INTRODUCTION
Prior to the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as "SARFAESI Act, 2002"), the banks and financial institutions[1] had to resort to the adjudicatory process prescribed under the Recovery of Debts and Bankruptcy Act, 1993 (hereinafter referred to as "RDB Act, 1993")[2]. Under the RDB Act, 1993, a financial institution has to approach the Debts Recovery Tribunal (hereinafter referred to as "DRT") with a claim that certain dues are recoverable from the borrowers who had committed default in repayment of loans. The DRT would call upon the borrowers (and guarantors) to file their response, and after giving due opportunity of hearing to both sides, pass an order on the merits of the case. For the purpose of the present article and convenience, we shall hereby only discuss those cases where the order of DRT went in favor of the financial institution.
Eventually, DRT passes the final order holding that the financial institution is lawfully entitled to get a certain amount recovered from the borrowers, and consequently, a recovery certificate is issued in favor of such financial institution. At this stage, there is a formal adjudication of debts against the borrower; in other words, the financial institution is now lawfully entitled to get back its money, i.e., the borrower cannot refute the claim of the financial institution. The fact remains that even after contesting the entire case, the financial institution has only obtained a document quantifying the amount it is entitled to get back, but actual money has yet to be received by the financial institution. Executing the aforesaid recovery certificate is yet another procedural challenge that such a financial institution has to undergo in front of the recovery officer.
The Recovery Officer again issues notices to the borrower or guarantor to give details of their assets or asks the financial institution to identify valuable assets of the defaulters, and a complete new procedure as per the Second Schedule of the Income Tax Act, 1961, is followed in order to ensure the recovery. The detailed description of the characteristics, nature, and tedious procedure is not relevant in the instant context.
WHY WAS SARFAESI ACT INTRODUCED?
The provisions contained in the SARFAESI Act, 2002, deal only with resolving the issue of bad debts (non-performing assets) by recovering the money that was stucked in secured assets.
The SARFAESI Act is the outcome of the recommendations of the Andhyarujina Committee, which in turn was predominantly based on the recommendations of the two Narsimham Committees, which underlined the acuteness of Non-Performing Asset (hereinafter referred to as "NPAs") in India. To reflect on the excruciating stress that these NPA’s gave to the economy, we can recall that the NPA’s or bad debts of banks and financial institutions crossed the figure of Rs. 1,10,000 crore as of March 31, 2002. Clearly, the Recovery of Debts and Bankruptcy Act, 1993, was not effective in improving the banking industry in India. This fact was also noticed by the Hon’ble Supreme Court in Mardia Chemicals Ltd. vs. Union of India [3] when it was observed as follows:
“Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993, but as the figures show, it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the governments in creating debt recovery tribunals and appointing presiding officers for a long time, even after leaving that margin, it is to be noted that things in the concerned spheres are desired to move faster. In the present-day global economy, it may be difficult to stick to old and conventional methods of financing and recovering dues.”
HOW LOAN AGAINST PROPERTY (LAP) WORKS?
The SARFAESI Act, 2002, generally deals with the process of liquidating properties that were given as security by the borrower. Specific definitions have been assigned to words like “secured asset," “secured creditor," “secured debt,” and “security interest." To keep this discussion simple and not let legal jargon complicate it, let us say that a borrower takes money from the bank in exchange for some collateral, for instance, property papers. The financial institution makes an agreement with a borrower according to which original property documents are handed over to the bank, and the bank credits money into an account opened in the name of the borrower. The physical possession of the aforesaid property vests with the borrower only; the borrower is under an obligation to pay the Equated Monthly Installments (hereinafter called EMI) regularly to the bank. However, when the borrower fails to pay an EMI, he is said to have committed a default, which entitles the financial institution to classify the loan account as a NPAs.
NON-PERFORMING ASSET
An account of the borrower that is under default can be classified as a "Non-Performing Asset in the books of accounts of the secured creditor/financial institutions, but this cannot be done by the financial institution as per its own wish. The Reserve Bank of India has formulated guidelines for the classification of an account as an NPA, which are revised from time to time. Presently, the rule of 90 days is applicable; if the borrower has missed 3 EMI’s (Term Loan) or total outstanding dues have remained more than the sanctioned limit (Cash Credit) continuously for 90 days, then the financial institution can classify such a loan account as an NPA. The recovery process under the SARFAESI Act, 2002, can commence only after the loan account has been classified as a non-performing asset.
