Debt Recovery and SARFAESI: formula sheet

Key formulas

Core jurisdiction (RDB Act, section 17(1))

DRT decides applications by banks and financial institutions for recovery of debts due to them

Applicant must be a bank or financial institution. The Act's section 1(4) threshold applies to debt due to a bank, financial institution or a consortium.

Threshold limit (RDB Act, section 1(4))

Act does not apply if debt < ₹10,00,000 (or notified amount, not less than ₹1,00,000)

Save as otherwise provided. A debt of exactly ₹10 lakh is not below the limit.

Appellate Tribunal (section 17(2))

Appeals against orders of a Tribunal go to the Appellate Tribunal

Section 17(2A) adds appeals against Adjudicating Authority orders under Part III of the IBC from a date to be appointed.

IBC Part III jurisdiction (section 17(1A))

DRT hears Part III IBC applications from a date appointed by the Central Government; circuit sittings at all district headquarters

Operative only from the notified date.

SARFAESI application to DRT (section 17, SARFAESI Act)

Application within 45 days from the date the section 13(4) measure was taken

Disposal is to be within 60 days, extendable, with total pendency not over 4 months.

Territorial jurisdiction under SARFAESI section 17(1A)

Cause of action arises, or secured asset located, or branch maintaining the account where debt is outstanding

Any of the three places can found jurisdiction.

Civil court bar (SARFAESI section 34)

No civil court suit or injunction on matters the DRT or Appellate Tribunal can decide

Applies to matters under the SARFAESI Act and the RDB Act.

Start of recovery

Certificate under section 19(7) → Recovery Officer → recovery of the amount specified in the certificate

Section 25 says the Recovery Officer proceeds on receipt of a copy of the certificate.

Modes of recovery under section 25

(a) attachment and sale of movable or immovable property of the defendant; (aa) taking possession of property over which security interest is created or any other property of the defendant, appointing a receiver and selling it; (b) arrest and detention in prison; (c) appointing a receiver for management of movable or immovable properties; (d) any other mode prescribed by the Central Government

Clause (aa) was inserted by Act 44 of 2016, w.e.f. 1-9-2016. Clause (d) is also an insertion.

Other modes under section 28

Section 28(2) deduction from amounts due to the defendant; 28(3) notice to persons holding or owing money; 28(4) application to court holding defendant's money; 28(4A) affidavit of assets; 28(5) distraint and sale of movable property

Section 28 works without prejudice to section 25. The Recovery Officer may use one or more modes.

Deduction under section 28(2)

Amount due to defendant from any person → Recovery Officer requires deduction of debt → paid to credit of Recovery Officer

Does not apply to any part of the amount exempt from attachment under section 60 of the Code of Civil Procedure, 1908.

Notice under section 28(3)

Notice in writing to any person from whom money is due or may become due to the defendant, or who holds or may hold money for the defendant → pay sufficient amount to Recovery Officer

A copy goes to the defendant (and to all joint holders in a joint account). Joint holders' shares are presumed equal until the contrary is proved.

Consequences of a section 28(3) notice

Claims arising after notice void against the demand; false objection on oath → personal liability; discharging liability after notice → personal liability; non-payment → deemed defendant in default

Liability is limited to the lesser of the person's own liability to the defendant and the defendant's liability for the debt. Receipt from Recovery Officer fully discharges the payer to that extent.

Affidavit of assets under section 28(4A)

Recovery Officer may, by order at any stage of execution, require the defendant (and, for a company, any of its officers) to declare particulars of assets on affidavit

Inserted by Act 1 of 2000, w.e.f. 17-1-2000.

Distraint

Distraint and sale of movable property as per the Third Schedule to the Income-tax Act, 1961

Section 28(5). The text supplied refers to the 1961 Act, so quote it as written.

RDB Act section 21: pre-deposit for appeal to DRAT

Deposit = 50% of the debt determined by the Tribunal under section 19; DRAT may reduce it, for reasons recorded in writing, to not less than 25%

Applies to a person from whom a debt is due to a bank, financial institution or consortium. Without the deposit the appeal is not entertained.

RDB Act section 30A: appeal against Recovery Officer order

Deposit = 50% of the debt due as determined by the Tribunal; appeal against an order under section 30 is not entertained without it

The section as supplied contains no power to reduce the deposit. The appeal is to the Tribunal.

SARFAESI section 18(1): appeal to Appellate Tribunal

Time limit = 30 days from the date of receipt of the DRT order under section 17

Along with the prescribed fee. Different fees may be prescribed for a borrower and for a person other than the borrower.

SARFAESI section 18: pre-deposit

Deposit = 50% of the debt due, as claimed by the secured creditor or as determined by the DRT, whichever is less; reducible to not less than 25%

The deposit is required of the borrower. The reduction needs reasons recorded in writing.

SARFAESI section 17: application to DRT

Time limit = 45 days from the date the section 13(4) measure was taken

Do not confuse it with the 30-day limit for the appeal under section 18.

