Debt Recovery and Securitization: formula sheet

Key formulas

Establishment of DRT

Section 3(1): Central Government, by notification, establishes one or more Debts Recovery Tribunals

Section 3(2): the notification also specifies the areas of jurisdiction of each Tribunal.

Establishment of DRAT

Section 8(1): Central Government, by notification, establishes one or more Debts Recovery Appellate Tribunals

Section 8(2): the notification specifies the Tribunals over which the Appellate Tribunal has jurisdiction.

Original jurisdiction of DRT

Section 17(1): entertain and decide applications from banks and financial institutions for recovery of debts due to them

The applicant must be a bank or financial institution.

Appellate jurisdiction of DRAT

Section 17(2): entertain appeals against any order made, or deemed to have been made, by a Tribunal under the Act

Includes deemed orders.

IBC jurisdiction (Part III)

Sections 3(1A), 17(1A)(a): DRT acts as Adjudicating Authority; sections 8(1A), 17(2A): DRAT hears appeals

These provisions were inserted w.e.f. 1-12-2019 per the text supplied. The Part III jurisdiction under sections 17(1A)(a) and 17(2A) begins from the date appointed by the Central Government.

Circuit sittings

Section 17(1A)(b): Tribunal has circuit sittings in all district headquarters

Linked to the Part III jurisdiction clause.

Chairperson of another Appellate Tribunal acting as DRAT Chairperson

Proviso to section 8(1): Central Government may authorise the Chairperson of any other Appellate Tribunal, established under any other law, to discharge the functions of the DRAT Chairperson in addition to his own office

This concerns a Chairperson under another law, not a move between DRATs.

Chairperson of one Appellate Tribunal acting for another

Section 8(3): Central Government may authorise the Chairperson of one Appellate Tribunal to discharge also the functions of the Chairperson of another Appellate Tribunal

Operates notwithstanding sections 8(1) and 8(2).

SARFAESI appeal to DRAT

Section 18(1) SARFAESI: appeal within 30 days of receipt of the DRT order under section 17

Borrower must deposit 50% of the debt (the lower of the amount claimed or determined by the DRT); DRAT may reduce this to not less than 25%, with written reasons.

Bar on civil courts

Section 34 SARFAESI: no civil court jurisdiction and no injunction

Covers matters the DRT or DRAT can determine under SARFAESI, and action under SARFAESI or the RDB Act.

Transfer of pending applications

Section 5A SARFAESI: ARC applies to a DRAT having jurisdiction over any one of the DRTs concerned

Used when secured debts of more than one bank are pending in two or more DRTs. The DRAT order binds all those DRTs.

Threshold for RDB Act

Debt due < ₹10,00,000 → Act does not apply (save as otherwise provided)

The Central Government may notify another amount, not less than ₹1,00,000. Section 1(4).

SARFAESI section 17 application

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

Filed by any person including the borrower, with prescribed fee, before the DRT.

Where to file under section 17(1A)

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

Any one of the three grounds gives jurisdiction.

Disposal time for section 17 application

60 days; extendable by recorded reasons; 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 under SARFAESI section 18

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

The Appellate Tribunal records reasons in writing for reduction.

Appeal against Recovery Officer's order, section 30A RDB Act

Pre-deposit = 50% of debt due as determined by the Tribunal

Applies to appeals under section 30 by the person from whom the debt is due.

Old decrees, section 31A RDB Act

Decree passed before the 2000 Amendment Act and not executed → decree-holder applies to Tribunal → certificate to Recovery Officer

The Recovery Officer recovers as if it were a certificate for a debt under the Act.

Source of the Recovery Officer's power

Certificate under section 19(7) → Recovery Officer → modes under sections 25 and 28

The Recovery Officer acts on receipt of the copy of the certificate. No certificate, no recovery proceedings.

Section 25 modes

(a) attachment and sale; (aa) possession, receiver and sale; (b) arrest and detention; (c) receiver for management; (d) other prescribed mode

One or more modes may be used. Clauses (aa) and (d) were inserted by Act 44 of 2016.

Section 28(2) deduction requisition

Amount due to defendant → deduct debt → pay to Recovery Officer

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

Section 28(3) notice to a third party

Written notice → pay so much as covers the debt, or the whole sum if it is equal to or less than the debt

A copy goes to the defendant. Joint holders' shares are presumed equal until the contrary is proved.

