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Since banks and financial institutions were experiencing considerable difficulties in recovering loans and enforcement of securities charged with them through the pvrocedure of civil courts.  In order to streamline the recovery of bad debts by banks and financial institutions without further delay the Parliament then enacted “The Recovery of Debt Due to Banks and Financial Institutions Act, 1993”(hereinafter called ‘The Act’).This Act will not apply where the amount due to banks or financial institutions is less than ten lakh rupees.

Section 19 of the Act follows the powers and procedure to file application to the Tribunal.

Jurisdiction of the Tribunal

Where a bank or financial institution has to recover any debt from any person, it can make an application to a Tribunal within local limits of whose jurisdiction:

Ø  Where a defendant or defendants actually or voluntarily resides or carries on business or works for gain or

Ø  Any of the defendants at the time of making application voluntarily resides or carries on business or works for gain or the cause of action wholly or partly arises.

Hence bank has to file an O.A. for recovery of debt before the Debt Recovery Tribunal where the defendants are residing or carrying on business or is working for gain or where the cause of action arises.

The format for ruling O.A. is provided in the Debt Recovery (Procedure) Rules, 1993. The O.A. has to be filed as per the prescribed format in Rule 4 before the Tribunal.

Contents of the Application

Every O.A. filed before the Tribunal shall set forth concisely under distinct heads, the grounds for such applications and such grounds shall be numbered consecutively. For interim relief there is no necessity to present a separate application before a Tribunal unlike in civil court. The party can plead interim reliefs in the O.A. itself.

A perusal of the model O.A. filed by the bank before the Debt Recovery Tribunal, Ernakulam shows that an O.A. shall contain a statement showing details of the debt due to the defendant and circumstances under which such debts are due, all documents relied upon by the bank and those mentioned in the application, details of the crossed Indian Postal Order representing the application fee and index of documents. Such an application shall neatly be  typed and duly attested by an authorized officer of the bank. The authority of the duly authorizing officer shall be filed along with the application. If an O.A. is filed by an advocate it shall be accompanied by a duly executed vakalat.

Issue of Summons

As per Rule 4 of the Debt Recovery (Procedure) Rules, 1993 it has to be submitted in sets in an empty file size envelope bearing the address of the defendants. If there are more than one defendant, then such number of extra paper books together with empty file size envelopes submitted by the applicant.

The Registrar after verification of the O.A. and after being satisfied that the O.A. fulfills all the required formalities in issue, send  notice to the defendants mentioned therein. If   any defect found on scrutiny, the Registrar may allow the bank to rectify the sale in this present. If the defect is not rectified in the time stipulated by the Registrar he may decline appeal before the Presiding Officer, whose decision thereon shall be final.

When a summons is received by the defendant he shall at or before the first hearing  or within such time granted by the Tribunal may present a written statement of his defence. If the defendants claim a set-off against the applicant or make a counter-claim they shall file it along with the written statement. When a counter-claim is made against the applicant, the applicant shall be at liberty to file a written statement in answer to the counter claim made by the defendant within the time limit fixed by the Tribunal. After the pleadings of the parties are over, the Tribunal will allow the parties to adduce evidence.

If the defendant is not filing any written statement as directed by the Tribunal then the Tribunal may proceed with an ex parte order against the defendant and pass an order on the application filed as it thinks fit. If the defendant is contending the application, the Tribunal may allow the parties to prove their claims by affidavit and will give an opportunity to all and parties of being heard and after hearing the parties will pass an order as it thinks fit. If the Tribunal is allowing the O.A. filed by the bank, the Tribunal will issue a Recovery Certificate. A Recovery Certificate shall contain the amount to be recovered by the applicant bank, the interest at which rate the bank is entitled to get from the defendants etc.

If any person is aggrieved by the order of the Tribunal may prefer an appeal to the Appellate Tribunal having jurisdiction in the matter. Every appeal shall be filed within a period of 45 days from the date on which the copy of the order made and the appeal shall contain the prescribed fee. If an appeal is filed after the prescribed time limit of 45 days, and if the Appellate Tribunal is satisfied that there was sufficient cause for not filing it within the period the Appellate Tribunal may  admit the appeal. Appellate Tribunal also will hear all the parties to the appeal; will pass an order as it thinks fit confining, modifying or setting aside. When an appeal is filed before the Tribunal by a person against whom the Debt Recovery Tribunal passed an order to pay an amount to the applicant such appeal shall not be entertained by the Appellate Tribunal unless appellant deposited seventy five per cent of the amount determined. The Appellate Tribunal has the power to waive or reduce the amount to be deposited under S21 of the Act.

