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Indian’s Escaping from Gulf Countries to avoid Paying Back Bank Loans – will it end an era of Cheating & Liability Dodging?

Indian’s Escaping from Gulf Countries to avoid Paying Back Bank Loans – will it end an era of Cheating & Liability Dodging?

INTRODUCTION:

In a recent article[1]“Why Indian Borrowers and UAE Banks Find It Hard to Settle Defaulted Loans?” Gulf News: Latest UAE News, Dubai News, Business, Travel News, Dubai Gold Rate, Prayer Time, Cinema, … Continue reading, dated 04 September 2021 (Gulf News) which is an important update for India’s banking sector. Between 2015 to 2019, almost $10 Billion of loans were defaulted by Indian Customers in UAE, among which the majority are from the States of Kerala, Tamil Nadu & Maharashtra.

But will all this change? Let us discuss the issue in detail. Bankruptcy Laws in UAE were criminal[2]“The UAE Bankruptcy Law: Stepping Up to the Challenges Raised by the COVID-19 Crisis.” JD Supra, www.jdsupra.com/legalnews/the-uae-bankruptcy-law-stepping-up-to-99272/ until the 2020s. Therefore, for many Indians who could not pay back the loans to UAE banks, there was no option but to escape from the country (unless they want to be in a prison in the desert).

Across UAE, we can see many abandoned Ferraris and Lamborghinis that are abandoned by their expatriate owners who fled the country because of inability to pay back the loans[3]https://www.drive.com.au/news/million-dollar-scrapyard-final-resting-place-for-supercars-in-dubai/. Not paying back loans in UAE is a serious criminal issue, which can result in Jail any time.

There are also multiple cases of willing defaulters who take a loan from GCC Banks, deposit the money in India, and repay for a few months before escaping to live in India forever. This is unethical and it will destroy the trust of UAE Banks & Government on Indians. UAE is an important business partner of India and trust is essential to strengthen cross-border business transactions.

Before SARFAESI Act[4]Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Indian Banks had a tough time[5]Shaardha, Mrs Chandra, and Ajay Jain. “The Impact of SARFAESI Act 2002 in recovering the Non Performance Assets in Public Sector Banks: A study on Recovery in SBI, CBI, CB, BOB and PNB (2008 to … Continue reading (recovery procedures running into decades) recovering assets from NPA Customers. Enforcement of Foreign Loans (especially with small amounts[6]Less than 1 crore INR) did not even make cost-return sense for many of these banks. India maintains Judicial Cooperation[7]Including UAE and many GCC Countries with multiple countries and has signed many international treaties, but these loans are not criminal cases or that of extradition. However, everything changed in 2020 when India made a new agreement with UAE (First GCC Country that was included in the reciprocal territory definition) whereby Civil Judgements in UAE[8]Ministry of Law & Hustice (Department of Legal Affairs) Notification New Delhi. 17th
January, 2020 [F. No. J-14014/1/2015-Judl.]
could be semi-automatically enforced in India.

UNDERSTANDING RECIPROCATING TERRITORIES

To understand reciprocating territories, we need to understand the Doctrine of Comity.

Comity is an international law concept even accepted by India’s Judiciary. India is a signatory of the New York Convention (this is for international arbitration – award enforcement) and in the 1960s made a domestic Foreign Awards Enforcement Law[9]The Act (Foreign Awards Act, 1961) was repealed and replaced by Arbitration & Conciliation Act, 1996 to fulfil its obligations under the above convention. Principles of Comity is not just used in Foreign Bank Loans and other smaller issues but also for international debt restructuring (even Sovereign Debts). This is used by Courts to try their level best not to clash against each other. In the future, we can expect a lot of Indian Companies to engage/get ‘cannibalized’ in cross-border insolvency issues and in such scenarios, the principle of comity is important [10]Davies, Martin. “Cross-border insolvency and admiralty: A middle path of reciprocal comity.” The American Journal of Comparative Law 66.1 (2018): 101-126. Without Comity, different Courts may give random/different judgments, and asset tracking for loan enforcement would become impossible.