Liability of the noticed person

Discharging liability after notice, or false objection → personal liability up to the lesser of own liability to defendant and defendant's debt

Failure to pay makes that person a defendant in default, and the notice has the effect of an attachment of a debt.

Asset declaration, section 28(4A)

Order at any stage → defendant (or officers of a company) declare assets on affidavit

Applies to any person against whom, or company against which, the certificate is issued.

RDB Act s.20: appeal and time limit

Appeal to DRAT within 30 days of receipt of the Tribunal's order

Late appeal allowed if sufficient cause is shown. No appeal from a consent order.

RDB Act s.21: pre-deposit

Deposit = 50% of debt determined by the Tribunal under s.19; reducible to not less than 25%

Reduction needs reasons recorded in writing. Earlier figure was 75%.

RDB Act s.30A: appeal against Recovery Officer order

Appeal against a Recovery Officer's s.30 order lies to the Tribunal (DRT) and is not entertained unless 50% of debt due (as determined by the Tribunal) is deposited with the Tribunal

The appeal goes to the DRT, not the DRAT, and the deposit is made with the Tribunal. The text of s.30A has no proviso allowing reduction. Do not invent one.

SARFAESI s.18: appeal against DRT order under s.17

Appeal within 30 days; deposit = 50% of the lesser of (debt claimed by secured creditor, debt determined by DRT); reducible to not less than 25%

Borrower must deposit. Appellate Tribunal records reasons for any reduction.

Disposal of appeal

Endeavour to dispose of the appeal within 6 months of receipt (RDB Act s.20(6))

A directory target, not a hard bar.

Registration requirement (section 3(1))

No business of securitisation or asset reconstruction without (a) certificate of registration and (b) net owned fund ≥ ₹2 crore or higher amount notified by RBI

RBI may notify different amounts for different classes of ARCs.

Registration conditions (section 3(3))

No losses in 3 preceding financial years; adequate arrangements to realise assets and pay qualified buyers; directors with professional experience; no director convicted of moral turpitude offence; sponsor fit and proper; prudential norms; RBI guideline conditions

RBI checks these by inspecting records or books, or otherwise, before granting registration.

Grant and rejection (section 3(4) and (5))

Grant: after satisfaction, with conditions. Reject: if conditions not met, after reasonable opportunity of being heard

Hearing before rejection is mandatory.

Prior RBI approval (section 3(6))

Needed for: substantial change in management (including appointing any director, MD or CEO), change of registered office location, change of name

The RBI's decision on whether a change is substantial is final.

Other functions (section 10(1))

ARC may act as (a) agent for recovery of dues, (b) manager under section 13(4)(c), (c) receiver if appointed by a court or tribunal

It cannot act as manager if that creates pecuniary liability.

Other business (section 10(2))

Any business other than securitisation or asset reconstruction, apart from section 10(1) functions, needs prior RBI approval

The term ARC here does not include its subsidiary.

Notice period

Notice under s.13(2) → pay in full within 60 days from date of notice

Only after the account is classified as NPA. Failing payment, the creditor may use s.13(4) measures.

Content of notice

Notice = amount payable + secured assets intended to be enforced (s.13(3))

A notice missing these details is open to challenge.

Reply to borrower's objection

Reasons for rejecting representation → communicate within 15 days of receipt (s.13(3A))

Communicating reasons does not by itself give a right to apply under section 17 (proviso to s.13(3A)).

Measures after default

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

One or more may be used. Under (b), transfer by lease, assignment or sale only if a substantial part of the business is held as security; if the business is severable, take over only the part relatable to the security.

Debt securities exception

NPA classification not needed for borrowers who raised funds by issuing debt securities

The debenture trustee may enforce security as per the security documents (proviso to s.13(2)).

Redemption right

Tender dues + costs before publication of notice for auction, quotations or tender → no transfer (s.13(8))

If steps were already taken, no further step may be taken after tender.

Multiple secured creditors

Consent of creditors representing ≥ 60% in value of amount outstanding on record date (s.13(9))

Subject to the IBC. The decision binds all secured creditors. Amount outstanding includes principal, interest and other dues as per the creditor's books.

