2022 Supreme Court NPL verdict coming back to haunt the Judiciary and Financial Institutions

On 13 July 2022 the Supreme Court upheld a High Court judgment on the RICBL Vs Ugyen Wangchuk Non Performing Loan (NPL) recovery case which said that a Nu 102.39 mn loan owed by contractor Ugyen Wangchuk is to be divided equally between Ugyen Wangchuk, RICBL and the relevant RICBL employees at Nu 34.13 mn each.

The case became a precedent setting judgment as it was a bid by the judiciary to fix accountability not only on the borrower, but also the bank officials and the bank for not following proper process and procedures in giving the loans or managing them.

The underlying legal logic of the judgment was that even if the borrower took a huge loan and did not pay it back he or she can pay only a small portion of it if they can prove the bank made some procedural lapses while giving the loan, and the bank and its employees would have to pay the majority of the loans. It took an international doctrine stance saying ‘“when both parties are at fault, the loss has to be shared equally.”

However, this judgment is turning out to have a lot of unintended consequences as it is increasingly being cited as precedence by both loan defaulters and even courts at a time when Financial Institutions are trying to recover billions in non performing loans at the courts.

Danger to FIs

The issue, while posing a threat to all FIs is particularly precarious for insurance companies like RICBL which cannot issue cheques or did not have stringent lending practices like traditional banks.

It is also a threat for FIs that engaged in a process called ‘Ever-greening’ where they issued new loans to clients to close their old loans to avoid high NPL and those that did not follow due process in giving loans. This was a rampant practice in the past for many years in RICBL under the former management and it is suspected it was also practiced in certain other FIs.

It was driven by a need to show lower NPLs on paper so that RICBL could claim higher dividends for its shareholders and higher bonuses for its management and employees.

In a separate RICBL Vs Gyem Dorji case where the latter owed RICBL Nu 6.658 mn in loans the Commercial Bench 2 of the Thimphu Dzongkhag Court on 1st June 2023 ruled that Gyem would only have to pay 50 % or Nu 3.329 mn to RICBL.

The bench gave three reasons for this. One was that the loan was sanctioned on the same day as the loan proposal and so the Credit Manual 2011 was not followed.

Secondly the loan was only sanctioned to make adjustments against the client’s previous loan accounts (ever-greening).

Third, the court cited the Supreme Court’s Judgment on the RICBL vs Ugyen Wangchuk as precedent.

A senior RICBL official, on the condition of anonymity said that RICBL in another case in the High Court is trying to recover Nu 700 mn in NPL from a client, however, the arguments seem to be going the ‘RICBL vs Ugyen Wangchuk’ case way.

The big fear of the RICBL is that this is the very same High Court bench which had given the ‘RICBL vs Ugyen Wangchuk’ verdict upheld by the Supreme Court.

To make matters worse RICBL has around Nu 3 bn in NPL that it has to recover from around 400 accounts.

The official said that it is not only RICBL but certain other FIs are also starting to suffer in their recovery of loans due to this judgment.

This comes as the NPL of FIs hit a high of Nu 18 bn in March 2023 as per the RMA and this does not even take into account the fact that the real NPL would be much higher if not for the loan deferments given as part of the monetary measures. The deferments all end by June end 2024 after which NPL figures are set to go much higher.

Meanwhile, many big loan defaulters including those who owe hundreds of millions to FIs in NPLs are looking at the ‘RICBL vs Ugyen Wangchuk’ case precedent as a major legal weapon to not pay their full NPL by citing procedural lapses from FIs in giving them loans or ever-greening loans for them.

They look at the case as god sent for them to drastically reduce their loan burden or even avoid paying them at all even though FIs had given them the loans or ever-greened it based on trust.

The headache for the FIs is that the courts themselves are also citing the case as a precedent.

This precedent, if used widely, can impact the very foundation of financial stability in Bhutan as big borrowers can get off the hook for money they took citing certain procedural lapses, ever-greening or not following the credit manual. Money which actually belongs to depositors.

The senior RICBL official said that the biggest winner in the ‘RICBL vs Ugyen Wangchuk’ case is the contractor as his NPL which he had taken got reduced from Nu 102 mn to only Nu 34.13 mn.

He said this is not justice. The official said even if the courts wanted to fix accountability they could have made the contractor pay the 102 mn and then imposed a Nu 100 mn fine on RICBL as here at least the money would have gone to the government.

Destruction of employees and FIs

The ‘RICBL vs Ugyen Wangchuk’ has also another dangerous precedent in it that at best can lead to credit officials being afraid to even sign on documents and issue loans and at worst can potentially lead to the very destruction of FIs.

This is because apart from the 34.13 mn each to be paid by Ugyen Wangchuk and RICBL the verdict says Nu 34.13 mn is to be paid by the relevant employees.