Even though there are various other provisions for enforcement of foreign civil judgments. Section 44A of CPC talks about the principle of reciprocity and Government of India at times recognizes certain jurisdictions as “reciprocating territories”. These civil judgments are given certain extra privileges when it comes to enforcement in India. Here UAE has been given that privilege when it comes to enforcement of judgments given by UAE Civil Courts.

There are a few conditions for the enforcement, also there are exceptions through which an award or a judgment can be set aside by the Indian Courts. Reciprocating territories are notified by the Government of India from time to time, recently India declared UAE to be a reciprocating territory. We have also enacted the Reciprocity Act, 1943 for the same, much before the incidents.

HOW IS IT APPLIED?

This doctrines (principle of reciprocity and comity) are applied in cross-border civil suits (especially in Debt & Commercial Matters). Whether a civil verdict of a foreign country is to be enforced or not depends on the country and also based on ‘whether the applicant is trying to enforce the same’. The first prominent proposition of this theory itself states the same that the application is optional and it is also based on the public policy of the state where the foreign award or law is going to be applied. India has made this concession to UAE as a part of foreign policy.

THE IMPORTANCE OF THIS PRINCIPLE –illustrated with an example

Last year, when the pandemic started, we saw the Suez Canal Blockage Issue[11]https://www.weforum.org/agenda/2021/03/suez-canal-ship-global-trade-shipping-economics-international-globalization/ after a ship blocked the passage. The corporate structure of the ship shows how internationalized every industry is. For instance, the ship registered in Panama, operated in Singapore by a Taiwanese Shipping Corporation and managed by Japan. And apart from that, the ship will probably have a tortious liability in the middle east after getting stuck in the Suez Canal (in Egypt) while transporting the cargo from Malaysia to the Netherlands. Ship Arrests for not paying debts has become very common[12]Lynn, Robert W. “A Comment on the New International Convention on Arrest of Ships, 1999.” U. Miami L. Rev. 55 (2000): 453. Without any comity between different countries’ Judicial Systems, corporations can evade enforcement of loans especially in certain sectors (Commercial and corporate sectors). Incorporating a Company or a ship in another Jurisdiction just takes less than a day these days with the advent of e-portals and e-business and tracking assets for loan enforcement can happen easier when there is an ability to deal with multiple jurisdictions at a time. Enforcement of Foreign Debt Instruments will be impossible in the absence of the above principles since most of the major debt transactions have an international angle to them.

INDIAN JUDICIAL TRENDS IN ENFORCING S.44A OF CPC –

Supreme Court and various High Courts (Bombay, Madras, Calcutta & Kochi) while dealing with Section 44A cases have repeatedly emphasized that principles of comity require Indian Courts to respect the orders of foreign courts.

In Alcon Electronics Pvt. Ltd. v. Celem S. A[13]Alcon Electronics Pvt. Ltd. v. Celem S.A. (2017) 2 SCC 253 , (where the UK party was involved) the Supreme Court explained,

As far as the explanation with regard to reciprocal territory is concerned, there is no dispute that England is a reciprocating territory for the purpose of above Section. Section 44A of CPC indicates an independent right conferred on a foreign decree holder for enforcement of a Decree/Order in India. Section 44A was inserted by Section 2 of the Civil Procedure Code (Amendment) Act, 1937 (Act No. 8 of 1937). This Section is meant to give effect to the policy contained in the Foreign Judgments (Reciprocal Enforcement) Act, 1933. It is a part of arrangement under which on one-part decrees of Indian Courts are made executable in United Kingdom and on the other part, decrees of Courts in the United Kingdom and other notified parts of Her Majesty’s dominions are made executable in India. It is to be seen that as United Kingdom is a reciprocating territory and the High Court of Justice, Chancery Division, England being a recognized superior Court in England. Therefore, the order passed by that Court is executable in India under Section 44A of the CPC”.