Recovery of Debt Determined by Tribunal

When the Presiding Officer passed a recovery certificate he will send it to the recovery officer for execution. The modes of recovery of debts are described in S25 of the Act. Recovery Officer can recover the amount either by:

(i)   Attachment and sale of movable and immovable property of defendant

(ii)  Arrest of the defendant and his detention, in prison

(iii)  Appointment of receiver for the movable and immovable properties of defendant

The parties against whom the recovery of debt is ordered is called Certificate Debtor, and the person in whose favour the certificate is issued is called Certificate Holder.

The Certificate Debtor has no right to dispute before the Recovery Officer regarding the correction of the amount specified in the certificate and has no right to object the certificate on any other ground. He has to file appeal within 45 days as mentioned above.

If the certificate debtor is not complying with the Recovery Certificate, the Recovery Officer can recover the recovery certificate debt from the Certificate Debtors by any of the methods defined above. In addition to that the Recovery Officer may require any such person who is liable to pay any amount to the Certificate Debtor to deposit that amount before him.

In the recovery by attachment and sale of property etc the provision of the Income Tax Act, 1961 and the rules made there under enforced from time to time shall apply with necessary modifications.

After the establishment of the Debt Recovery Tribunals a suit or other proceeding pending before any court immediately before the date of establishment of the Tribunal shall stand transferred on such date to the particular Tribunal. As per S41 A of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993 where a decree or order passed by any court before the commencement of the Act and has not been executed then the decree-holder may apply to the Tribunal to pass an order for the recovery of the amount. The Tribunal shall issue a certificate of recovery to the Recovery Officer.

SRFAESI Proceedings

Another important rule of the Legal Department is to follow SRFAESI accounts. I have studied the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SRFAESI Act) and came to know how banks will be able to recover their dues through SRFAESI Act. The SRFAESI Act entitles the banks to recover the dues without the intervention of a court or Tribunal. Section13 of the SRFAESI Act elaborately deals with enforcement of security interest.[1] When an account is classified as a Non-Performing Asset (NPA)[2] and the borrower who is under liability to secured creditor[3] under a security agreement[4]  makes any default, the secured creditor may require the borrower in a notice in writing to discharge in full his liabilities within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise any or all of the measures mentioned in Section 13 (4) of the SRFAESI Act.

I have studied the model form of SRFAESI notice issued by the bank to the borrowers. It contains the details of the amount payable by the borrower,, the details of the secured asset intended to be enforced by the bank in case of his default, security details, a description of the property, a factual account of the situations of non-payment and so on. Of the borrower makes any representation to the said notice the bank shall within seven days cause to reply to the borrower either accepting the objection or rejecting the objection. Even after rejecting the objection the party is not making payment as demanded in the notice then the bank is entitled to take measures as provided in Section 13 (4) that is,

a)  to take possession of secured assets,

b) to take over management of the business of the borrower,

c) appoint any person to manage the secured asset which the possession has been taken over by the secured creditor.

d) require any person who has acquired any of the secured asset from the borrower to pay the secured creditor so much of the money as is sufficient to pay the secured debt.

Section 14 of the SRFAESI Act provides that the Chief Metropolitan Magistrate or District Magistrate is authorized to assist the secured creditor to take possession of the security interest if the secured creditor is unable to take possession by himself. For this purpose the secured creditor has to file an application to the concerned Chief Metropolitan Magistrate or District Magistrate.

Any of the interested parties aggrieved by any if the measures referred o in Section 13 (4) taken by the secured creditor can file an application to the Debt Recovery Tribunal  having jurisdiction in the matter within 45 days from the date on which such a measure has been taken. It shall be accompanied by fees provided by the SRFAESI Act and Rules. The Debt Recovery Tribunal after hearing the parties shall pass an order as it thinks fit.

The SRFAESI Act is not applicable in certain cases which are described below:

Ø A lien on any goods, money or security given by or under the Indian Contract Act, 1872 or the Sale of Goods Act, 1930 or any other law for the time being in force.

Ø a pledge of movables within the meaning of Section 172 of the Indian Contract Act, 1872

Ø creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act, 1934;

Ø creation of security interest in any vessel as defined in clause (55) of section 3 of the Merchant Shipping Act, 1958;

Ø any conditional sale, hire-purchase or tease or any other contract in which no security interest has been created;

Ø any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1930;

Ø any of the properties not liable to attachment (excluding the properties specifically charged with the debt recoverable under the Act) or sale under the first proviso to sub-section (1) of section 60 of the Code of Civil Procedure, 1908;

Ø any security interest for securing repayment of any financial asset not exceeding one lakh rupees;

Ø any security interest created in agricultural land;

Ø any case in which the amount due is less than twenty per cent of the principal amount and interest thereon.