SARFAESI section 17(5): disposal time

Disposal in 60 days; extendable for reasons recorded, but total pendency not more than 4 months

After 4 months, a party may apply to the Appellate Tribunal for a direction for expeditious disposal (section 17(6)).

SARFAESI section 30A and 30B: ARC penalty

Penalty up to ₹1 crore or twice the amount involved (if quantifiable), whichever is more; further up to ₹1 lakh per day for a continuing failure. The penalty is payable within 30 days of the show-cause notice (section 30A(3)). If an ARC does not pay, its registration is cancelled under section 30A(4), after it is given a hearing.

Applies where an ARC or person fails to comply with an RBI direction. The 30-day appeal under section 30B is not against the penalty order. It lies to the Appellate Authority only against the section 30A(4) order cancelling registration, within 30 days from the date of that order. The Appellate Authority may entertain a late appeal if there was sufficient cause for the delay.

Registration requirement

No ARC may commence or carry on securitisation or asset reconstruction without (a) a certificate of registration and (b) net owned fund of at least ₹2 crore

Section 3(1). The RBI may notify a higher amount, and may specify different amounts for different classes of ARCs.

Application

Application to the RBI in the form and manner it specifies

Section 3(2). The RBI may inspect records or books to satisfy itself on the conditions.

Conditions the RBI checks (section 3(3))

No losses in any of the three preceding financial years; adequate arrangements for realising assets and paying returns and redeeming investments of qualified buyers; directors with adequate professional experience in finance, securitisation and reconstruction; no director convicted of an offence involving moral turpitude; sponsor a fit and proper person; compliance with RBI prudential norms; compliance with conditions in RBI guidelines

These are the clauses (a), (b), (c), (e), (f), (g) and (h). Clause (d) has been omitted.

Grant and rejection

RBI grants certificate under s.3(4), subject to conditions it thinks fit; may reject under s.3(5) after a reasonable opportunity of being heard

Rejection is allowed only if the conditions in s.3(3) are not fulfilled.

Prior RBI approval for changes

Substantial change in management (including appointment of any director, MD or CEO), change of registered office location, or change of name needs prior RBI approval

Section 3(6). RBI's decision on whether a change is substantial is final.

Other functions (section 10(1))

Agent for recovery of dues; manager under s.13(4)(c); receiver if appointed by a court or tribunal

An ARC cannot act as manager if that gives rise to any pecuniary liability.

Other business (section 10(2))

Any business other than securitisation or asset reconstruction needs prior RBI approval

Section 10(1) functions are the exception. The word ARC here does not include its subsidiary.

ARC under the RDB Act

ARC with a certificate of registration under s.3(4) of SARFAESI = financial institution under s.2(h)(ia) of RDB Act

Its claims can therefore be a 'debt' recoverable before the DRT.

Right to enforce

Security interest may be enforced by the secured creditor without the intervention of court or tribunal (s. 13(1))

Applies notwithstanding sections 69 and 69A of the Transfer of Property Act, 1882.

Conditions for notice

Default in repayment + account classified as NPA → written notice to pay in full within 60 days (s. 13(2))

The NPA condition does not apply to a borrower who raised funds through debt securities; the debenture trustee can enforce under the security documents.

Content of notice

Notice must state (i) amount payable and (ii) secured assets to be enforced (s. 13(3))

A notice lacking these details is open to challenge.

Reply to objections

Reasons for non-acceptance to be communicated within 15 days of receiving the representation (s. 13(3A))

Communication of reasons does not itself give a right to apply under section 17 or 17A.

Measures after 60 days

s. 13(4): (a) take possession; (b) take over management; (c) appoint manager; (d) require debtors of the borrower to pay

The creditor may use one or more of these measures.

Takeover of management

Right to transfer by lease, assignment or sale only where a substantial part of the business is held as security

If the business is severable, the creditor takes over only the part relatable to the security.

Redemption before sale

Dues plus costs, charges and expenses tendered before the date of publication of notice for auction, quotations or tender → no transfer or further step (s. 13(8))

The cut-off is publication of the sale notice, not the sale date.

Multiple secured creditors

Action under s. 13(4) needs agreement of creditors representing not less than 60% in value of the amount outstanding on the record date (s. 13(9))

Subject to the Insolvency and Bankruptcy Code, 2016. The decision binds all secured creditors.

Application of proceeds

Proceeds are held in trust: first costs, charges and expenses; second secured dues; residue to the person entitled (s. 13(7))

Applies in the absence of any contract to the contrary.

Shortfall

Balance dues may be recovered by application to the DRT or competent court (s. 13(10))

The creditor may also proceed against guarantors or sell pledged assets without first using s. 13(4) measures (s. 13(11)).

Application to DRT (Section 17)

Aggrieved person → DRT within 45 days of the Section 13(4) measure

Open to any person including the borrower. Communication of reasons for rejecting the borrower's objection is not a measure and does not give a right to apply.

Where to file (Section 17(1A))

DRT where cause of action arises (wholly or in part), or where the secured asset is located, or where the bank branch maintaining the account with the outstanding debt is

Three alternative venues.

