Recently, Thane additional district consumer disputes redressal commission held that banks can recover the dues from a credit card customer from the customer’s fixed deposit (FD) held by the bank. The district commission dismissed the plea by the card-holder after the bank contested that:
The bank had reached a settlement with the card-holder to clear the dues in three instalments.
Since the card-holder failed to clear the dues as per the settlement terms, the bank issued a notice to him and then exercised its right to recover the dues from his FD with the bank.
Not happy with this judgement, the card-holder preferred to file an appeal before the Maharashtra state consumer disputes redressal commission. His argument was that the dues on his credit card were for the period up to 2006 and could not be recovered from his account in 2014 because the claim by the bank had been time-barred under the Limitations Act. He alleged that the bank recovered the money from his FD without his knowledge or consent.
The state commission made an important observation that the card-holder had neither disputed issuance of the credit card, nor the dues against the card. The commission further held that, though the bank was barred by the Limitation Act for initiating legal remedy, it did have the right to recover the dues. So, the state commission dismissed the appeal by the card-holder and upheld the order in favour of the bank.
What we gather from this news report is that the card-holder did not dispute his dues, he agreed for amicable settlement with the bank; but, since he did not follow the terms and conditions of the settlement, the bank exercised its right of set-off and the provisions of the Limitations Act, 1963 were not a hurdle in the recovery of bank dues.
The Madras High Court had given almost a similar ruling on 18 June 2016. Justice M Venugopal had dismissed a writ petition filed by a retired Tamil Nadu Electricity Board employee, who sought to restrain a nationalised bank from recovering the farm loan dues from his pension amount in the savings bank account.
We need to know a little more about the credit card dues and their recovery, about the right of set-off and about certain limitations under some Acts. Here, let me clarify that I am not a lawyer. I will try to explain various provisions from the view of a banker and a common man and in a broader sense.
We must first understand the working of a credit card. As the term denotes, credit card facilitates the card-holder to make various payments on credit. A bill is generated at the end of the period during which such purchases are made and contains all the transaction details informing the card-holder to pay the dues by a specific date. It also explains various terms and conditions. One must understand that the card-issuing bank is settling these payments out of its own funds, which is as good as a loan given to the card–holder, and the credit card limit is nothing but a loan limit.
The dues should be paid on or before the due date to avoid attracting penalty and hefty interest. If the dues are high, they can be converted into equated monthly instalments (EMI) on certain terms and conditions, if the card-holder is not in a position to pay the dues in one go. In the above-mentioned case, the bank and the card-holder even reached an amicable settlement of paying the dues in three instalments. However, since the dues were not paid as agreed upon, the bank had to initiate its right of set-off.
A right of set-off is a right to set off a debt due to someone against a debt due from the same person. In other words, this is combining and netting two accounts. As an example, suppose I owe Rs10,000 to Mr A and, at the same time, Mr A owes Rs9,000 to me. Here, I can exercise the right to set off my dues to Mr A to the extent of Rs9,000 and pay him the balance of Rs1,000. Indian Contract Act, 1872, has discussed the right of set-off in detail under various Sections with examples. Sections 59, 60 and 61 deal with appropriation of payment. Section 59 deals with payments where the debtor specifies application of payment to a specific debt. Section 60 says that if the debtor has not mentioned anything specific, the creditor will apply the payment as per his discretion to any lawful debt of his choice, which has actually fallen due and whether it is or is not barred by any law of in force. As per Section 61 where neither party makes any choice for appropriation, the payments will be applied in discharge of the debts in order of time and, again, whether or not, they are barred by the law in force.
For example, assume A has lent to B Rs10,000 on 1.1.2023, Rs5,000 on 17.2.2023, Rs7,000 on 15.3.2023, and so on. First payment of, say, Rs9,000 by B will go to settle the first debt of 1.1.2023. Any next payment will first be adjusted against the balance Rs1,000 of the first debt and the remaining amount will be adjusted against the second debt. If instead of Rs9,000 B pays Rs12,000, then Rs10,000 will fully go to settle debt of 1.1.2023 and balance Rs2,000 will go to adjust debt of 17.2.2023; and so on. While loans are repaid by fixed instalments, cash credits and overdrafts are running accounts. So, to avoid any complications, banks obtain ‘Letter of Continuity’ or ‘Letter of Continuing Security’ so that the earliest debts get appropriated with every subsequent deposit.
Apart from the above three Sections, Section 171 of the Indian Contract Act explains general lien, inter alia, of bankers. It says that “in the absence of any contract to the contrary, they can retain as a security for a general balance of account any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.” It is worth noting that the housing finance companies / banks generally insert an ‘Extension Clause’ in their agreement with the borrower of housing loan thereby extending the lenders’ right on the property to any other loan given to that borrower.
Now about the limitation period which the credit card customer cited. The well-known Limitation Act, 1963, basically lays down provisions for filing suit in case of default or dispute. It notifies as many as 137 descriptions of suits and, in most of them, the limitation is for three years. A few carry limitation of 12 years; whereas it is 30 years for various local authorities. Limitation period for application in specified cases runs from 10 days to one year depending on the case. Section 18 of this Act specifies “Effect of acknowledgement in writing.” Accordingly, where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.
Section 19 seems to strengthen the position of a lender stating that “Where payment on account of a debt or of interest is made before the expiration of the prescribed period by the person liable to pay the debit or by his agent duly authorized in this behalf, a fresh period of limitation shall be computed from the time when such payment was made.” It is interesting to note that as per Section 22 of the Limitation Act, 1963, in the case of continuous breach of contract a fresh limitation begins to run at every moment of the time during which the breach continues.
Apart from Limitation Act, 1963, some other Acts have also defined their own terms as far as limitation is concerned. For example, the Electricity Act, 2003, provides under Section 56 (2) that “no sum due from any consumer, under this section shall be recoverable after the period of two years from the date when such sum became first due unless such sum has been shown continuously as recoverable as arrear of charges for electricity supplied and the licensee shall not cut off the supply of the electricity.” However, limitations across various Acts are flexible enough to consider genuine reasons and exceptions are granted by the authorities and judicial system based on the ground reality. While concluding, I would repeat that I am not a lawyer and have taken best possible efforts to explain various provisions in a simple language. After all, it is upon the lawyers to interpret the law, depending on a case.