After Account Turns NPA and Recovery Suit Is Filed, Interest Is at Tribunal's Discretion: DRAT Allahabad

The Debts Recovery Appellate Tribunal (DRAT) at Allahabad has reiterated that once a loan account is classified as a non-performing asset (NPA) and a recovery suit is filed, contractual terms governing interest do not automatically apply. The tribunal said it is for the adjudicating forum to decide the rate of pendente lite and future interest.

A coram of Chairperson Justice R.D. Khare dismissed an appeal filed by Housing and Urban Development Corporation Ltd. (HUDCO) against an order of the Debt Recovery Tribunal which had reduced the rate of interest in recovery proceedings against Shashi Bhusan Cold Storage Pvt. Ltd. and its guarantors.

“But in case of the account being NPA, the contract executed between the bank and the borrower comes to an end and no terms and conditions of the said agreement can prevail in future when recovery suit is filed before any Court of law,” the tribunal observed.

It added that once a recovery suit is filed, “it is the discretion of the court to award the compensation by way of interest in addition to the principal amount.”

The financial assistance was extended to the borrower company for setting up a cold storage project, supported by personal guarantees and security documents executed on July 7, 2008.

Due to persistent defaults, the loan account was declared NPA on November 30, 2010. HUDCO filed an application before the DRT, claiming recovery of approximately Rs. 2.55 crores with interest.

While allowing the recovery claim, the DRT reduced the pendente lite and future interest, noting that once the account had become NPA and recovery proceedings were initiated, the contractual agreement governing interest could no longer automatically prevail.

The tribunal held that interest awarded thereafter is in the nature of compensation and must be determined judicially, taking into account surrounding facts and equities. Challenging this, HUDCO contended that the contractual rate of interest ought to have been granted in full.

Rejecting the argument, the appellate tribunal held that once a recovery suit is filed, it is the discretion of the court or tribunal to award interest, and such discretion cannot be fettered by contractual terms that stood exhausted upon the account turning NPA.

Finding that the DRT had exercised its discretion judiciously, the Debts Recovery Appellate Tribunal declined to interfere and dismissed the appeal.