ENFORCEMENT MECHANISM OF S.44A

What we can see is that Section 44A is all about “Quid Pro Quo”. If one country enforces our civil judgment, which is mandatory in these agreements, we will also be required to enforce their judgments here in India. Section 44A enumerates the procedure that has to be followed for the same, to be enforced in India. Also, as of now the jurisdictions which are considered as reciprocating territory for Section 44A – United Kingdom, Aden, Fiji, Republic of Singapore, Malaysia, Trinidad and Tobago, New Zealand, The Cook Island (including Niue) and Samoa, Hong Kong, Papua, and New Guinea, Bangladesh & United Arab Emirates. It is important not to confuse Section 44A with a foreign debt enforced through an arbitral award as in majority of big cases[14]https://www.ft.com/content/af6efd52-645f-11ea-a6cd-df28cc3c6a68.

IMPACT OF ADDING UAE AS A RECIPROCATING TERRITORY

The majority of the countries in this list were added when India was a part of the British Empire. UAE was recently added to the list in 2020. This is a significant move because UAE is India’s biggest trading partner, and it is quite essential to point out that many South Asia-focused businesses are headquartered in cities like Dubai and Abu Dhabi in UAE. In the coming years, it is expected that more of such moves will happen as commercial ties are deepening with other South Asian & ASEAN Countries. As a consequence of the above, many Indians who have defaulted on loan repayments to UAE Banks will be affected.

Now with this reciprocity agreement, a UAE Bank can peruse Indians on their properties located in India. Even for Debt Recovery, this provision can be used. All these days, debt was criminalized in UAE, but many people from Kerala/India won’t be having any substantial assets in UAE, so once they cannot pay back the loans, they used to come back home to be safe from being caught for default in repaying the debt. Nevertheless, the cooperation between India and UAE started 20 years back via a Mutual Assistance Agreement [15]Agreement on Juridical and Judicial Cooperation in Civil and Commercial Matters for the Service of Summons, Judicial Documents, Commissions, Execution of Judgements and Arbitral Awards 29th May 2000 … Continue reading. Also, in the current notification, the list of Superior Courts in the UAE is specified. After the Notification passed on by the Government of India, the Indian Courts can enforce a decree of the Superior Courts of UAE as if the decree is passed by an Indian Court, subject to conditions stated in Section 13 of the CPC[16]Conclusiveness Test.

Section 13 – The test which determines whether a foreign judgment can be enforced in India or not is given under Section 13 of CPC. This test is popularly known as the conclusiveness test. Moreover, this is a principle in Public International Law. The core idea here is that the laws of states are different but at the end of the day all the countries are civilized in nature, and a dispute, which had been adjudicated, must be enforced. Conclusiveness means that the infringed right must be declared by the foreign court. Pieces of evidence and facts of that particular judgment need not be examined by the Indian Court for establishing conclusiveness.

For a conclusive foreign judgement, a few factors need to be met;

(a) Foreign Court issuing the judgement must be of competent jurisdiction
(b) When the case has not been judged on basis of merits; For the judgement to be executed, the judgment must be made on merits, by taking all the facts and evidences, hearing both the parties and then declaring the verdict[17]E. Vedavanam Vs. Dr.Saravanan Balagurusamy and ors , & Y. Narasimha Rao v. Y. Venkata Lakshmi.
(c) both the parties must accept the jurisdiction[18]MEB vs Rajendra Singh Sethia &if the case is based on incorrect view of international law or a refusal to recognize the law of India where such law is applicable is not conclusive.

(d) where the proceedings in which the judgment was obtained are opposed to natural justice;
(e) where it has been obtained by fraud; This one is also invalid. If the judgement of the foreign court was obtained through illegal ways or defrauding the justice system abroad.
(f) It violates an existing Indian Law. Opposed to Indian Public Policy.
Essentially Section 13 acts as a guardrail to prevent Section 44A (enforcement of foreign civil judgements) from being used to circumvent the rights of an average Indian.

