The loan trap
Pushpa Girimaji

Recently, a consumer from Punjab recounted the way he had been cheated by a fly-by-night non-banking finance company. Apparently the company had advertised that it would give loans without much fuss and in the quickest possible time. On seeing the advertisement, the consumer called up and a representative of the company visited him and collected Rs 6,000 towards processing fee.

Then a surveyor was sent to assess the property to be mortgaged and a sum of Rs 3,000 more was collected from him. The consumer was promised that he would get the loan in a week's time. But when nothing happened, he contacted the company and found the office of the company closed. There was no response on the cell phones of the company officials either. Cases like this are not rare. At regular intervals, the police investigates such cases on the basis of complaints filed by the consumers. Some years ago, for example, the Delhi Police had nabbed owners of two car finance companies, for cheating a large number of applicants for car loans. The companies, according to the police, had set up posh offices in a business centre in the Capital, advertised heavily, promising quick processing of loans, and got a large number of applications. Loans were sanctioned to the applicants and as is the practice with most car finance companies, these operators also collected the first three installments of repayment from the applicants in advance. However, the promised loan was never disbursed.

There are also companies that offer loans to entrepreneurs, collect huge amounts as processing charges, but fail to provide the promised finance, forcing the consumers to eventually seek legal help. In fact more than a decade ago, the Monopolies and Restrictive Trade Practices Commission had dealt with one such case and directed the partners of a dissolved finance firm to not only pay back the money collected from the applicants, but also compensate them for the loss suffered.

The case dates back to the year 1988, when a Mumbai-based company called Trustwel Inc, calling itself a "specialist in business and industrial finance" advertised term loans on easy rates of interest and against mortgage of immovable property, for new ventures as well as expansion or diversification of existing projects.

Two companies from which Trustwel collected nearly Rs 9 lakh towards various expenses, but never released the loan, filed cases before the MRTP commission, resulting in the commission directing the finance company to refund Ajanta Chemicals as well as Modi Champion Ltd, the entire amount paid by them at 18 per cent interest. In addition, both the companies were to be paid Rs 2 lakh each as compensation for pecuniary and non-pecuniary losses suffered by them, the commission said.

However, the main issue here was whether a case can be filed against a non-existent firm. The partners of Trustwel Inc had dissolved the company and, therefore, their main contention was that the commission can't hold an enquiry against a non-existent firm. Besides, When the firm itself did not exist, there was no question of its indulging in an unfair trade practice, they contended. They also quoted previous orders of the commission in support of their argument.

The Director General (Investigation and Registration) on the other hand, cited a number of judgements of various High Courts where it was clearly held that a suit can be filed against a firm even after its dissolution and that Section 25 of the Indian Partnership Act provided that every partner was liable jointly with all other partners and also severally, for all acts of the firm done while he was a partner. Thus it was incorrect to say that no decree can be passed against a dissolved firm or against one of the partners of the firm, the DG argued.

The commission, after hearing both the parties, concluded that there was no doubt at all that the firm and its partners were liable for acts performed during the existence of the firm and that the partners cannot escape liability by just dissolving the firm and claiming that it did not exist any more. (Director General (I and R) V Trustwel Inc, Bombay, 1997).

So even if the company does not exist, you can file a case against the partners before the MRTP Commission or the consumer court and get back your money. However, for that to happen, you must have the address of the partners. In the case that I have mentioned in the beginning, the consumer said that neither the company nor its partners were traceable. So whenever you deal with an unknown company offering loans, check its track record .