“The Debts Recovery Tribunal (DRT) and the enforcement of Securities Interest- A critical analysis”

This article was written by Punyam Bhutani, a student of Vivekananda Law School, Vivekananda Institute of Professional Studies (Affiliated to Guru Gobind Singh Indraprastha University, Delhi)

Introduction

India is hailed as a green- field Investment and Competition regime. The Investment and Competition laws keeping in consideration the jurisprudential aspect is older than many of its developing counterparts. Also, the financial sector has been one of the key handlers in India’s efforts to achieve success in rapidly developing its economy. The establishment of the Debt Recover Tribunals (DRT’s) in the country has given a proper framework within which banks can file for a speedy debt recovery process. These tribunals assure expeditious recovery proceedings as well as speedy adjudication of matters concerning debt recovery of banks.

The existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms.

Considering the enforcement of Securities Interest, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was enacted by the legislature for the primary objective of efficient or rapid recover of Non-Performing Assets (NPA’s) of the banks and Financial Institutions.

The Debt Recovery Tribunals

The Banking or the credit sector is one that holds the reins of the world economy. Without the presence of a well-established credit system, one cannot expect the economy to role on. Therefore, a dynamic Banking system is vital and essential for a thriving economy.

Banks have had to wait for a very long time in the civil courts to get cases concerning debt- recovery disposed and recovered. This led to tapping of crores of rupees in litigation proceedings forcing the Government of the country to establish Debt Recovery Tribunals.

Keeping in line with the Global trends and standards on helping Financial Institutions, the perspective relating to the ordinary court procedures, the DRT’s were established for the purpose that they could handle a large number of cases with less delays during the initial phases.

The Debt Recovery Tribunals (DRT’S) and The Debt Recovery Appellate Tribunals (DRAT’s) have been constituted for the expeditious adjudication and recovery of debts due to Banks and Financial Institutions and for matters in so far connected. [1] Presently, there are a total of 39 Debt Recovery Tribunals running across the country.[2] They have been constituted at various cities throughout the country, which comprises of, Ahmadabad, Allahabad, Aurangabad, Bengaluru, Chandigarh, Coimbatore, Cuttack, Ernakulum, Guwahati, Hyderabad, Jabalpur, Jaipur Lucknow, Nagpur, Patna, Pune, Ranchi and Vishakhapatnam. Some of the cities have more than one Debt Recovery Tribunal as well.[3] Depending upon the number of cases a Debt Recovery Tribunal is constituted.[4]

Higher the number of cases within a territorial area, a greater number of Debt Recovery Tribunals would be set up. The territorial jurisdiction of some Debt Recovery Tribunals is very vast. For instance, the Debt Recovery Tribunal located in Guwahati, has jurisdiction over all the seven North Eastern States. Also, the Tribunal located at Chandigarh, too has a very wide jurisdiction over the states of Punjab, Haryana and Chandigarh.

Composition of the DRT’s

• Every Debt Recovery Tribunal is presided over by a Presiding Officer. The Presiding officer is generally a Judge of the rank of District and Sessions Judge.
• A Presiding Officer is assisted several officers of other ranks, but none of them need necessarily have a Judicial background.

• The Presiding Officer is the sole Judicial Authority to hear and pass any Judicial Orders.[5]

• Each Debt Recovery Tribunal has two Recovery Officers. The work amongst the Recovery Officers is allotted by the Presiding Officer. The appointment is of five years only (from the date he enters upon his office) or until he attains the age of sixty-five years.[6]
• Though a Recovery Officer need not be a Judicial Officer, but the orders passed by a Recover Officer are judicial in nature. and are appealable before the Presiding Officer of the Tribunal.[7]

Composition of the DRAT’s

• The Debt Recovery Appellate Tribunals are presided over by a Chairperson, who is qualified for appointment or who has been a Judge of a High Court or has been a member of the Indian Judicial Services who has held the post of Grade 1 of such services for at least three years.
• The Debt Recovery Tribunals and the Debt Recovery Appellate Tribunals have no Administrative features as there is no Administrative member in the composition. The aspects of the Constitution of these Tribunals making them different from other Tribunals might be connected with the nature of cases which the Tribunal deals with.

The Debt Recovery Tribunals are governed by provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, also popularly known as the RBD Act. Rules have been framed and notified under the Recovery of Debt Due to Banks and Financial Institutions Act, 1993

The list of Amending Acts[8]

• The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 1995 (28 of 1995)
• The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2000 (1 of 2000)
• The Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2016 (44 of 2016)

The Powers of Debt Recovery Tribunals

The following are the powers of Debt Recovery Tribunals-

• To summon and enforce the attendance of any person and examining him on oath;
• To require the discovery and production of documents;
• To receive evidence on affidavits;
• To issue commissions for the examination of witnesses or documents.;
• To review its decisions;
• To dismiss an application for default or deciding it ex parte;
• To make an interim order by way of injunction, stay or attachment against the defendant to debar from transferring, alienate or otherwise deal with the property or asset without permission of the Tribunal.
• To direct the defendants to provide security sufficient to satisfy the debt.