BEFORE THE AMENDMENT- HOW CAN A FOREIGN DEBT (NOT AWARD) BE ENFORCED?

Most of the awards from non-reciprocating territories were having an arbitration clause which would be decided by a private arbitrator, rather than the dispute being decided by a US Court, and the award can be brought up to a high court in India to be enforced.

Like, the US, China, Brazil, etc., many countries are still not in S.44A, then it is easy to execute the foreign court’s decree- here the only good way possible to get the debt back is to file for a fresh suit in a district court in India. The foreign judgement only has a persuasive value, and is only useful as an evidentiary document. In Marine Geotechnic LLC v Coastal Marine Construction and Engineering[19]Company Petition No. 67 of 2013 (Bom), the Bombay High Court explained that Section 44A is a higher-level privilege and classified and given the difference in the same.

In addition, the court explained “Armed with a decree of a court in a non-reciprocating foreign territory, what must a party do in India? His option is to file, in a domestic Indian court of competent jurisdiction, a suit on that foreign decree, or on the original, underlying cause of action, or both. He cannot simply execute such a foreign decree. He can only execute the resultant domestic decree. To obtain that decree, he must show that the foreign decree, if he sues on it, satisfies the tests of Section 13. If the decree is, on the other hand, of a court in a reciprocating territory, then he can straightaway put it into execution, following the procedure under section 44A and Order XXI, Rule 22 of the CPC.”

SECTION 44A & RECIPROCAL TERRITORIES – A LESS USED, BUT HIGH POTENTIAL PROVISION

Fugitive Economic Offenders Act, 2018[20]https://prsindia.org/billtrack/the-fugitive-economic-offenders-bill-2018 – Why expanding 44A is a better solution than this;

Mr. Nirav Modi, Mr. Vijay Mallya etc., went away from India to foreign jurisdictions. Most of their assets are stashed in offshore bank accounts along with other instruments. After losing thousands of crores of rupees from the Public Exchequer, Government came up with an idea regarding this Act. Even though the word here is ‘Economic Offender’, the whole idea is to catch and get assets of Indian Tycoons who fled India with Bank Loans. However, the issue is that the whole bill has a lot of inherent flaws – no millionaire or billionaire tycoon would keep 100 crore Rupees in an Indian Scheduled Bank and flee to the Caymans. Government forgot that fugitives always keep their assets in untraceable offshore locations.

Section 44A- reciprocating countries usually ensure that Indian Civil Judgements can be enforced comparatively hassle free in a foreign court with which India has this arrangement. Asset Recovery is easier from a tycoon abroad when their assets in London or Bahamas instead of looking for non-existent assets in India. Fugitive Economic Offenders (FEO) Act, 2018 is undoubtedly a criminal law but making more reciprocal territories may encourage an offender to run for a few more places. Signing up for more reciprocating territories is like signing up for more extradition treaties with foreign countries.

Now arises a question – Can India get a criminal from a country that does not have an extradition treaty with India? The answer is yes, but it can be harder. The treaty makes it easier. This is how exactly reciprocating territory lists works. Banks and Financial Institutions in India must also use this solution more to recover money from foreign jurisdictions with which India has a reciprocal territory agreement.

Asset Recovery should be the goal of any Indian Bank that has lost money. Getting a fugitive back to India is extremely difficult[21]Stuart, Pamela B. “Treaty Traps: How to Get Your Client Through the Maze of Extradition.” Crim. Just. 6 (1991): 24 as Western Countries Courts are sceptical of India’s human rights records[22]Arnell, Paul. “India–UK extradition law and practice–the case for reform.” Commonwealth law bulletin 45.3 (2019): 411-430. A criminal law does not ensure that people are more active in paying all loans back to India before fleeing the country. Only strengthening the recovery process that makes potential loan evaders feel that they will not get benefit will reduce the chances of loan repayment evasion.