The Security Interest (Enforcement) Rules, 2002 provides the procedure to issue demand notice, reply to the representation of the borrower and procedure. The rule also provides the procedure for sale of immovable security interest.

The authorized officer shall take possession by delivering a possession notice to borrower or his agent by attaching the possession notice in a conspicuous property.  The possession notice shall be published in two leading dailies, one in vernacular language, having sufficient circulation in the locality. The property will be insured and shall remain in the custody of the authorized officer or any other person authorized to do so. 

The process of valuation of the property should be done by an approved valuer and in consultation with secured creditor,  fix the reserve price of the property and may sell the whole or any part of the immovable secured asset by:

i.  by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying such assets.

ii. by inviting tenders from the public;

iii. by holding public auction; or

iv. by private treaty

A public notice of sale of thirty days has to be published in two leading newspapers one in vernacular language which shall include:

1. The description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor

2. the secured debt for recovery of which  the property is to be sold

3. reserve price, below which the property may not be sold

4. time and place of public auction or the time after which sale by any other mode shall be completed

5. depositing earnest money as may be stipulated by the secured creditor;

6. any other thing which the authorized officer

7. considers it material for a purchaser to know in order to judge the nature and value of the property.

The sale notice has to be affixed to a conspicuous part of the immovable property. Any other method of sale can be settled by the parties in writing.

The sale price should not be less than the reserve price but if no such price can be obtained the authorized officer may effect the sale with the consent of the borrower and the secured creditor. A deposit of twenty five per cent of the sale price has to be deposited with the authorized officer after sale and if not paid the property will be sold again. The balance amount shall be paid on or before the 15th day of confirmation of sale or an extended period can be agreed upon by the parties. After all the formalities have been met a certificate of sale will be issued to the purchaser. Payment for any encumbrances and any interest due thereon shall be paid by the purchaser to the authorized person. The amount deposited for encumbrances will be paid to those entitled to it by issuing notices. The property will be delivered to the purchaser free of encumbrances and it will be so mentioned in the sale certificate.

The bank can proceed simultaneously to recover the debts by initiating proceedings under the Debt Recovery Tribunal as per S19 of The Recovery of Debt Due to Banks and Financial Institutions Act, 1993 and through the enforcement of security under the SRFAESI Act as under by the Supreme Court decision in the Transcore case.

Lok Adalat

The bank is also recovering their debt through Lok Adalats. Lok Adalat is a forum functioning under Legal Services Authority Act, 1987. It is a forum which will determine and arrive at a compromise settlement between the parties to a dispute in respect of any pending cases or pre-litigation cases. If the case is pending before the court or if the parties to the dispute agree to or any party makes an application to the court for referring the matter to the Lok Adalat for settlement, then the court will refer the matter to the Lok Adalat. If after negotiation if the dispute is settled between the parties then the Lok Adalat forum will pass an award which shall deal with the decree of a civil court and it shall be binding on all the parties to the dispute. No appeal shall lie to any court from the award. If the award debtor fails to honour the award then the award holder can execute the award as if it is through the concerned civil court as if it is a decree of a civil court.

Miscellaneous Functions

Certain parties are filing suits/claims against the bank before the civil courts, consumer forums, ombudsman etc. Those cases are also defended by the bank through its empanelled lawyers. The bank is conducting and defending the cases through a panel of lawyers. Legal department is empanelling the lawyers who are qualifying the norms prescribed by the bank. The legal officers at different level of the bank are liasoning with the advocates. The factual position of accounts, the stand to be taken by the bank in a particular matter etc are studied by law officers and will apprise the advocate and the advocate will prepare the claim or defence of the bank.

Where a matter involved in legal issue is referred to the legal department, the legal department frames an opinion based on the established legal principles, and will guide the concerned department accordingly.

Banks are also recovering their dues through a compromise settlement by the borrowers and the bank. Legal and recovery department are framing the policies for settlement of accounts etc. Provisioning is made for each account in case of default. 

[1] Section 2(zf) of the SRFAESI Act defines “security interest” as the right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, hypothecation, assignment etc.

[2] An NPA is an asset or account of a borrower, which has been classified by a bank or financial institution as; sub-standard, doubtful or loss asset- provided such classification are made according to the asset classifications issued by the concerned authority or body or in accordance with the directions or guidelines issued by the Reserve Bank. [ S 2 (o)]

[3]  Secured Creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includes a debenture trustee, a reconstruction company, or any other trustee holding securities on behalf of a bank and in whom a   security interest is created towards the borrower who is liable for due payment. [ S2 (zd)]

[4] “Security Agreement “ means an agreement, instrument or any other document or arrangement  under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor. [S 2(zb)] 

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