An overview of the SARFAESI Act, 2002

The Narasimham Committee and the Andhyarujinal Committee was constituted by the Central Government for the purpose of examining banking sector reforms having considered the need for changes in the legal system in respect to these areas. Amongst the other committees, these Committees made suggestions to form a new a new legislation for Securitization and empowering Banks and Financial Institutions to gain possession of the securities and to sell them without any intervention of the court.[9]

The Central Government administers the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which allows to recover their dues exceeding one lakh rupees by proceeding against secured assets of the borrower/guarantor without the intervention of the court/ tribunals.[10]

Applicability of SARFAESI Act, 2002

The Act deals with the following-

• Registration and Asset Reconstruction Companies (ARC’s) by the Reserve Bank of India.
• Facilitating securitization of Financial Assets of Banks and Financial Institutions with or without the benefit of underlying securities.
• Promotion of seamless transferability of Financial Assets by the ARC to acquire Financial Assets of Banks and Financial Institutions through the issuance of Debentures or Bonds or any other security as a Debenture.
• Entrusting the Asset Reconstruction Companies to raise funds by issue of security receipt to qualified buyers.
• Facilitating the Reconstruction of Financial Assets which are acquires while exercising powers of Enforcement of Securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions.
• The term ‘Security Interest’ can be defined as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any Bank or Financial Institution.

The Securitization Act was enacted to facilitate the recovery of the dues of the banks and financial institutions by a non-adjudicatory process.

• The ordinary recovery mechanism contemplated under the Code of Civil Procedure, 1908 was not considered sufficient. Thus, the recovery of Debts due to Banks and Financial Institutions Act, 1993 was introduced for a special and speedier mechanism for the recovery.
• Almost a decade of experience proved that the recovery process was not achieving the intended objects and hence, the SARFAESI Act was enacted.
• The Act removes fetters on the rights of the secured creditor and enables the Banks and Financial Institutions to realize long term assets, management problems of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce Non- Performing Assets (NPA) by adopting measures for recovery of reconstruction.[11]

Constitutionality of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002

The Supreme Court has opined that the Act put one party in an advantageous position. However, for that reason the Act cannot be said to be unconstitutional in view of the fact that the object of the Act is to achieve speedy recovery of the dues declared as Non Performance Assets (NPA) and better availability of capital liquidity and resources to help in the growth of the economy of the country and welfare of the people in general which would serve the public interest.[12]

Non-Performing Assets[13]

“Non-Performing Asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset. –

• In case such a bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to the asset classifications issued by such authority or body;
• In any other case, in accordance with the directions or guidelines relating to asset classification issued by the Reserve Bank.

Therefore, it is a loan that is not recovered from the customer within stipulated time under the RBI guidelines all banks are supposed to follow a particular procedure before classifying a NPA and the same is based on the evidence of recovery. Just because of a temporary deficiency Banks cannot classify and asset as a NPA.

Debt Recovery dilemma: RDDB & FI v. SARFAESI

Many a times, the interpretation of statutes becomes a tedious job, mostly due to the clash of legislations, keeping in consideration, their ambit and scope. On the surface what may seem supplementary legislations, but in realty be two diverse tools of laws addressing different issues altogether. There are many situations, which neither the courts nor the legislators imagined would crop up.

One of such issue is the conflict created by defaulters. And the statutes in question are the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest, 20002.

A thorough understanding of SARFAESI shows that it is an act to regulate securitization and reconstruction of financial assets and enforcement of security interest; whereas RDDB&FI is there to establish Tribunals for expeditious adjudication and recovery of debts due to Banks and Financial Institutions. Moreover, only secured creditors can refer to SARFAESI, whereas RDDB&FI is for all types of creditors whether or not they are secured or unsecured. Both these statutes throw an insight on the recovery of money due from defaulters to the banks and financial institutions.

Thus, the ambit and scope of the two remedies provided by the RDDB&FI Act and SARFAESI Act, is distinct, and has different shades.

RDDB&FI Act is an adjudicating act and SARFAESI Act is executory in nature. [14]

Applications made to the DRT under the Securitization   Act

• Any person aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor may make an application under section 17 of the Act to the Debts Recovery Tribunal, within forty five days from the date on which such measures had been taken.
• Procedure prescribed under the DRT Act has to be adopted by the DRT for disposal of such applications filed under section 17 of the Act.

