Company Law Case: Arun Chandra Vs. Nepal Rastra Bank, NKP,2063, No. 11, P. 1434.
Case: Certiorari and Mandamus
Petitioner: Basuling Sugar and General Industries Ltd., represented by Arun Chand.
Respondents: Nepal Rastra Bank, Central Office, Kathmandu and other participating banks and financial institutions.
Decision No: 7785
This case is related to certiorari and mandamus against the banks and Nepal Rastra Bank for loan restructuring and financial concessions.
Facts of the Case:
Basuling Sugar and General Industries Ltd. was established in Kailali in 2051 B.S. to produce and sell sugar. It started trial production in 2054 B.S. but faced shortage of raw materials, lack of timely loan disbursement, the state of emergency, industrial insecurity and other adverse conditions, causing continuous losses. The company obtained a total loan of about Rs. 57.43 crore from different banks and financial institutions under a co-financing arrangement led by Agriculture Development Bank. The loans consisted of:
Long-term loan – Rs. 43.88 crore
Working-capital loan – Rs. 8 crore
Bridge-gap loan – Rs. 5.35 crore,
It had also paid about Rs. 3.60 crore as interest. Because of its financial difficulties, the company repeatedly requested interest deferment, loan restructuring and other facilities to revive the industry. The authorities considered the company a sick industry and took steps regarding possible relief and restructuring. However, the banks later decided that loan restructuring would be considered only if the company:
- paid 25% of the accumulated interest;
- arranged working capital through its own equity investment and
- paid the 25% interest within one month, otherwise recovery proceedings would be started.
The company did not fulfill these conditions. It also failed to repay the loan and interest according to the original agreements. Consequently, the company and its shareholder were placed on the blacklist as willful defaulters. After the company challenged the actions before Supreme Court, arguing that the blacklist decision was unlawful and that it was entitled to sick-industry facilities and loan restructuring. It also challenged Regulation 3(1) and 4 of the Nepal Rastra Bank Credit Information Regulations, 2059 as ultra vires.
Petitioner’s Claim:
Petitioner claimed that, The industry had become sick because of circumstances beyond its control and the authorities had also recognized the industry as a sick industry. The respondents had previously taken steps toward restructuring the loan and providing relief. But the respondents later decided to recover the loan and place the company and its directors on the blacklist which was inconsistent with the earlier decision to provide sick-industry facilities. The action violated petitioner’s constitutional and legal rights. The relevant provisions of the Nepal Rastra Bank Credit Information Regulations, 2059, particularly Regulation 3(1) and 4, were beyond the authority given by the Nepal Rastra Bank Act, 2058. Therefore, the blacklist decision should be quashed and the respondents should be ordered to provide the facilities and relief available to the sick industry. The petitioner therefore sought certiorari to quash the impugned decisions and mandamus directing the respondents to provide the requested relief and facilities.
Respondents Arguments:
Nepal Rastra Bank: NRB argued that Section 79 of the Nepal Rastra Bank Act, 2058 gives Nepal Rastra Bank broad authority to regulate banks and financial institutions. Section 88 gives it authority concerning the credit information system, Section 110 gives authority to make regulations for implementing the Act. Therefore, the Credit Information Regulations, 2059 were validly made. The establishment and operation of the Credit Information Centre were within the statutory authority and the blacklisting of a borrower who failed to repay the loan was lawful.
Agriculture Development Bank: ADB argued that petitioner had borrowed money under an agreement and failed to repay the principal and interest within the agreed time. Repeated demands for repayment were ignored and failure to repay constituted a breach of the loan agreement. Therefore, blacklisting and recovery proceedings were lawful.
Nepal Bank Limited: NBL argued that the company had failed to repay the loan despite repeated notices and that the decision to blacklist it was made according to the direction of Nepal Rastra Bank. Therefore, the writ petition should be dismissed.
Rastriya Banijya Bank: RBB argued that petitioner had not paid the loan and that restructuring could be considered if it paid 25% of the accumulated interest. Since it failed to do so, the bank was entitled to take recovery action and blacklist the petitioner.
Credit Information Centre: The centre argued that it did not independently decide to blacklist the petitioner, The participating banks and financial institutions requested the blacklisting therefore the Centre was legally authorized and required to maintain credit information and blacklist defaulting borrowers under the Nepal Rastra Bank Act and relevant directions. Therefore, its action was lawful.
Legal Issues:
- Were Regulation 3(1) and Regulation 4 of the Nepal Rastra Bank Credit Information Regulations,2059 inconsistent with Sections 88(1), 88(2) and 110(2) of the Nepal Rastra Bank Act, 2058?
- Was the decision to blacklist the petitioner legally valid?
- Was petitioner entitled to the certiorari and mandamus orders it requested?
Decisions of the Courts:
Supreme Court: Court held that being recognized as a sick industry did not automatically give the company a legal right to demand loan restructuring or financial concessions. The proposed restructuring was subject to conditions, and the company had not fulfilled those conditions. Therefore, court could not order the banks to provide the requested concession. Court held that Regulation 3(1) and 4 were not ultra vires. Sections 88 and 110 of the Nepal Rastra Bank Act, 2058 gave Nepal Rastra Bank sufficient authority to establish and regulate the credit information system and make necessary regulations. The Court also held that the blacklisting was lawful because the company had failed to repay its loans and interest within the agreed period. Under Section 88 of the Nepal Rastra Bank Act, 2058, defaulting borrowers could be placed on the blacklist. Therefore, Supreme Court found no basis to interfere through writ jurisdiction and writ petition was dismissed.
Established principle:
A concession or privilege not protected by law cannot be claimed as a legal right, and a borrower who fails to fulfill its loan obligations may lawfully be blacklisted according to the applicable law.
Legal Doctrines:
- Doctrine of Separate Legal Personality: A company is legally separate from its shareholders and directors. However, the court observed that the company’s activities are carried out through its directors, and directors are responsible for carrying out the company’s duties and obligations.
- Doctrine of Judicial Restraint in Contractual/Alternative Proceedings: Where an appropriate ordinary legal mechanism is already available or proceedings concerning the contractual dispute are pending, the Supreme Court generally does not use extraordinary writ jurisdiction to interfere unnecessarily.