The RICBL put the liability of the Nu 34.13 mn loan on four employees Jigme Namgyal, Jurme Chetsho, Ugyen Lhamo and Tashi Penjor mentioned in the high court case discussion part where they were cited in relations to one of the loans. It said they withdrew and deposited funds from Ugyen Wangchuk’s Loan accounts without his consent while they have defended saying his consent was there and given mainly via phone.

The four names came up in connection to one loan account called CRCS/2010/84.  Jigme Namgyal, Jurme Chetsho and Jambay Wangchuk had bought a plot of land at Debsi from Mrs. Tshering Dema.

They used their own RICBL employee loan accounts to take loans and buy the 45 decimal land in Debsi with the intention of building homes. However, the ownership transfer could not happen due to the National Cadastral survey and so with the interest piling up they sold the land with 30 decimal going to someone else and with Ugyen Wangchuk agreeing to buy 15 decimals at Nu 4.62 mn.

As part of this Nu 4.62 mn transaction Nu. 2 million was transferred to Mrs. Jurme Chetsho’s loan maintained in the RICBL from Ugyen Wangchuk’s account, Nu. 2 mn was transferred to Mr. Norbu Tashi’s loan account, Nu. 423,963 was deposited to Jigme Namgyal’s loan account, Nu. 16,037 was deposited to Mrs. Jurme Chetsho’s loan account, and the balance Nu. 180,000 was paid in cash.

Mrs. Tshering Dema personally testified for the sale of land and Ugyen Wangchuk also did not refute it and accepted the transactions as genuine and executed as per his verbal authorisation.

The District Court accepted the rebuttal statement as a genuine transaction and didn’t find Jigme Namgyal and Jurme Chetsho accountable for the restitution of the amount to RICB or Mr. Ugyen Wangchuk in the judgement.

In the case of Ugyen Lhamo, Ugyen Wangchuk approached RIBCL’s Recovery Team on failure to regularize his loan account CRCS/2010/84 and during the discussion, Mr. Ugyen Wangchuk proposed availing a loan of Nu. 2 million in his sister, Ms. Tshering Pem’s name, which was to be used as repayments for his defaulted loans. Tshering Pem consented and volunteered to help.

On the advice of the recovery team, the proposal was appraised by the Credit Committee, and the committee approved the loan of Nu. 2 million (Loan Ever-greening) proposed by Tshering Pem as it fulfilled all the requirements. In sanctioning of this new loan, Ugyen Wangchuk furnished additional collateral worth Nu. 3.2 million.

The Nu. 2 million only benefited Mr. Ugyen Wangchuk and the RICBL and neither Ms. Tshering Pem nor Ugyen Lhamo were summoned to District Court.

Tashi Penjor was called to testify in the District Court regarding the withdrawal of Nu. 186,000/- from Ugyen Wangchuk’s Loan Account CRCS/2010/84.

During the hearing and in the presence of the legal representative of RICBL and witnesses, Ugyen Wangchuk confirmed that the amount had indeed been handed over to Mr. Ugyen Wangchuk’s wife, Mrs. Karma Choden. The transaction was carried out with his verbal consent through a telephone call since Mr. Ugyen Wangchuk was in eastern Bhutan at the time.

The case summary of the High Court judgment mentions a deposit of Nu. 1 mn into Mr. Ugyen Wangchuk’s loan account by Tashi Penjor. Tashi said Ugyen had to get Nu 1 mn from someone in cheque and so he followed Ugyen’s verbal instruction to deposit it in Ugyen’s account

It seems that while no criminality was established in the above transactions the RICBL took a very dim view of them especially in the case of the land transaction between the client and two of the employees. 

A legal adviser for the four employees said that the four dealt with just one of the 12 loans that Ugyen Wangchuk took and the court’s order clearly means all the relevant employees who dealt with all 12 loans and that would mean around 40 employees from the top management down who all signed, approved and gave out the loans.

The legal adviser said that in most of the 12 loans there are procedural lapses and ever-greening was done and so it makes no sense to just put the four of them in the dock.

While the name of the four employees does come up in the case discussion part of the verdict as mentioned above with regard to one loan, in the final order it does not name them but cites the Nu 102 mn involving 12 loan accounts and asks Ugyen Wangchuk, RICBL and the ‘relevant employees of the bank’ to pay Nu 34.13 mn each.

The legal advisor for the four employees said that the relevant employees are those who approved the loan, processed it and gave it and this comes to around 40 people including the top management.

In a sense if the RICBL had taken the actual interpretation of the ‘relevant employees’ then it would mean these 40 employees including the top management paying close to a million each or facing arrest. This would have destroyed the entire credit and management of the RICBL with their personal savings being wiped out, mass resignations, mass court cases and possibly employees’ behind bars for what are administrative lapses. It may even have fatally wounded the RICBL as a company.

