Recovery of Debts

Banks and financial institutions duly registered with Reserve Bank of India (RBI) provide loan facility to legal entities and individuals (borrowers). In the event where the borrower fails to repay loan amount or any part thereof which also includes unpaid interests and other charges and/or debt becomes Non-Performing Asset (NPA), banks and financial institutions can recover the debt by approaching appropriate judicial forums.

Before, the enactment of the RDDBFI Act, banks, and financial institutions was facing huge challenges in recovering debts from the borrowers as the courts were overburdened with large numbers of regular cases due to which courts could not accord priority to recovery matters of the banks and financial institutions. The Government of India in 1981 constituted a committee headed by Mr. T.Tiwari, this committee suggested a quasi-judicial setup exclusively for banks and financial institutions which by adopting a summary procedure can quickly dispose-off the recovery cases filed by the banks and financial institutions against the borrowers.

Again in 1991, a committee was set up under Mr. Narasimham, which endorsed the view of the Shri T.Tiwari Committee and recommended the establishment of quasi-judicial for the speedy recovery of debts. Pursuant to which Government of India enacted the RDDBFI Act. Through, the RDDBFI Act quasi-judicial authorities were constituted, and the procedure was specified for the speedy recovery of debt.

Origin of the Act

The Recovery of Debts due to Banks and Financial Institutions Act, 1993, was enacted on 27th August 1993, to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions, and for matters connected therewith or incidental thereto. Quite obviously, the idea of law was to provide for an alternative mechanism for recovery of debts due to banks and financial institutions. Quite clearly, the law was not meant for resolution of banking cases- as it is only banks and financial institutions that could file cases before DRTs, and those too, related to the recovery of debts only.

The legality and validity of the Act were however challenged in the Delhi High Court in the matter of Delhi High Court Bar Association v. Union of India[1], whereby various issues were argued to challenge the constitutional sanctity of the Act. On some of these counts, the petition succeeded and the Delhi High Court held the law as bad on grounds like the power of the Central Government to constitute tribunals under Article 323A and 323B of the Constitution, that the law placed tribunals on pedestal higher than the High Courts in respect of monetary jurisdiction; that judiciary had been given no role in appointment of presiding officers; that there were no provisions for set-off, counterclaims or transfer of cases, etc.

However, Supreme Court stepped in and gave a stay to such an order of the Delhi High Court on being assured that the government will consider amending the legal anomalies in the law.

Finally, necessary amendments were made in the year 2000, and the Act was given the green signal. The Act has been recently amended vide the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012[3] (the amending Act).

1. Debt Recovery Tribunal Section 3, provides for the establishment of Debt Recovery Tribunal (DRT), by notification to be issued by the Central Government, for exercising, jurisdiction, powers, and authority conferred on such tribunal under the RDDBFI Act. First DRT was established in Kolkata in the year 1994. Presently 33 DRTs are functioning at various places in India, and 6 more DRTs are also being established.

As per section 4, DRT consists of sole member only, known as Presiding Officer. Section 5, provides that a person who has been or is qualified to become District Judge can be appointed as Presiding Officer of DRT.

Section 6 provides that the terms of the Presiding Officer shall end after the expiry of the period of 5 years from the date he enters the office and he will be eligible for reappointment provided he has not attained the age of 65 years.

Sections 8 -11 deals with the establishment, qualification, and term of the Chair Person of the Debt Recovery Appellate Tribunal (DRAT). DRAT is established to exercise control and powers conferred under the RDDBFI Act. DRAT consist of sole member to be known as Chair Person. A person is eligible to become a Chair Person, if he has been an or qualified to become a High Court Judge, or has been a member of the Indian Legal Services and held a Grade 1 post as such member for the minimum period of three years or has held office of Presiding Officer of Tribunal for period of at least three years. The Chair Person of DRAT can hold his office for the period of five years and is also eligible for reappointment, provided, that he has not attained the age of seventy years. Presently there are 5 DRATs in India in Delhi, Chennai, Mumbai, Allahabad, and Kolkata. DRAT has appellate and supervisory jurisdiction over DRTs.

Who can recover money from DRT under RDDBFI Act As per section 1(4), the provisions of RDDBFI Act does not apply where the amount of debt due to the bank or financial institution or the consortium of banks and financial institutions is less than Rupees Ten Lakh or any other amount not below Rupees One Lakh, cases where the central government may by notification specify. Thus, in essence, minimum debt which is to be recovered from DRT should not be less than Rupees Ten Lakh. In the case of SARFAESI Act, if the asset has been declared as Non-Performing Asset (NPA), eligible banks and financial institutions after enforcing security can recover remaining amount under RDDBFI Act which is in excess, of Rupees One Lakh.

