Author: Abhigyan, IV year of B.A.,LL.B. from Delhi Metropolitan Education, Noida Affiliated to GGSIPU, Delhi
Introduction
India's banking industry has played a critical role in the country's attempt to achieve fast economic growth but the road to this was not really easy and smooth. A bank performs various functions, out of which providing credit to the client is one of the primary and major function of the banks. However, credit is a fragile plant that thrives under favourable conditions but withers quickly amid adversity and it carries the seed of its own demise. As a result, when banks/financial institutions lend, theyfirst ensure that the loan is returned when due and, second, that it is utilised for authorised reasons.
However, loan recovery is one of the most challenging challenges that these institution address, regardless of whether the loan is short-term, medium-term, or long-term, or to whom the loan is given. The then existing legal framework relating to commercial transactions was not able to not keep up with evolving business practises and banking sector reforms. This resulted in a slow pace of recovery of defaulting loans which escalated the levels of non-performing assets of banks and financial institutions and were becoming a big hurdle to rapid development.
In this abstract we will have a look into the existing legal framework and process of Recovery of debt by banks and Financial Institutions without the intervention of court.
Indian legal system provides various legal provisions for the recovery of debts, these include:
1. Suit under CPC; Summary suits can be filed by the lender under Order XXXVII of the Code of Civil Procedure, 1908
2. Criminal complaint under Section 138 of NI Act,1881 (Negotiable Instruments Act) for dishonour of any cheque issued by borrower to the bank in discharge of legally enforceable liability.
3. Arbitration under the Arbitration & Conciliation Act, 1996 for the recovery of amount due as specified in the Arbitration Agreement /clause in the loan instruments, in circumstances where RDDBFI Act is inapplicable.
4. OA by Banks and FI's before the DRT for a loan above Rs. 20 lakhs, under RDDBFI ACT, 1993.
5. Enforcement of Security Interest under SARFAESI ACT, 2002
Out of the following measures, we will discuss the recovery of debts under the DRT Act and SARFAESI Act as it provides for the banks and FinancialInstitutions to proceed without the intervention of courts.
RDDBFI Act, 1993 (“Recover of Debts due to Banks and Financial Institutions”)
Prior to ratification of the RDDBFI Act, banks and FI’s faced significant difficulties in recovering debts from borrowers because the courts were overburdened with a large number of regular cases, preventing the courts from giving priority to bank and financial institution recovery matters.
“The Government of India formed a committee headed by Mr T. Tiwari in 1981, and this committee proposed a quasi-judicial setup exclusively for banks and financial institutions, which, by using a summary procedure, can quickly dispose-off recovery cases filed by banks and financial institutions against borrowers. In 1991, a committee chaired by Mr.Narasimham backed the Mr T. Tiwari Committee's findings and proposed the formation of quasi-judicial debt collection agencies to expedite debt recovery. As a result, the Government of India adopted the RDDBFI Act. Through the enactment of RDDBFI Act, quasi-judicial bodies, i.e., the DRT (Debt Recovery Tribunal) and DRAT (Debt Recovery Appellate Tribunal) were established, and a system for debt collection was established.
The first DRT was established in Calcutta on 27th April 1994.”[i]Presently there are 39 DRT’s and 5 DRAT in India.
Constitutionality of Act
The Act's constitutionality was contested in the case of “Union of India &Anr. vs. Delhi High Court Bar Association &Ors.”[ii] The Act's constitutionality was challenged on the grounds that it was irrational, violated Article 14 of the Constitution, and exceeded the legislative competence of Parliament.
The Supreme Court ruled that “while Articles 323A and 323B specifically enable the legislature to enact laws for the establishment of tribunals, the power of the parliament to enact a law constituting a tribunal such as a banking tribunal is not taken away in relation to the matter specified therein.” It was observed that, in exercising its legislative competence, the parliament can offer a mechanism for recovering payments owed to banks and financial institutions, therefore upholding the Act's legitimacy.
Pecuniary Jurisdiction
For any debts worth more thansum of Rs. 20 Lakhs, an application for the recovery of debt can be made to thetribunal. Banks and FI’s can use the standard remedy and approach Civil Courts, for smaller sums.
