WELCOME TO PRESENTATION ON

RECOVERY PROCESS & ENFORCEMENT OF

SECURITY INTEREST IN INDIA
PRESENTED BY :-

R-26, South Extension, Part-II,

New Delhi-110049

Phone: (Delhi) 011-46175500/41551533

(Mumbai) 022-43470005
Fax: 011-41551537
Email: [email protected]

OVERVIEW OF THE PRESENTATION

RECOVERY OF DEBTS LEGAL FRAMEWORK IN INDIA

DEBT RECOVERY TRIBUNALS & PROCESS OF RECOVERY

RECOVERY OF DEBTS (DUE TO BANKS AND FINANCIAL

INSTITUTIONS) ACT 1993 (DRT ACT)

SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT 2003
(SECURITISATION ACT)

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).

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

BROAD CLASSIFICATION OF THE DEBT WORK OUT PROCESS IN INDIA

Amount to be recovered

Procedure

Does not exceed Rs. 10,00,000/-

i)

Exceeds Rs. 1,00,000/-

In case the Security Interest has been created in

specific movable / immovable property provisions of
the Securitization Act may be invoked to repossess
the mortgaged property, without intervention of the
court, and sell the same, provided the account has
been classified as NPA.

Exceeds Rs. 10,00,000/-

Original application is to be filed before the DRT for

recovery of dues. Bank can simultaneously initiate
proceedings under Securitization Act as well. Civil
court / Arbitrator will not have jurisdiction to
entertain such claim.

Filing simple suit for recovery before Civil

Court.
ii) Filing of summary suit under Order XXXVII of
CPC, 1908.
iii) Filing suit for foreclosure of mortgage.
iv) Arbitration proceedings if arbitration agreement
exists.

DEBT RECOVERY TRIBUNALS & PROCESS OF RECOVERY

Debts Recovery Tribunals (DRT) and Debts Recovery Appellate Tribunals

(DRAT) have been constituted under the provisions of the DRT Act for
establishment of Tribunals for expeditious adjudication and recovery of debts
due to Banks and Financial Institutions and for matters connected therewith.

DRT has also been given the power to adjudicate the applications filed by the
Borrower/Mortgagor against the action of the Secured Creditor initiated
under the Securitization Act

ESTABLISHMENT OF DRTs
The Central Government by notification has established Tribunals known as Debts
Recovery Tribunals (DRT) to exercise the jurisdiction, power and authority confers under
the Act at:
Mumbai,

Delhi,

Kolkata,

Chennai,

Bangalore,

Allahabad,

Ahmedabad,

Aurangabad,

Chandigarh,

Madurai,

Coimbatore,

Cuttack,

Orissa,

Patna,

Bihar,

Ernakulam,

Guwahati,

Hyderabad,

Vishakhapatnam,

Jabalpur,

Jaipur,

Lucknow,

Nagpur,

Ranchi

Pune.

Establishment of DRATs
In exercise of powers, the Central Government has established DRAT at places
:

Allahabad Jurisdiction over DRTs functioning at Allahabad, Lucknow

and Jabalpur.

Chennai Jurisdiction over DRTs functioning at Bangalore, Chennai,

Coimbatore, Hyderabad, Vishakhapatnam and Ernakulam.

Delhi Jurisdiction over DRTs functioning at Delhi, Chandigarh, Jaipur.

Kolkata Jurisdiction over DRTs functioning at Cuttack, Guwahati, Patna,

Kolkata and Ranchi.

Mumbai Jurisdiction over DRTs functioning at Ahmedabad, Aurangabad,

Mumbai, Nagpur and Pune.

Composition of DRT and DRAT

DRT is presided over by a Presiding Officer, who is qualified to

be a District Judge, and is appointed by notification by Central
Government.

DRAT is presided over by a Chairperson, who is qualified for

appointment or who has been a Judge of a High Court, or has
been member of the Indian Legal Services who has held the post

of Grade I of such services for at least three years.

The Recovery Of Debts Due To Banks And Financial Institutions

Act, 1993

Applicability (DRT Act)

The Act applies to whole of India except State of Jammu & Kashmir.