The Amendment Bill, 2016[15]

The bill was introduced by the Minister of Finance, Mr. Arun Jaitley, in Lok Sabha on May 11, 2016. It was further an Act to amend four laws:

1. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
2. Recovery of Debts due to Banks and Financial Institutions Act, 1993
3. The Indian Stamp Act, 1899
4. The Depositories Act, 1996, and for matters connected herewith or incidental thereto.

• In addition, the Bill empowered the District Magistrate to assist banks in taking over the management of a company, in case the company was unable to pay the loans.
• It also created a Central Registry to maintain records of transactions related to Secured Assets. The Bill created a central database to integrate records of property registered under various registration systems with the Central Registry.
• It included Registrations made under The Companies Act, 2013, The Registration Act, 1908 and The Motor Vehicles Act, 1988.
• It empowered the Reserve Bank of India (RBI) to examine the statements and any information of Asset Reconstruction Companies related to their business.
• The bill further empowered the RBI to carry out audit and inspection of the companies. It can penalize a company if it fails to comply with the directions issued by it.
• Amendments relating to the RDDBFI Act- The Bill increased the retirement age of Presiding Officers of Debt Recovery Tribunals from 62 years to 65 years. Further, it increased the retirement age of chairperson of Appellate Tribunals from 65 years to 67 years. It also made, Presiding Officers and Chairpersons eligible for reappointment to their positions.
• It provided certain procedures under the Act, i.e., the electronic form. This included presentation of claims by parties and summons issued by Tribunals under the Act.
• The Bill gave further details of procedures that the Tribunals would follow in case of Debt Recovery Proceedings. This included the requirements of the applicant to specify the asset of the borrower, which is Collateralized. The Bill also prescribed time limits for the completion of some of the procedures.

Conclusion

The functioning of DRTs needs to improve to ensure bank can recover their existing loans and offer fresh advances at cheaper rates. In the current scheme of things, there is no mechanism in place to ensure that the tribunal disposes the case in a timely manner. There is a strong need to bring in more accountability for the DRT. The same applies to private student loan settlement and recovery. 

Private student loan settlement

As to the suggestions to improve the debt recovery scenario in the country it is recommended that the time bound disposal of cases though the Court has to dispose an order application within six months, and a stay application within two months from the date of its admission, this has not been followed by the Tribunals in India in many situations. The government must make sure that time-bound disposal of the cases is done mandatorily by adding the clause in the Act and making it a law. Even though the SARFAESI Act has mandated the Debt Recovery Tribunals to settle the original applications within six months, this is not obeyed strictly. Efforts have to be taken to ensure this.

Bibliography

 Acts

1. Recovery of Debts and Bankruptcy Act, 1993
2. The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI), Act, 2002

Textbooks

A. Adhvani, Investment and Securities Market in India, Himalaya Publishing House, 2001, (9^th Edition)

• Websites

1. https:/openlibrary.webnode.com/
2. com
3. https://www.taxmann.com/blogpost/2000000381/what-is-sarfaesi-act.aspx
4. https://www.mondaq.com/india/securitization-structured-finance/626056/recovery-process-enforcement-of-security-interest-in-india
5. tn.nic.in
6. https://www.prsindia.org/billtrack/the-enforcement-of-security-interest-and-recovery-of-debts-laws-and-miscellaneous-provisions-amendment-bill-2016-4279
7. https://drtcbe.tn.nic.in/Actsrules/SARFAESI%20AMENDMENT%20ACT%202016.pdf

[1] The Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993

[2] drt.gov.in

[3] New Delhi and Mumbai have three Debt Recovery Tribunals and Chennai and Kolkata have two Debt Recovery Tribunals each.

[4] Section 3, The Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993

[5] Section 4(1), The Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993

[6] Section 6, (Term of Officer), The Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993

[7] Ibid.

[8] drat.tn.nic.in

[9] Cleartax.in/sarfaesi-act-2002

[10] Recovery under Sarfaesi Act, Ministry of Finance, July 15, 2019

[11] Authorised Officer, Indian Overseas Bank v. Ashok Saw Mill III, AIR 2009, SC 2420

[12] Mardia Chemicals Ltd. v. Union of India, AIR 2004 SC 2371

[13] Section 2(1) (o), The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

[14] https://shodhganga.inflibnet.ac.in/bitstream/10603/113909/13/13_chapter%204.pdf

[15] https://drtcbe.tn.nic.in/Actsrules/SARFAESI%20AMENDMENT%20ACT%202016.pdf