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CS Professional · Corporate Restructuring, Valuation and Insolvency

Debt Recovery and SARFAESI for CS Professional

Debt Recovery and SARFAESI covers how banks and financial institutions recover dues. The RDB Act, 1993 sets up Debts Recovery Tribunals. The SARFAESI Act, 2002 lets a secured creditor enforce security without court intervention, after a 60-day notice under Section 13. Solve questions by applying provision, facts, conclusion.

What this chapter covers

This chapter deals with two routes for recovering bad loans. The first is the tribunal route under the Recovery of Debts and Bankruptcy Act, 1993 (the RDB Act). Here a bank or financial institution files an application before a Debts Recovery Tribunal (DRT), gets a recovery certificate, and a Recovery Officer executes it. Appeals go to the Appellate Tribunal, usually with a pre-deposit.

The second route is the SARFAESI Act, 2002. It covers securitisation, asset reconstruction companies, and the power of a secured creditor to enforce security interest without the intervention of the court or tribunal. The heart of it is Section 13: the NPA classification, the notice, the 60-day period, the measures under sub-section (4), and the limits on those measures. The chapter also covers appeals against enforcement, the Central Registry and miscellaneous provisions.

This chapter sits in the Insolvency, Liquidation and Winding Up part of Paper 6. It links to the IBC material, because Section 13(9) is expressly subject to the Insolvency and Bankruptcy Code, 2016. It also links to restructuring, since asset reconstruction and resolution are alternatives to enforcement. Questions are written and case-based, so you must apply the provisions to facts.

Paper 6 is a written, case-based paper, and recovery law lends itself to fact-based questions: a borrower defaults, a notice is issued, and you must say whether the creditor can act. Section 13 is precise and full of conditions, such as 60 days, 15 days for replying to objections, and the 60 per cent rule for joint financing. If you know these exactly, you can earn full marks on a structured answer. The chapter also feeds your IBC preparation, so effort here pays twice.

Debt Recovery and SARFAESI: topics in the order to study them

  1. 1Debt Recovery Tribunals under the RDB Act, 1993Start with the tribunal route, its purpose, constitution and jurisdiction, so you know the forum that SARFAESI later bypasses.
  2. 2DRT Procedure: Application, Recovery Certificate and Recovery OfficerProcedure follows the forum: filing, order, recovery certificate and execution by the Recovery Officer.
  3. 3Appeals under the RDB Act: Appellate Tribunal and Pre-depositAppeals complete the RDB Act cycle and rest on the procedure you have just learnt.
  4. 4SARFAESI Act: Securitisation and Asset Reconstruction CompaniesLearn the definitions and the role of asset reconstruction companies before the enforcement provisions that use those terms.
  5. 5Enforcement of Security Interest and Section 13 NoticeThis is the core and most examined topic, so study it once the vocabulary is clear.
  6. 6Appeals, Central Registry and Miscellaneous SARFAESI ProvisionsStudy these last, since appeals challenge the Section 13 steps and need that knowledge first.

How to prepare Debt Recovery and SARFAESI

Treat this chapter as two procedures plus one detailed section. Build a flow first, then add the conditions and numbers.

  1. Draw a flow chart of the RDB route: application, DRT order, recovery certificate, Recovery Officer, appeal. Add the forum at each stage.
  2. Read Section 13 line by line and write it as a sequence: default, NPA classification, written notice, 60 days, objections, measures under sub-section (4).
  3. Make a short list of every time period and threshold in Section 13: 60 days for payment, 15 days to communicate reasons for rejecting an objection, and 60 per cent in value for joint financing.
  4. List the four measures in Section 13(4) and note the limits, for example the right to transfer on taking over management applies only where a substantial part of the business is held as security.
  5. Practise three or four fact-based problems. Write each in three parts: the provision, the analysis of the facts, and the conclusion.
  6. Compare the RDB Act and SARFAESI in a two-column note covering forum, who can use it, and appeal route. Then link Section 13(9) to the IBC.
  7. Revise by writing the Section 13 sequence from memory, then check it against the text.

Common mistakes in Debt Recovery and SARFAESI

  • Saying a secured creditor can enforce security immediately on default.

    Fix: Always state the steps in order: default, NPA classification, written notice, then sixty days before any sub-section (4) measure.

  • Mixing up the time limits, such as confusing the 60-day notice period with the 15-day period for replying to objections.

    Fix: Write each number next to its purpose in your revision note and test yourself on them.

  • Ignoring the limits on the measures in Section 13(4).

    Fix: Note that the right to transfer on taking over management applies only where a substantial part of the business is held as security, and that severable business is dealt with separately.

  • Treating the 60 per cent rule as applicable to a single lender or ignoring the IBC.

    Fix: Apply it only where there is financing or joint financing by more than one secured creditor, and mention that it is subject to the Insolvency and Bankruptcy Code, 2016.

  • Writing a theory answer on a case-based question.

    Fix: Use provision, analysis of facts, conclusion. Quote the dates and amounts from the question in your analysis.

  • Mixing RDB Act and SARFAESI forums and appeals.

    Fix: Keep a comparison note: under the RDB Act the DRT decides the application, while under SARFAESI the creditor acts first and the DRT is approached by way of challenge or for any balance.

Last-day revision: Debt Recovery and SARFAESI

  • 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.

Debt Recovery and SARFAESI practice questions

Debt Recovery and SARFAESI in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Debt Recovery and SARFAESI: frequently asked questions

What is the difference between the RDB Act and the SARFAESI Act?

Under the RDB Act, a bank or financial institution files an application before a Debts Recovery Tribunal, which decides the claim and issues a recovery certificate. Under SARFAESI, a secured creditor can enforce its security interest on its own, without the court or tribunal, after a notice. Learn both as separate routes.

How long does a borrower get after a Section 13(2) notice?

The borrower gets sixty days from the date of notice to discharge liabilities in full. If the borrower fails, the secured creditor may take one or more measures under sub-section (4). The notice must give the amount payable and the secured assets intended to be enforced.

Can a secured creditor sell the assets after taking possession?

Yes, the right to transfer by way of lease, assignment or sale is available under Section 13(4)(a). A transfer vests in the transferee all rights in the asset as if the owner had made it. The borrower can stop this by tendering the full dues and costs before the auction or tender notice is published.

Is the 60 per cent rule relevant when only one bank has lent?

No. Section 13(9) applies where a financial asset is financed by more than one secured creditor or jointly financed. In that case, creditors representing not less than sixty per cent in value of the amount outstanding on a record date must agree before any of them uses the measures, and the decision binds all.