Debt Relief Legislation & Litigation

The budget proposal to write off debts to the tune of Rs.60,000 crores due by small and medium farmers to the banking sector and rural co-operative credit has been greeted with hooplas and hurrahs. A renowned scientist of international reckoning has said that these measures are not sufficient. He has pleaded for expanding the categories of farmers eligible for waivers to include persons holding larger extents with no irrigation facilities, persons with land holdings in certain dry parts of the country and also to farmers who have availed of credit from private money lenders. The last suggestion is a topic too familiar to lawyers. It was in the then Madras Presidency that the saga of agriculturists debt relief legislations began. Called by the common folk as Rajaji Act, it was Act 4 of 1938 that contained provisions for reducing the rate of interest of loans for agriculturists, notwithstanding the specifications for higher interest in the contract, provisions for scaling down of debts having due regard to repayments already made at higher rates of interest, wiping out debts if the amount paid towards interest or principal had equaled twice the principal, setting aside sales that had already taken place and reworking the amount payable. The Act also contained special provisions for redemption of usufructuary mortgages that had complicated and technical rules of discharge in instances when the mortgagor continued in possession under a lease back arrangement with the usufructuary mortgagee.

The Agriculturists Debt Relief Act was hammered and chiseled, maimed and amended several times both by legislative exercise and judicial pronouncements. Cases multiplied to such an extent that the Chief Justice Lionel Leach constituted a special bench with Wadsworth and Patanjali Sastri JJ to deal with all the cases exclusively so that there would be consistency in approach and interpretation. The constitutionality of the Act on the ground that the provincial legislation had no power to deal with matters relating to negotiable instruments was rejected by the Full Bench in Nagaratnamma v Seshayya (1939) by adopting the well known principle of pith and substance doctrine in identifying the Act as dealing principally with money-lending which was a provincial subject and indebtedness arising out of contract which was in the concurrent list under the Government of India Act 1935 and the Governor and General having assented to the legislation under section 107 of GI Act, the legislative competence of the provincial legislature could not be doubted. The vires of the Act came for consideration again when Wadsworth J, while dismissing a civil revision petition in terms of the Full Bench to which he was a party, granted leave to appeal to the Federal Court, which again decided that the Act was intra vires the legislative powers in Subramanyan Chettiar v Muthuswami Goundan (1941). The Federal Court, while dealing with Bengal Money Lenders Act, which dealt with scaling down of all debts had held in Bank of Commerce v Kunja Behari Kar that the Act was intra vires only in so far as the debts did not apply to negotiable instruments and ultra vires in so far as it made provisions for promissory notes. This decision was the cause for reference to a Full Bench again, which held in Perumal Reddiar v Suppiah Thevar that the fact that the Federal Court had granted leave in Bank of Commerce to prefer an appeal to Privy Council need not deter them and said earlier Full Bench ruling would stand in view of the Federal Court decision in Subramania Chettiar. There was soon enough an ordinance that the Act would apply also to promissory notes to clear the cloud created by Bank of Commerce decision. The challenge to the Ordinance was rejected again by the Federal Court in Kothapu Subbi Redi v Sanepalli Chenna Reddi (1946).

The 1938 Act and the litigations just refused to fade. It was resurrected through Amending Act 8 of 1973 and similar provisions for ‘indebted persons’ who were not agriculturists under Act 38 of 1972. From 1975 to 1980, there were several avatars of debt relief legislations through Act 15 of 1975, 16 of 1975, their periodical extensions, Act 40 of 79, Act 13 of 1980, Act 50 of 83, each containing novel provisions for scaling down or wiping out debts. Act 13 of 1980 came for adverse criticism when it completely wiped away debts to creditors irrespective of their own economic status and the Act was repealed to save the creditors from ruin. The law reports are surfeit with decisions that speak volumes on the interpretative forensic skills of the legal fraternity. There had been a long respite for debt relief legislations and it had to wait till the State Government, soon after assuming power in the last election made a wipe out of debts due to Cooperative Societies that cost the institutions Rs.600 crores.

Some people say that the proposal to write off debts gives a premium to dishonesty. The Finance Minister’s sops will soon be complemented, it is believed , with State legislation granting debt reliefs from private money lenders. These lenders have now known their game too well. They do not advance moneys on promissory notes. Instead, they enter into agreements for sale which they put into court for enforcement if the moneys are not repaid as promised. Whoever loses, there are more litigations round the corner. There could be reliefs from debts but how could anyone guarantee relief from litigations on debt relief?