The provisions of Act applies where the amount of debt due is not less
than Rs. 10,00,000/-.

Original Application for recovery of Debts can be filed only by Banks

and Financial Institutions.

Applications to be made to DRT under DRT Act

Only Banks and Financial Institutions defined under the DRT Act,
(which includes Public Financial Institutions within the meaning of
Section 4A of the Companies Act, 1956, Securitization company /
Reconstruction company under the Securitization Act), can file an
application before the DRT. Normal fees, based on amount claimed in
O.A., has been fixed as court fee which does not exceed Rs. 1.50
lakhs.
Summary procedure is adopted by the DRTs for adjudication of
dispute. Evidence is taken on affidavit and cross examination is not
permitted except in few deserving cases.
The defendants can file counter claim or claim of set off against the
claimed amount.
The final order is passed by the Tribunal directing the borrowers to
pay the amount. In case, the borrower does not pay the ordered
amount, recovery certificate is ordered to be issued against the
borrower which is then executed by Recovery Officer of the DRT.

Powers of DRT
DRT has power to:

summoning and enforcing the attendance of any person and examining him
on oath;
requiring the discovery and production of documents;
receiving evidence on affidavits;
issuing commissions for the examination of witnesses or documents;
reviewing its decisions;
dismissing an application for default or deciding it ex-parte.
make interim order by way of injunction, stay or attachment against the
defendant to debar from transferring, alienating or otherwise dealing with the
property or asset without permission of Tribunal.
direct the defendants to provide security sufficient to satisfy the debt.
Willful disobedience of powers of Tribunal are punishable under Contempt
of Court Act.

Appeal against the order of DRT

Any person aggrieved on account of order passed by DRT may

file an appeal before DRAT.
However, the DRAT does not entertain the appeal unless the
Appellant deposits with the Appellate Authority, 75% of the
amount or such other lesser amount as directed by DRAT.

Overriding Effect
Provisions of the DRT Act has overriding effect over any other law for the
time being enforced except :
A.

IFCI Act

B.

State Financial Corporation Act,

C.

Unit Trust of India Act,

D.

Financial Reconstruction Bank of India Act,

E.

Sick Industrial Companies (Special Provisions) Act and

F.

Small Industries Development Bank of India Act.

G.

The Industrial Reconstruction Bank of India Act, 1984

Applicability of Securitization Act

The Act applies to whole of India.

The provisions of the Act shall apply to Security Interest created in favour of
Secured Creditor, except on :(a)

A lien on any goods, money or security given by or under the Indian

Contract Act, 1872 or the State of Goods Act, 1932 or any other law for
the time being in force;

(b)

A pledge or movables within a meaning of Section 172 of Indian

Contract Act.

(c)

Creation of any security in any aircraft as defined in clause (1) of

Section 2 of Aircraft Act, 1934.

(d)

Creation of security interest in any vessel as defined in clause (55)

of Section 3 of the Merchant Shipping Act, 1958.

(e)

Any conditional sale, hire purchase or lease or any other contract in which no
security interest has been created.

(f)

Any rights of unpaid seller under Section 47 of the Sale of Goods Act, 1932.

(g)

Any property not liable to attachment (excluding the properties specifically

charged with the debt recoverable under this Act) or sale under the first proviso
to sub section (1) of Section 60 of the Code of Civil Procedure, 1908.

(h)

Any security interest for securing repayment of any financial asset not
exceeding one lakh rupees.

(i)

(j)

Any security interest in agricultural land.

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

Compliance under The Securitization & Reconstruction of

Financial Assets & Enforcement of Security Interest Act 2002
(Securitization Act) & Security Interest (Enforcement)

Rules, 2002(Rules )

CHECK LIST FOR ENFORCEMENT OF SECURITY INTEREST IN

CASE OF IMMOVABLE ASSETS

SR. NO.

COMPLIANCES

RELEVANT PROVISIONS

Bank/FI to give a Power of

Attorney/ Letter authorising its
concerned official to take steps
under the Act.

Sec 13 (12) read with Rule 2(a)

Sending of Demand Notice for

enforcement of Security Interest.