PRACTICAL CONSIDERATIONS -RBI MUST BE PROACTIVE

Many defaulters have taken these loans for real and legitimate reasons such as starting a business or buying a house, but once the debt payments become late, their only option is to flee UAE [23]Supra. Also, for small defaulters, there was always a hope that UAE banks wouldn’t pursue them as the cost of recovery is very high and Indian courts are slow. UAE Banks have explained the high costs of recovering these loans from India, but remain optimistic about the prospects of getting the money faster and in a more affordable proceeding since this amendment has been passed. Foreign banks cannot use recovery agents in India, as Kerala High Court also recently reiterated[24]https://www.thehindu.com/news/national/kerala/foreign-banks-cannot-engage-recovery-agents-high-court/article28700299.ece.

WHAT CAN RBI TO MAKE A CPC PROVISION WORK BETTER [25]Ibid – Inability of Foreign Banks discussed above?

Also, RBI must make a regulatory framework to ensure that Section 44A amendments can be properly used for debt recovery from Indian Citizens by foreign banks. At the same time, the reciprocating country should also respect our judgments. RBI must ensure that Section 44A’s purpose (which is also about foreign debt) is enforced in India without too many ‘public policy’ considerations by the Courts.

There are multiple Acts for debt recovery and asset tracking in India[26]Recovery of Money under the Recovery of Debts Due To Banks and Financial Institution Act, 1993 and various combining acts and notifications, but can these Acts be used by a Foreign Bank in the same way[27]Foreign Exchange Management Act, 1999? Will FEMA issues crop up ? The defects in FEMA and other similar enactments can be rectified by issuing Master Directions and RBI may ask for a Bill from Parliament which may fill in all the gaps left out in the previous enactments.

If RBI could issue proper guidelines and directions in the way of assisting Foreign Banks in recovery process, then the enforcement of foreign decrees and enforcement mechanism can be easier and this may also prevent India from having people who may be other version Nirav Modi and Vijay Mallya. Hence, RBI must test the enforcement and recovery mechanism of foreign banks with a regulatory sandbox rather rushing into an untested notifications and circulars.

FUTURE – WHAT SHOULD INDIA DO?

Indian Judiciary was always sceptical about the concept of arbitration- especially when it comes to foreign awards. The same crisis may happen if our Judges start treating foreign civil judgments like Arbitral Awards using their extensive powers to stop any foreign judgements from being enforced. ONGC v Saw Pipes was the beginning. Judges often sets aside[28]NAFED v. Alimenta S.A.: Has the Indian Supreme Court Opened a Pandora’s Box on Enforcement of Foreign Awards? (for not so strong reasons) or even alters a foreign award (which is not a good idea as it is illegal to alter an award). Execution of Foreign Awards and judgements must be made easy in India. There are cases where wealthy Indians (many cases of Keralites) taking huge loans to buy luxury cars in Dubai, UAE and never paying it back by fleeing back to India. Since UAE has been considered as a reciprocating territory now, such wilful defaulters’ assets can be seized and sold off.

The government of India must expand the list (in S.44A of CPC) to more countries (especially countries with strong commercial ties) so that implementation of judgements would be easier, and shifting between countries would not be misused to prevent lawsuits.

For instance, let us take Mr Jacob Cruz takes a 10-crore loan from SBI and flees to USA, as of now it is almost impossible for SBI to chase Mr Cruz, as it is extremely time-consuming. But if US was also considered as a reciprocating territory, their courts would enforce an order given by a Debt Recovery Tribunal/ Court in Mumbai, this is far easier than filing a Fresh Debt Suit in a US Federal Bankruptcy Court and waiting for another decade. In the coming decades, Indian Banks doing business with Expats and Expat Companies in India will benefit.
Section 44A is a very important apparatus for foreign loan defaulters’ judgements to be applied in India. There are enough protections to ensure that these judgements do not cause any injustice (S.13) or any other issue. Supreme Court must ensure that these cases are not rejected on trivial grounds.