The RICBL took an easier way out by pinning the entire 34.13 mn on the four employees based on the fact that they were mentioned in the case summary section of the high court verdict.

The RICBL senior official said that the 4 names were not brought by RICBL but it came up during the course of the litigation as the court looked at each of the 12 loan accounts.

The senior official said that the managment presented the verdict to the board pointing out that the names of the 4 employees came in the case summary but not in the final order part. The board felt that it was not fair to pin such a heavy amount on the 4 employees but when the board asked the management for its opinion on this the management said that the amount cannot be put on others and there is no other option since they are named in the case summary and so the amount by default goes on the 4 employees. The board then agreed to this and a letter was sent to the 4 employees.

The official said that the judgment had not elaborated more and so they went with the names mentioned in the case summary.

The senior official said that in the District Court the RICBL submitted the same 4 names and details it was asked to submit in the High Court.

Counter case in District Court

The four employees have now filed a counter case against RICBL that is being litigated in the Thimphu District Court.

The four have made it clear that while they are not questioning the verdict of the Supreme Court they are questioning how they four have been made liable by RICBL when their names came up in connection to only one loan account and many more people handled the 12 loan accounts coming to Nu 102 mn.

They also say that the Supreme Court judgement clearly refers to all the relevant employees who handled the Nu 102 mn loan and not just them.

They are also saying that the RICBL lawyer in the case failed to inform them that they are being made a party to the case in the High Court judgment and so he represented them without their consent in the Supreme Court during appeal. They argue as a party to the case they did not get legal representation.

The enforcement unit of the District Court has sent a letter seeking clarification from the High Court by asking what it means when it says ‘relevant employees.’

The four have also filed a case in the Bar Council against the RICBL lawyer saying he was not even legally qualified to represent the case.

A legal advisor for the four even alleged that in the subsequent appeal made after the Supreme Court to the Office of the Gyalpoi Zimpon the RICBL lawyer in question provided a wrong translation of the verdict shifting the blame away from the 12 loan accounts and all relevant officials to the four of them.

The legal advisor said the four may even file a criminal case against the lawyer for deception and other more serious charges of deliberately mistranslating the verdict.

A labour complaint has also been filed with Ministry of Industry, Commerce and Employment regarding how they were treated by RICBL.

At the end of the day it seems the RICBL faced an unprecedented verdict that not only penalized the institution but also its employees having to bear the huge loans taken by the contractor and enjoyed by him.

This verdict if implemented in its full sense when it came to the ‘relevant employees’ would have probably destroyed RICBL. It then decided to take the safer option of penalizing only the four mentioned in the case summary and not even the final order of the judgment.

The burden

However, the disproportionate burden placed on the four employees has had a huge impact on them as the Nu 34.13 mn loan divided among them comes to around Nu 8.5 mn each. Three of them are in Australia and even if they can earn anything it will have to be given up to clear the loan amount.

The fourth who is Tashi Penjor is here in Bhutan. Tashi is from Mongar and does not have landed property or the resources to pay the loan. Tashi had contested the NC elections and was doing well but then when the enforcement order came for him in the middle of the polls some of his rivals spread the rumors that he had embezzled Nu 8.5 mn which is not true. He still came third out of 7 candidates indicating he had a political future.

Today, Tashi lives in constant fear of arrest especially since he has three young children and a wife who is a housewife, who are all dependent on him. He is three months behind on rent, under treatment for depression from JDWNRH and has contemplated committing suicide twice.

Supreme Court responds

The reporter asked the Supreme Court about the impact of the judgment in terms of setting a precedent and it being used to argue against paying full amounts in NPL cases and how it can impact FIs in NPL recovery.

The Supreme court said, with this judgment it sought to address the persistent challenges surrounding non-performing loans, particularly the issues of double mortgages and outstanding loans surpassing their mortgage values.

‘The intention behind this judgment is to curtail lapses and misuse of authority by banking officials who are entrusted with the crucial role of safeguarding public funds and their equitable distribution to all its consumers.’

‘It is undeniable that FIs play a pivotal role in our country’s economic advancement. Therefore, it is paramount that these institutions and their staff operate within their designated mandates.’

The Supreme Court said it has taken note of instances where defendants in non-performing loan recovery cases are referencing this judgment in their defense.

‘While the judgment aims to deter certain banking lapses on these officials, it is not crafted to given loan defaulters a blanket exemption from their financial responsibilities. The lower courts should as it always has, utilize their judgment in determining when and under what circumstances this ruling should be cited.’

‘The decision lies completely in the discretion of the lower courts and it shall depend on the facts, circumstances and proven evidence before it to determine the liabilities of those at fault.”

The court said in essence, the ruling endeavors to establish a fair distribution of accountability, holding both the financial institutions and loan defaulters to their due responsibilities. The Supreme Court said its ultimate objective is to ensure that the public funds are managed judiciously and for the collective benefit of the nation.

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