Sec 13(2) read with Rule 2(b) & 3

Notice can be sent by Registered Post or

Speed Post or Courier or Fax or E-mail

Rule 3(1)

If Borrower avoids notice, service shall

be made by affixing the notice in some
conspicuous place of his residence/
business and by publishing the notice in
two leading newspapers, one in a
vernacular language having sufficient
circulation.

Proviso to Rule 3 (1)

If more than one Borrower (which

includes guarantor), individual notice to
be served on each of them.

Rule 3(4)

5A

In case any reply/representations are

received, the Bank to suitably adjudicate
upon and decide.

Section 13(3A)

5B

Issue Notice for taking possession of

Secured Asset u/s 13(4) of Act .

Sec 13(4)

5C

Take symbolic possession of the Secured

Assets

Sec 13(4)

File an application before the Chief

Metropolitan Magistrate or District
Magistrate for taking actual possession of
the property

Comply with the order of the Chief

Metropolitan Magistrate or District
Magistrate

Sec 14(1)

Sec 14(2)

8.

Liaisoning with the Court Receiver, Police

authorities, etc.

9.

Deposit of fee with Police authorities, if any, in

case the police force is to be made available by
police station in Utter Pradesh

10

After taking the possession a notice in terms of

Appendix IV will be sent to the Borrower, which
will also be affixed on the Property.

Rule 8(1)

11

The said notice will also be published in two

leading newspapers one in vernacular language
within 7 days.

Rule 8(2)

12

Name of Bank/FI to be displayed on the Property.

Rule 8(1)

13

Insurance cover to be arranged

Rule 8(4)

14

Take Photographs

15

Security Guards to be deployed at the site of the

Property.

Rule 8(4)

16

Valuation of property by an approved valuer

before effecting the sale

Rule 8(5)

16A

Serve on the Borrower a notice of 30 days for

sale.
Obtaining Quotations/Inviting tenders/Holding
Public Auctions/ Signing Private Agreement for
sale of the property.

Rule 8(6)

17

Not specified

Rule 8(5)

18

If sale is by way of inviting tenders from

public or holding of public auction, a public
notice to be published in two leading news
papers one in vernacular language, having
sufficient circulation, setting out the terms of
the sale.

Proviso to
Rule 8(6)

19

Notice and Publications to be affixed on

conspicuous part of the property and put on
the website of the Bank.

Rule 8(7)

20

Sale other than public auction/tender to be

on terms settled between the parties in
writing.

Rule 8(8)

21

Sale to be confirmed in favour of highest

bidder

Rule 9(2)

22

No sale to be confirmed on less than reserve Proviso to Rule 9(2

process. However sale at less than Reserve
price can be made with the consent of
Borrower

23

25% of the sale price to be deposited

forthwith and balance within 15 days

Rule 9(3) and (4)

24

If balance is not deposited the deposit would

be forfeited and the property be resold.

Rule 9(5)

25

Sale of Property to be made effective from

execution of Sale Deed

Not specified

26

If the terms of payment have been complied

with, the Bank/FI shall issue a certificate of
sale in favour of the purchaser

Rule 9(6)

27

The certificate of sale to specify whether the

property is free from encumbrances known
to the Bank

28

Acknowledgement from buyer of having

taken over the physical possession of
property to be obtained by the Bank/FI.

Not specified

29

In case the dues of the Bank/FI are not fully

met with the sale proceeds of the property,
Bank/FI may file an application before Debt
Recovery Tribunal
or Court having
jurisdiction, for recovering the balance
amount.

Sec 13(10)
Read with
Rule 11

Applications to be made to DRT under said Securitisation Act

Any person, aggrieved by any of the measures referred to in subsection (4) of sector 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 is to be adopted by the

DRT for disposal of such applications filed un/s 17 of the Act.

Appeal against the order of DRT under Securitisation said Act

Any person aggrieved on account of order passed by DRT may file

an appeal before DRAT.
The DRAT does not entertain the appeal unless the Appellant
deposits with the Appellate Authority, 50% of the amount or such
other lesser amount as directed by DRAT.

