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CS Professional · Insolvency and Bankruptcy - Law and Practice

Debt Recovery and Securitization: Chapter Guide for CS Professional

Debt recovery and securitization covers how banks and financial institutions recover dues through Debts Recovery Tribunals under the RDB Act, 1993, and how they enforce security and transfer bad assets to asset reconstruction companies under the SARFAESI Act, 2002. You solve questions by naming the forum, the provision, the facts and the conclusion.

What this chapter covers

This chapter deals with two linked laws. The Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) sets up Debts Recovery Tribunals (DRTs) and Appellate Tribunals. Banks and financial institutions go there to recover a "debt". The SARFAESI Act, 2002 lets secured creditors enforce security interest without going to court, and it governs securitisation and asset reconstruction companies.

Start with the RDB Act because its definitions drive everything. "Debt" means any liability, including interest, claimed as due from any person by a bank or financial institution during its business activity. It can be secured or unsecured, and it must be subsisting and legally recoverable on the date of the application. "Bank" and "financial institution" are also defined terms. Many answers turn on whether the claimant and the claim fit these definitions.

The chapter connects to the rest of the paper as the pre-IBC and parallel recovery route. In the Insolvency and Bankruptcy paper you will compare recovery tools: DRT recovery, SARFAESI enforcement and the Code's resolution process. Questions often ask which route suits a given creditor on given facts, so learn how these routes differ and where they meet. Section 5A of SARFAESI is one such meeting point. It lets an asset reconstruction company move pending applications of several banks to one DRT.

This paper is written and case-based, and this chapter suits that format well. Questions give you a lender, a borrower and a dispute, and ask you to pick the forum, state the procedure and reach a conclusion. The provisions are specific, such as the modes of recovery, the bar on other courts and the transfer powers, so a student who knows them precisely can write short, accurate answers. Because it is open book, you can carry the Acts in, but you still need to know where each rule sits so you can find it and apply it within the time.

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

  1. 1Debt Recovery Tribunals: Constitution and JurisdictionStart with the forum. Definitions such as debt, bank and financial institution, and the bar on other courts under section 18, set the base for every later topic.
  2. 2Application to DRT and Recovery ProcedureOnce you know the forum, learn how a bank files an application and how the matter moves to a recovery certificate.
  3. 3Recovery Officer and Modes of RecoveryThe certificate goes to the Recovery Officer, who recovers the debt by the modes listed in section 25. This follows directly from the procedure.
  4. 4Appeals and Pre-deposit under RDB ActAppeals come after the decision and recovery steps. Study them last within the RDB Act so you see the full life of a case.
  5. 5SARFAESI Act: Securitisation and Asset ReconstructionMove to the second Act with its structure: asset reconstruction companies, their role and how they link to DRTs, including section 5A.
  6. 6Enforcement of Security Interest under SARFAESITake this last. It is the most procedural topic, and it is easier once you can compare it with the DRT route.

How to prepare Debt Recovery and Securitization

Treat this chapter as two procedures to compare. Build each one as a sequence of steps and note who acts at each step.

  1. Read the definitions in section 2 of the RDB Act closely. Write out "debt", "bank", "financial institution", "security interest" and "secured creditor" in your own words.
  2. Draw a flow chart of the RDB route: application to the Tribunal, order, recovery certificate, Recovery Officer, modes of recovery, appeal.
  3. Memorise the modes of recovery in section 25: attachment and sale, taking possession and appointing a receiver to sell, arrest and detention, appointing a receiver for management, and any other prescribed mode.
  4. Make a short table for yourself comparing the DRT route and the SARFAESI route on forum, who can use it, and what the creditor can do. Use it for revision, not as an answer format.
  5. Learn the transfer powers: the Appellate Tribunal chairperson's power under section 17A(2) to move a case between Tribunals, and the asset reconstruction company's application under section 5A of SARFAESI.
  6. Practise two or three case questions in the format of provision, analysis of facts, conclusion. Draft the notices and applications the facts call for.
  7. Before the exam, tab your Acts so you can open the right section quickly, but do not rely on looking up every answer.

Common mistakes in Debt Recovery and Securitization

  • Treating any lender as able to go to the DRT.

    Fix: First check the claimant against the definitions of bank and financial institution, then check the debt definition.

  • Forgetting that the debt must be subsisting and legally recoverable on the date of the application.

    Fix: Underline the condition in your Act and test it in every fact pattern.

  • Confusing the Appellate Tribunal's powers with those of the Tribunal.

    Fix: Note that the chairperson of the Appellate Tribunal supervises Tribunals and can transfer cases under section 17A, and that section 5A applications go to the Appellate Tribunal.

  • Listing modes of recovery from memory and missing some.

    Fix: Learn section 25 as a five-item list: (a), (aa), (b), (c), (d).

  • Mixing up the DRT route and the SARFAESI route.

    Fix: Identify the forum and the actor in each question. Tribunal and Recovery Officer point to the RDB Act. Secured creditor enforcing security and asset reconstruction companies point to SARFAESI.

  • Writing general descriptions instead of applying the law to the facts.

    Fix: Write each answer as provision, analysis of facts, and conclusion, and name the specific section.

Last-day revision: Debt Recovery and Securitization

  • 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.

Debt Recovery and Securitization practice questions

Debt Recovery and Securitization 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 Securitization: frequently asked questions

Which Acts does this chapter cover?

It covers the Recovery of Debts and Bankruptcy Act, 1993 and the SARFAESI Act, 2002. The first deals with Tribunals and recovery of debts. The second deals with enforcement of security interest and asset reconstruction.

Is this chapter in a paper with an open book exam?

Yes. Elective 7.5 is an Elective 2 paper, and electives are open book. You still need to know where each provision is, because time is limited.

What is the difference between a DRT and the Appellate Tribunal?

A Debts Recovery Tribunal hears applications from banks and financial institutions for recovery of debts. An Appellate Tribunal supervises the Tribunals under its jurisdiction. Its chairperson can also transfer cases between Tribunals.

What does section 5A of SARFAESI do?

It applies when an asset reconstruction company holds a financial asset made up of secured debts of more than one bank or financial institution, with applications pending before two or more DRTs. The company can ask the Appellate Tribunal to transfer them all to one DRT. The Appellate Tribunal decides after hearing the parties, and its order binds all the DRTs concerned.