CONCLUSION:

The Government and institutions, which involves in monitoring the foreign exchange and foreign transactions, must ensure that essence of Section 44A of CPC is utilized properly at right time. The judiciary must be given enough power and freedom to scrutinize and adjudicate the cases that may involve huge swindle and fraudulent activities. Government and corresponding ministries must frame appropriate guidelines and policies to ensure smooth working between the countries with which we have large commercial relationship. By doing so, it will not only curb the undesirable scams that are likely to happen but also confirm the resolution for the people who have been victimised in such cases.

 

 

 

Anwin Thomas

4th Year, B.A.LL.B (Hons), Tamil Nadu National Law University

 

References

References
1 “Why Indian Borrowers and UAE Banks Find It Hard to Settle Defaulted Loans?” Gulf News: Latest UAE News, Dubai News, Business, Travel News, Dubai Gold Rate, Prayer Time, Cinema, gulfnews.com/business/banking/why-indian-borrowers-and-uae-banks-find-it-hard-to-settle-defaulted-loans-1.82023056
2 “The UAE Bankruptcy Law: Stepping Up to the Challenges Raised by the COVID-19 Crisis.” JD Supra, www.jdsupra.com/legalnews/the-uae-bankruptcy-law-stepping-up-to-99272/
3 https://www.drive.com.au/news/million-dollar-scrapyard-final-resting-place-for-supercars-in-dubai/
4 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
5 Shaardha, Mrs Chandra, and Ajay Jain. “The Impact of SARFAESI Act 2002 in recovering the Non Performance Assets in Public Sector Banks: A study on Recovery in SBI, CBI, CB, BOB and PNB (2008 to 2014).” International Journal of Applied Engineering Research 11.7 (2016): 5218-5224.
6 Less than 1 crore INR
7 Including UAE and many GCC Countries
8 Ministry of Law & Hustice (Department of Legal Affairs) Notification New Delhi. 17th
January, 2020 [F. No. J-14014/1/2015-Judl.]
9 The Act (Foreign Awards Act, 1961) was repealed and replaced by Arbitration & Conciliation Act, 1996
10 Davies, Martin. “Cross-border insolvency and admiralty: A middle path of reciprocal comity.” The American Journal of Comparative Law 66.1 (2018): 101-126
11 https://www.weforum.org/agenda/2021/03/suez-canal-ship-global-trade-shipping-economics-international-globalization/
12 Lynn, Robert W. “A Comment on the New International Convention on Arrest of Ships, 1999.” U. Miami L. Rev. 55 (2000): 453
13 Alcon Electronics Pvt. Ltd. v. Celem S.A. (2017) 2 SCC 253
14 https://www.ft.com/content/af6efd52-645f-11ea-a6cd-df28cc3c6a68
15 Agreement on Juridical and Judicial Cooperation in Civil and Commercial Matters for the Service of Summons, Judicial Documents, Commissions, Execution of Judgements and Arbitral Awards 29th May 2000 – UAE- India
16 Conclusiveness Test
17 E. Vedavanam Vs. Dr.Saravanan Balagurusamy and ors , & Y. Narasimha Rao v. Y. Venkata Lakshmi
18 MEB vs Rajendra Singh Sethia
19 Company Petition No. 67 of 2013 (Bom
20 https://prsindia.org/billtrack/the-fugitive-economic-offenders-bill-2018
21 Stuart, Pamela B. “Treaty Traps: How to Get Your Client Through the Maze of Extradition.” Crim. Just. 6 (1991): 24
22 Arnell, Paul. “India–UK extradition law and practice–the case for reform.” Commonwealth law bulletin 45.3 (2019): 411-430
23 Supra
24 https://www.thehindu.com/news/national/kerala/foreign-banks-cannot-engage-recovery-agents-high-court/article28700299.ece
25 Ibid – Inability of Foreign Banks discussed above
26 Recovery of Money under the Recovery of Debts Due To Banks and Financial Institution Act, 1993 and various combining acts and notifications
27 Foreign Exchange Management Act, 1999
28 NAFED v. Alimenta S.A.: Has the Indian Supreme Court Opened a Pandora’s Box on Enforcement of Foreign Awards?

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