Powers of DRT under Securitisation Act

In addition to the power of the DRT under DRT Act, a DRT has
following additional powers:

a. to restore for ordering restoration of the management of the

secured assets to the borrower or restoration of possession of the
secured assets to the borrower.
b. to order payment of cost/compensation to the borrower if it holds
that the possession of the secured assets by the secured creditor
is not in accordance with the provisions of the Act.

Disposal of Application /Appeal by DRT/DRAT

Any application made by the Banks and Financial Institutions is to

be dealt with by the Tribunal as expeditiously as possible and
endeavor is to be made by Tribunal to dispose off the application
finally within a period of 180 days from the date of receipt of
application.

The appeal filed before the Appellate Tribunal is to be disposed off

as expeditiously as possible and endeavor is to be made by Tribunal
to dispose off the appeal finally within a period of six months from
the date of receipt of appeal.

On practical side the proceedings before may take from 1 (one) year
to 3 (three) years depending upon the facts and circumstances of the
case.

IMPORTANT PRECEDENTS

Mardia Chemicals Ltd. Vs Union Of India (AIR 2004 SC

2371)
Ratio: The constitutionality of the Securitisation Act was
upheld except 17(2) of the Act.

Transcore Vs Union Of India (AIR 2007 SC 712)

Ratio: Withdrawal of suit pending before DRT under DRT
Act, 1993 is not a pre-condition for taking recourse to the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. The Securitisation
and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 is an additional remedy, which is
not inconsistent with DRT Act, 1993 and, therefore, doctrine
of election has no application.

IMPORTANT PRECEDENTS
continued.

Central Bank of India Vs State of Kerla (JT 2009 (3) SC

216)
Statutory first charge over property under any law will prevail
over rights created in favour of secured creditors such as
banks and other financial institutions.

United Bank of India Vs Satyawati Tandon and Others

(AIR 2010 SC 3413)
Where statutory remedies are available under a fiscal statute
then exercise of jurisdiction under Article 226 by High Court
for passing orders, which could have serious adverse impact
on the right of banks and other financial institutions to recover
their dues, is not warranted

OTHER IMPORTANT JUDGMENTS

Rajshree Sugar and Chemicals Ltd. Vs Axis Bank

AIR 2011 Madras 144

State Bank of India Vs Sharda Spuntex ;

I(2010) BC 562 Rajasthan
Transactions in derivatives, fall within the category of
"business activity undertaken by the Bank" as they are
covered by Section 6(1) of the Regulation Act . If the
transaction in question gives rise to a claim by the Bank, of
any liability, on the part of the Company, the Bank may
certainly be able to invoke the provisions of DRT Act.
Further held that what is expressly permitted by law, cannot
be held to be opposed to public policy

OTHER IMPORTANT JUDGMENTS

continued

BOI Finance Ltd. Vs Custodians and Others; AIR 1997

SC 1952
The non-compliance of the directions issued by the Reserve Bank
may result in prosecution/or levy of penalty under Section 46, but it
cannot result in invalidation of any contract by the bank with the third
party.

ICICI Bank Ltd. Official Liquidator of APS Star Industries Ltd.

(2010) 10 SCC 1:
The Honble Supreme Court held that an outstanding in the account
of the borrower is a debt due and payable by the borrower to the
bank and the bank is the owner of such debt. The bank can always
transfer its assets and such transfer in no manner affects any right
or interest of the borrower.

Inderjeet Arya Vs. ICICI Bank Ltd., Writ Petition No. 7253/2011
The Honble Delhi High Court held that the action against the
Borrower in the Debt Recovery Tribunal is not a suit and, therefore,
such Guarantor cannot take protection under Section 22 of SICA.

Effect of the Act on the Economy / Banking Sector

The enactment of the Act has been a major factor in improving the
health of Banks and Financial Institutions by enabling the bank to
reduce their NPAs to substantially lower level. On account of
availability of dual remedy, i.e. remedy under the Securitization Act
and DRT Act, the Banks and Financial Institutions have been able to
substantially resolve the NPAs.

We have handled close to 600-650 default cases under Securitization

Act for various Banks viz., Standard Chartered Bank, HDFC Bank,
China Trust Commercial Bank, HSBC, Axis Bank etc. and have
successfully recovered the outstanding dues in more than 80% of the
cases.

THANK YOU