Jurisdiction of Tribunal
Section 17 of the RDDBFI Act gives the tribunal jurisdiction, power, and authority to entertain and decide applications from secured creditors for recovery of debts owed to such secured creditors. The DRT and DRAT's jurisdictional powers and authority are structured in such a way that civil courts do not directly intervene on the principal issue on which DRTs must rule. Furthermore, section 17A gives DRAT overall superintendence and control, as well as appellate jurisdiction over DRT.
Section 18 of the Act prohibits all other Courts from hearing debt related matters, with the exception of the Supreme Court and High Court, whose power is derived from Articles 226 and 227 of the Indian Constitution. The basic line is that only the High Court and the Supreme Court may grant redress against a DRAT verdict.
While the DRT procedure was intended to relieve the burden on lower courts, the lower courts do play a part in the DRT process since the judicial powers placed on the DRT and DRAT under the RDDBFI Act are extremely limited. In the case of “Standard Chartered Bank vs. DharmindarBhoi and others”[iii], the Supreme Court emphasised in its decision that the DRT and DRAT can only adjudicate on topics within their scope as established in section 17 of this Act. For example, DRTs and DRATs do not have authority over property succession rights, monitoring and enforcing KYC rules, or issuing receipts.Thus, disputes on such topics necessitate decisions from civil courts, which have greater authority than DRTs and DRATs.
Application to Tribunal
Under section 19, “the bank or financial institution for the recovery of any debt can file an application to the tribunal within the local limits of whose jurisdiction:
a) The branch or any other office of the bank or financial institution is maintaining an account in which debt claimed is outstanding, for the time being; or
b) The defendant, or each of the defendants where there are more than one, at the time of making the application, actually and voluntarily resides, or carries on business, or personally works for gain; or
c) Any of the defendants, where there are more than one, at the time of making the application, actually and voluntarily resides, or carries on business, or personally works for gain; or
d) The cause of action, wholly or in part, arises”[iv]
Right to Appeal
Under Section 20, an appeal to the order of tribunal may lie to the appellate tribunal i.e, the DRAT by the aggrieved person within period of 30 days from date on which the copy of order made by the DRT is received by borrower. Such appeal shall only be entertained on the submission of 50% of amount of the debt by the borrower which can be reduced to 25% by the tribunal but cannot be waived.
SARFAESI Act, 2002(“Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest”)
Even after the RDDBFI Act was passed, issues such as a lack of liquidity, an asset-liability mismatch, and long-term asset blockage continued. Banks were unable to recover their dues to the level predicted even after the establishment of DRTs.
“To overcome those gaps, the federal government formed different committees, such as the Narasimham Committee I (1991) and the Narasimham Committee II (1998) and Andhyarujina Committee constituted under the chairmanship of Sri T.R. Andhyarujina, to investigate banking sector reforms. These committees evaluated the need for changes to the legal framework and the creation of new securitization legislation that permits banks and financial institutions to take control of assets and sell them without the need for judicial intervention. In the year Finally, the SARFAESI ACT was approved in 2002.”[v]
Object of the Act
“The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”, was enacted to regulatesecuritization and reconstruction of financial assets, as well as the enforcement of security interests created in favour of secured creditors.
The Act specifies three possible techniques for recovering NPAs:
a) Securitization
(b) Asset Reconstruction; and
(b) Enforcing security without the intervention of the court.
Constitutionality of Act
In the case of “Mardia Chemicals Ltd. Vs Union of India”[vi],constitutionality of SARFAESI was challenged, namely “Sections 13, 15, 17, and 34”, on the grounds that they are excessive and arbitrary.The Supreme Court in its judgement upheld the constitutionality of SARFAESI.