Time to decide (Section 17(5))

60 days; extendable for reasons recorded in writing; total not more than 4 months

After four months, any party may apply to the Appellate Tribunal for a direction for expeditious disposal (Section 17(6)).

Appeal to Appellate Tribunal (Section 18)

Within 30 days of receipt of DRT order; borrower deposits 50% of debt (claimed or determined, whichever is less); reducible to not less than 25%

Reduction needs reasons recorded in writing. The pre-deposit condition applies to the borrower.

Compensation (Section 19)

Possession not in accordance with Act + direction to return asset → compensation and costs as determined

Available to the borrower or other aggrieved person who filed the application or appeal.

Appeal against penalty (Section 30B)

Person in default → Appellate Authority within 30 days of the Section 30A(4) order

Delay can be condoned if there is sufficient cause.

DRT powers on tenancy (Section 17(4A))

DRT may examine whether lease or tenancy has expired, is contrary to Section 65A of Transfer of Property Act, 1882, is contrary to mortgage terms, or was created after the Section 13(2) notice

If so, it may pass such order as it deems fit under the Act.

Quick revision

• Section 13(1): a secured creditor may enforce security interest without the intervention of the court or tribunal.
• Trigger: default by the borrower, and the account is classified by the secured creditor as a non-performing asset.
• The creditor gives written notice requiring full discharge within sixty days.
• The notice must state the amount payable and the secured assets to be enforced.
• If the borrower objects, the creditor must consider it and, if rejecting it, communicate reasons within fifteen days of receipt.
• Communicating reasons does not give the borrower a right to apply under section 17.
• Section 13(4) measures: take possession, take over management, appoint a manager, and require payment from persons who owe money to the borrower.
• Section 13(8): if the full dues and costs are tendered before publication of the auction or tender notice, the assets cannot be transferred.
• Section 13(9): for joint financing, creditors representing not less than sixty per cent in value of the amount outstanding must agree, and this is subject to the IBC.
• Section 13(10): if sale proceeds fall short, the creditor may apply to the DRT or a competent court for the balance.
• Section 13(13): after receiving the notice, the borrower cannot transfer the secured assets, other than in the ordinary course of business, without the creditor's prior written consent.
• NPA classification is not required for a borrower who has raised funds through debt securities, and the debenture trustee can enforce the security.

Common mistakes

• Saying the limit is more than ₹10 lakh. Fix: Remember the Act does not apply if the debt is less than ₹10 lakh. So ₹10 lakh itself is covered.
• Believing the ₹1 lakh figure is the threshold. Fix: ₹10 lakh is the default. The Central Government can notify a different amount, but never below ₹1 lakh.
• Saying the Recovery Officer decides whether the debt is due. Fix: Say the Tribunal decides and issues the certificate. The Recovery Officer only executes the amount specified in it.
• Listing only section 25 modes and ignoring section 28. Fix: Remember that section 28 operates without prejudice to section 25. Add garnishee notices, deductions, affidavit of assets and distraint.
• Taking the pre-deposit as 75% Fix: Use 50% now. The reduction floor is 25% of the debt.
• Sending a Recovery Officer order appeal to DRAT Fix: Section 30A deals with an appeal against a Recovery Officer's order under section 30, which is preferred before the Tribunal. DRAT hears appeals against Tribunal orders.
• Treating securitisation and asset reconstruction as the same thing. Fix: Securitisation is raising funds by issuing instruments against acquired financial assets. Asset reconstruction is acquiring the rights in a financial asset and working it out for recovery. State the difference in one line.
• Saying the minimum net owned fund is a fixed ₹2 crore for every ARC. Fix: Write: not less than ₹2 crore or such higher amount as the RBI may notify, and the RBI may specify different amounts for different classes.
• Saying the notice period is 30 days or that the creditor can act immediately after default. Fix: Remember that section 13(2) gives 60 days from the date of notice, and NPA classification must come first.
• Treating the NPA classification as necessary in every case. Fix: For borrowers who raised funds through debt securities, NPA classification is not required, and the debenture trustee can enforce under the security documents.

Exam tips

• Write the section number with every rule: 17(1) for jurisdiction, 17(2) for appeals, 1(4) for the threshold.
• In case questions, check the applicant and the amount first. Many answers turn on those two facts.
• Keep the numbers apart: ₹10 lakh and ₹1 lakh in the RDB Act; 45 days, 60 days, 4 months and 30 days in SARFAESI.
• Add a drafting or compliance point, such as naming the correct DRT by cause of action, asset location or account branch.
• For the Presiding Officer's qualifications and the constitution of the Tribunal, revise your study material, and state only what you are sure of.
• Write the chain in the first line: Tribunal, certificate under section 19(7), Recovery Officer, section 25 and 28.
• Quote the clause letters of section 25, such as (a), (aa), (b), (c) and (d). Examiners reward exact modes.
• In a fact-based question, make a short asset-by-asset list and name the mode for each.