Application of recoveries

Costs, charges and expenses first → secured creditor's dues second → residue to person entitled (s.13(7))

Money is held in trust, absent a contrary contract.

Shortfall

Dues not met by sale → application to DRT or competent court for balance (s.13(10))

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

Quick revision

• The RDB Act, 1993 sets up the Tribunals, and the SARFAESI Act, 2002 lets secured creditors enforce security.
• "Debt" includes interest, and may be secured or unsecured, due under a decree, award, mortgage or otherwise.
• The debt must be subsisting and legally recoverable on the date of the application.
• "Bank" includes banking companies, corresponding new banks, SBI, subsidiary banks, Regional Rural Banks and multi-State co-operative banks.
• A registered securitisation or reconstruction company is a financial institution under the RDB Act.
• Section 18 bars other courts and authorities for matters in section 17, except the Supreme Court and High Courts under articles 226 and 227.
• The Recovery Officer acts on the certificate sent under section 19(7) and recovers by the modes in section 25.
• Section 25 modes include attachment and sale, possession and receiver, arrest and detention, receiver for management, and other prescribed modes.
• Section 17A(2): the Appellate Tribunal chairperson can transfer a case from one Tribunal to another, on application or on his own motion, after hearing the parties.
• Section 5A of SARFAESI: an asset reconstruction company can seek transfer of all pending applications to one DRT; the order binds all the DRTs concerned.
• A recovery certificate from the transferred DRT is executed under section 19(23) of the RDB Act.

Common mistakes

• Saying any creditor can file a recovery application before the DRT. Fix: Section 17(1) covers applications from banks and financial institutions for debts due to them. Check the applicant first against the definitions of 'bank' and 'financial institution' in section 2 of the RDB Act (not in the text relied on here, so verify them from your study material). Do not assume a civil court is automatically open or barred for an applicant outside those definitions.
• Saying the DRT's territorial jurisdiction is chosen by the parties or fixed in the Act itself. Fix: State that the Central Government specifies areas in the notification under section 3(2). Section 8(2) does the same for the DRAT.
• Saying the RDB Act applies to every bank debt. Fix: Always test the amount first. Below ₹10 lakh (or the notified amount), the Act does not apply.
• Treating a section 17 application as the bank's recovery application. Fix: Section 17 is filed by the aggrieved person against measures under section 13(4). The bank's recovery application is under the RDB Act.
• Saying the Recovery Officer acts on the DRT's final order directly. Fix: State that the Recovery Officer acts on receipt of the copy of the certificate under section 19(7).
• Listing arrest and detention as the only or main mode. Fix: Present it as one of several modes. Lead with attachment and sale, and mention that modes can be combined.
• Quoting 75% as the pre-deposit. Fix: Write 50% for section 21 and section 30A of the RDB Act. In section 21, 75% was substituted by 50% w.e.f. 1-9-2016; section 30A was inserted in 2016 with 50%.
• Using the debt claimed by the bank as the base in a SARFAESI appeal. Fix: Compare the amount claimed by the secured creditor with the amount determined by the DRT and take the lower one.
• Treating securitisation and asset reconstruction as the same thing. Fix: Link securitisation to funding the purchase through qualified buyers and returns, and reconstruction to resolving the asset to recover value.
• Saying the net owned fund is fixed at ₹2 crore. Fix: Write that it is not less than ₹2 crore or such higher amount as the RBI notifies, and the RBI may fix different amounts for different classes.

Exam tips

• Quote section numbers for the establishment provisions (3, 8) and jurisdiction (17). A one-line citation earns marks in a case-based answer.
• Always state that the notification fixes the area of jurisdiction. Examiners like this detail.
• In SARFAESI questions, give the 30-day period and the 50% and 25% deposit figures exactly, and say which base amount applies.
• Mention the DRT's Part III IBC role in any answer on its jurisdiction. It shows you have the current law.
• Start every answer with the provision, then facts, then conclusion. Examiners mark this structure.
• Memorise the number set: ₹10 lakh, 45 days, 60 days, 4 months, 30 days, 50%, 25%.
• Always separate RDB Act recovery applications from SARFAESI section 17 applications in the first line.
• Quote section numbers only for those you know: 1(4), 17, 18, 30A, 31A, 5A.