Tribunals whether they pertain to income-tax or sales tax or excise or customs or administration have now become an essential part of the judicial system in our country. Such specialized institutions may not come strictly within the concept of the judiciary, as envisaged by Article 50, but it cannot be denied that such tribunals have become an indispensable part of the justice delivery system, like courts of law. Section 17 and 18 of the RDB Act, 1993, has given exclusive jurisdiction to Tribunals and Appellate Tribunals established under this Act to entertain and decide applications from banks and financial institutions for recovery of debts due to them. On the establishment of these tribunals, all suits in which the amount claimed is Rs. 10 lacs or more, stands automatically transferred to them (the transferred matter has to be taken up from the stage it has been transferred or an appropriate stage and not de novo). No other court or authority can exercise any jurisdiction, powers or authority in relation to these matters, except the Supreme Court or a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution. However, Section 18 is not applicable in case of proceedings in relation to recovery of debts due to any multi-state co-operative banks under the Multi-State Co-operative Societies Act, 2002, pending before the commencement of the amending act; such proceedings shall continue as is.

The purpose of the RDB law is to allow a quasi-judicial forum for the banks and financial institutions to file suits for recovery of debts due to them. Under the law, a bank or financial institution may file an application before the DRTs of an appropriate jurisdiction that has been given wide-ranging powers. DRTs are single-member benches- they have a presiding officer.

An aggrieved borrower or bank may take the matter further up to a Debt Recovery Appellate Tribunal (DRAT). In case of further grievances, the aggrieved person can go to the Supreme Court. Each DRT has a Recovery Officer, who, besides performing general administrative functions, also takes care of the execution of orders of the Tribunal.

Section 19(12) empowers the Tribunal to pass an interim order prohibiting the borrower from disposing of any of his assets. It is notable that while the SARFAESI Act is intended for the enforcement of security interests, the RDB Act extends to all claims of banks in respect of debts due. In other words, it is not necessary that the debt of the bank may be a secured debt. If the debt is not a secured debt, will the DRT still have a right to pass an order refraining the borrower from selling any of his assets? The power of the DRTs under the law is similar to the power of courts for recovery of money. Hence, the interlocutory stay on disposal of assets is from the viewpoint of ensuring that the assets of the borrower are not siphoned off to frustrate recovery.

Sub-sections (14) and (15) which provide for conditional attachment of property extend the debt recovering powers of the Tribunals. The bank that comes before the Tribunal is not necessarily a secured creditor having security interest on the asset. Hence, a Tribunal while passing orders of attachment will duly respect the interests of secured creditors having security interest on the asset. The competing claims of the secured creditor and the applicant under the RDB law came before the Supreme Court in Allahabad Bank v. Canara Bank[4].

The principal power and function of the Tribunal is-

• Adjudication of the claim of the bank

• The issue of a certificate of recovery or such other step as it might think appropriate for recovery.

Sub-section (18) lists several powers of the Tribunal- such as the appointment of a receiver, removal of a person from the possession of the property, etc. Section 19(22) authorizes the Tribunal to issue a certificate for recovery of debt, which has been taken at par with the decree of a civil court on the recovery of money.

DEBT RECOVERY – LEGAL FRAMEWORK IN INDIA

Indian Legal system encompasses varied legal provisions for recovery of debts by the Banks and Financial Institutions as follows:-

Summary suits under Order XXXVII of the Code of Civil Procedure, 1908. ?

Ordinary suits for recovery, under Civil Law. ?

Original Applications to be filed by Banks and Financial Institutions before Debt Recovery Tribunal for debt not less than Rs. 10 lakhs, under Recovery of Bank Due to Banks & Financial Institutions Act, 1993 (DRT Act). ?

An action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Securitisation Act). ?

Arbitration proceedings under Arbitration & Conciliation Act 1996, for recovery of outstanding amount as under Arbitration Agreement/clause in the loan documents, in cases where the Recovery of Debts due to Banks and Financial Institutions Act, 1993 is not applicable. ?

Initiation of criminal action in addition to civil proceedings for prosecution and punishment as per the Indian Penal Code and other laws where debt is also tainted with fraud, cheating, misfeasance etc.

Filing of a criminal complaint under Section 138 of Negotiable Instruments Act, 1881 for dishonor of any cheque issued by the borrower to the bank in the discharge of legally enforceable liability.