Pecuniary Jurisdiction
“The provisions of SARFEASI Act applies to NPA loan accounts of value exceeding Rs. 1 Lakh and the NPA loan account is more than a twentieth of principle and interest. Such NPAs should be backed by securities charged to the banks by way of hypothecation, mortgage or assignment and the secured assets.”[vii]
Recovery Process under SARFAESI
On the account of the borrowers failure of due payment of loan, bank declares the loan account as NPA andsend notice to the borrower under Section 13(2). On receiving such NPA notice from bank, the borrower has 60 days to discharge his liabilities. In case borrower fails to do so, the secured creditor proceeds under Section 13(4) of the Act for the enforcement of Security Interest.
“The secured creditor may take one or more recourse mentioned in under section 13(4) namely,
i. To take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset. When it comes to taking possession of the property, there are two things like taking symbolic possession and taking actual possession
ii. To take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for releasing the secured asset.
iii. Appoint the manager, to manage the secured asset whose possession has been taken
iv. Requiring money from any person who has acquired any of the secured assets from the borrower and from whom any money is due to the borrower, to pay to the secured creditor, by notice in writing”[viii]
The Secured creditor under Section 14 may request by writing to the jurisdictional Chief Metropolitan Magistrate or District Magistrate to take possession thereof. Such Magistrate may then take control of the asset and deliver it to the secured creditor. And may use or cause the use of such force as he deems necessary.
“Any individual who is aggrieved by any measure taken under section 13(4) by the secured creditor may file an application with the tribunal within 45 days of the date such measures were adopted under Section 17 of the Act. If the tribunal concludes, after reviewing, that the measures under section 13(4) are in violation of the Act, it may declare the measures invalid and return the borrower's possession of the secured asset.”[ix]
Right to Appeal
Any Individual aggrieved by the order of DRT may approach the DRAT under Section 18 of the act provided that no appeal shall lie unless the borrower has deposited 50% of the amount of debt owed by the borrower.
RDDBFI and SARFAESI Complimentary
In the case of“Transcore Vs. UOI”[x], it was held that RDDBFI Act, 2016 and SARFAESI Act are complementary to each other. The withdrawal of an action pending before the tribunal under RDDBFI, 1993 is not a prerequisite for resorting to SARFAESI. The SARFAESI Act of 2002 is an extra remedy that is not inconsistent with the DRT Act of 1993, and hence the theory of election does not apply.
Conclusion
The rising NPAs and debt issues are hurting the banking industry and the economy as a whole and the enactment of new laws have provided a relief to both judiciary and secured creditors for the recovery of the same but it can be seen that no law dealing with the recovery of loans is complete in itself; for example, money recovery suit filed under CPC in the Civil Court takes long to be decided because of the already plethora of cases within courts, and laws dealing specifically with recovery suits, such as the RDDBFI Act 1993, are only competent to deal with unsecured loans; for secured loans, the remedy under it is inadequate. Similarly, proceedings under the SARFAESI Act, 2002 deals specifically with the secured loan, and there are numerous complications under the Act for obtaining possession without the intervention of the court. Also secured creditors are compelled to file application before the Chief Metropolitan Magistrate or District Magistrate for the possession of assets which is a time-consuming process. Thus, all of the aforementioned remedies are incomplete in themselves and reliant on each-other at various levels.
[i]RDDBFI Act, 1993 available at http://www.drat.tn.nic.in/docu/rddbfi-act.pdf (last visited on Oct 24, 2021) [ii]Union of India &Anr. vs. Delhi High Court Bar Association &Ors.AIR 1995 Delhi 323 [iii]Standard Chartered Bank vs. DharmindarBhoi and others CivilAppeal 8486/2013 [iv]RDDBFI Act, 1993 available at http://www.drat.tn.nic.in/docu/rddbfi-act.pdf (last visited on Oct 24, 2021) [v]Manasi Phadnis and N. Prabhala, “Debt Recovery Tribunals in India: A Short Note”, CAFRAL 6 (2015) [vi]Mardia Chemicals Ltd. Vs Union of IndiaAIR 2004 SC 2371 [vii]Recovery of dues by banks https://www.legalindia.com/recovery-of-dues-by-banks/ (last visited Oct 24, 2021) [viii]The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) [ix]The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) [x]Transcore Vs. UOI (2008) SCC 125(73) SCL (11)135