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. The bank alleged that the former Branch Manager had colluded with borrowers to defraud the bank by sanctioning overdraft loans against proposed LIC policies as security, which later resulted in significant monetary losses. 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 Recovery of Debts and Bankruptcy (RDB) Act, 1993.
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. However, 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 sided with the manager, relying on judgments 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 tribunal 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.
This judgment highlights the importance of distinguishing between liabilities arising from customer transactions and losses resulting from employee misconduct. It also underscores the need for banks to establish clear evidence of criminal misconduct by employees in order to pursue recovery proceedings under the RDB Act. The DRAT’s decision provides clarity on the interpretation of ‘debt’ under the Act and has significant implications for banks and financial institutions seeking to recover losses resulting from employee fraud.