of the Companies Act.

Therefore, a Bank which is incorporated outside India and has established a place of business in India qualifies to be a foreign company.

4.       As per Section 599 of the Companies Act, a foreign company is not entitled to bring any suit, claim any set-off, make any counter claim or institute any legal proceedings in respect of any such contract, dealing or transaction, until it has complied with the provisions provided under Part-XI of the Companies Act. Such requirements are listed below-

Sections	Requirements
Section 592	Foreign companies to furnish following documents to the registrar within 30 days: (a)  a certified copy of the charter, statutes, or memorandum or articles of the company and others. (b)  The full address of the registered or principal office of the company. (c)   A list of the directors and secretary of the company, containing the particulars as prescribed. (d)  Name and address of the persons resident in India and authorized by the company to act on its behalf. (e)  Full address of the office of the company in India which is to be deemed its principal place of business in India; (f)    Such others as provided under the Section.
Section 593	Return to be delivered to registrar by a foreign company where documents filed with the Registrar are altered by the Company.
Section 594	Balance sheet and profit and loss account to be filed with the registrar (three copies to be filed)
Section 595	Obligation to state name of the foreign company, whether limited, and country where incorporated— (a)     in every prospectus inviting subscription (b)     conspicuously exhibit on the putside of every office or place where it carries on business in India (c)     such other as prescribed under the instant Section.
Section 596-598	Such requirements as prescribed under the instant Sections.

CONCLUSION:-

Therefore, in view of the above it can be concluded that foreign bank qualifying to be a foreign company under the Companies Act, 1956 is entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceedings including invocation of jurisdiction of the Debt Recovery Tribunals under the Recovery of Debt due to Banks and financial Institutions Act, 1993 in respect of any contract, dealing or transaction, only upon complying with the conditions and the provisions prescribed under part XI of the Companies Act, 1956.

Difference Between Trust and Retention Account and Escrow Account*

Trust and Retention Account (TRA) mechanism

TRA mechanism has been a common feature in financing of infrastructure projects. It seeks to protect the project lenders against the credit risk (the risk of debt service default) by insulating the cash flows of the project company. This is done through shifting the control over future cash flows from the hands of the borrowers (project company) to an independent agent, called TRA agent, duly mandated by the lenders.

2. The infrastructure projects are executed through a separate company created for the purpose (called 'Special Purpose Vehicle' - SPV) and the shares of the SPV would normally be held, among others, by the sponsors of the project. The cash flows of the SPV (project company) are subjected to a TRA arrangement. Under this arrangement, the lenders, the borrower and the TRA agent enter into a tri-partite agreement, which provides for all revenues of the project to be directed into a single account, maintained with the designated TRA agent. The lenders, in consultation with the borrower, draw up a detailed mandate for the TRA agent as to periodic transfer and utilisation of funds available in the TRA. The mandate basically spells out the manner and purpose of various payments including the debt service to the lenders. The payment to the lenders is to be made directly by the TRA agent, as per its mandate, without any intervention by the borrower. For operational convenience, the TRA could be sub-divided into several sub-TRAs dedicated to separate heads of expenses / purposes. In case of multi currency cash flows, there could also be separate TRAs with the same agent or different TRA agents for handling the cash flows in various currencies. Thus, the TRA agent acts as a trustee on behalf of the lenders and ensures that the cash flows are accessible to the borrower / project company, strictly as per the mandate. Thus, the TRA mechanism could be viewed as a sophisticated version of the traditional 'No Lien' accounts, on which the concerned bank could not exercise its right of general lien.

3. Illustratively, the mandate to the TRA agent by the lenders for appropriation of cash flows could prescribe the following sequence for end use of funds:

● All operation and maintenance expenses of the project;

● Monthly dues / accruals of net principal and interest payments to lenders;

● A debt service reserve equal to, say, six months' dues - which could also be backed by a letter of credit to be arranged by the sponsors of the project company;

● A cash reserve equal to, say, four months' operating expenses;

After meeting all the foregoing obligations, either through L/C or out of project cash flows, the residual funds, if any, would be available to the project company for disposal as per their discretion or as pre-determined by the mandate given to the TRA agent. .

4. A Trust and Retention Account mechanism needs to be distinguished from an Escrow Account arrangement,though the two are somewhat similar. An Escrow Account is an arrangement for safeguarding the borrower against its customers from the payment risk for the goods or services sold by the former to the latter. This is achieved by removing the control over the cash flows from the hands of the customer to an independent agent, who in turn could ensure appropriation of cash flows as per the its mandate. The Escrow arrangement provides for directing a pre-determined payment stream from the customers of the borrower to a special account maintained with a designated agent. Payment / deposit by the user / buyer into such an account is assumed to be a valid discharge of his liability to the supplier of the goods / services. An Escrow arrangement involves parties different from the parties in a TRA mechanism. The Escrow arrangement would involve usually four parties: the lender, the borrower, the customers of the borrower and the Escrow Agent. The mandate to the Escrow Agent would normally be finalised by the lenders in consultation with the borrower and its customers.

5. Thus, for instance, in financing of a power plant which sells its power generated to a SEB, the Escrow arrangement would involve the power producer (borrower), the SEB concerned (customer), the bank / FI (lenders) and the Escrow Agent (a designated bank). The SEB would agree to direct its collection centres to deposit the electricity charges received from retail consumers, into a designated account with the designated bank (Escrow agent) and to direct its bulk consumers to deposit their payments directly with the Escrow Agent in the specified account. The Escrow Agent would then appropriate the funds in the Escrow account as per the priority laid down in the Escrow Agreement.

* extract from co-ordination between banks and financial institutions, BP. BC. 82 /21.04.048/00-01 dated February 26,2011, available at www.rbi.org.in