RECOVERY OF DEBT UNDER THE SARFAESI ACT
Once an account has been classified as an NPA, the financial institution can issue a demand notice under Section 13(2) of SARFAESI Act, 2002 to the borrowers and guarantors, asking them to discharge their entire liability within 60 days of receiving such notice. This notice is popularly known as a "13(2) notice" in the banking parlance. If the borrower clears the entire outstanding amount, the recovery proceedings will drop; otherwise, after 60 days, the financial institution will proceed to take possession of the property that was given as security. A possession notice under Section 13(4) of the SARFAESI Act, 2002, is issued by way of which the symbolic possession of the property comes with the financial institution, and thereafter the property may be sold in public auction, specifically in accordance with Rule 8 and Rule 9 of the Security Interest (Enforcement) Rules, 2002. Once the property is sold, the sale proceeds are adjusted by the financial institution against the outstanding amount.
The procedure to be followed in the recovery of dues under the provisions of the SARFAESI Act, 2002, is crisp, swift, and devoid of complex adjudicatory procedures. The powers conferred upon the financial institutions are not unfettered, and it has to be seen that the entire action of enforcement of security interest is done as per the provisions of the SARFAESI Act. The Debts Recovery Tribunal has also been entrusted with the duty to see that the financial institutions follow the mandatory requirements of the SARFAESI Act while enforcing their security interests. It is the right of the borrower to file an appeal under Section 17(1) of the SARFAESI Act against the measures taken by the financial institution under Section 13(4). The procedure and grounds for raising a challenge to the recovery action initiated under the SARFAESI Act are not being discussed for the sake of brevity.
But what happens when the sale proceeds are not sufficient to clear the entire outstanding dues? Let us take an example: Borrower has total outstanding dues of Rs 50 lacs, and the mortgaged property/secured asset is sold by the secured creditor/financial institution for Rs 40 lacs. Despite such sale, Rs 10 lacs still remained outstanding with the secured creditor/financial institution. In order to solve this problem, special powers have been conferred upon the financial institutions under Section 13(10) of the SARFAESI Act, 2002, to file a recovery case before the DRT to recover any amount that remains outstanding even after the sale of a secured asset.
JURISDICTION OF DRT
The Debts Recovery Tribunal was established under Section 3 of the RDB Act, 1993, and Section 17(1) of the RDB Act, 1993, sets out the subject-matter jurisdiction of the DRT to entertain and decide applications from banks and financial institutions for the recovery of debts due.
In contrast, Section 17(1) of the SARFAESI Act, 2002, confers appellate jurisdiction upon the DRT. Any person who is aggrieved by the recovery action taken by a financial institution under Section 13(4) of the SARFAESI Act may file a securitization application before the DRT.
The Debts Recovery Tribunal exercises original jurisdiction when it accepts Original Applications (or OA) from banks and financial institutions for the recovery of debts due to them under Section 19(1) of the Recovery of Debts and Bankruptcy Act, 1993, after payment of the requisite court fees. The same DRT exercises appellate jurisdiction when it entertains a Securitization Application (or SA) from any aggrieved person (usually a borrower or guarantor) under Section 17(1) of the SARFAESI Act, 2002.
INTERPLAY OF SARFAESI ACT AND RDB ACT WHEN SECURED ASSET IS EXHAUSTED
Section 13(10) of the SARFAESI Act, 2002, allows a financial institution to traverse to Section 19(1) of the RDB Act, 1993, for the recovery of an amount that remains outstanding even after the sale of a secured asset.
Section 13(10) is transcribed as follows:
13(10) Where the dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secured creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower.
Rule 11 of the Security Interest (Enforcement) Rules, 2002 also prescribes the procedure to be followed in filing an application under Section 13(10) of the SARFAESI Act, 2002. A transcript of Rule 11 is given below: -
“11. Procedure for Recovery of Shortfalls in Secured Debt. -
(1) An application for recovery of the balance amount by any secured creditor pursuant to sub-section (10) of Section 13 of the Act shall be presented to the Debts Recovery Tribunal in the form annexed as Appendix VI to these rules by the authorized officer or his agent, or by a duly authorized legal practitioner, to the Registrar of the Bench within whose jurisdiction his case falls, or shall be sent by registered post addressed to the Registrar of Debts Recovery Tribunal.
(2) The provisions of the Debts Recovery Tribunal (Procedure) Rules, 1993, made under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993), shall mutatis mutandis apply to any application filed under sub-rule (1).
(3) An application under sub-rule (1) shall be accompanied by a fee as provided in rule 7 of the Debts Recovery Tribunal (Procedure) Rules, 1993.”
Thus, we notice that the procedure has to be imported from the RDB Act, 1993, for filing an application under Section 13(10) of the SARFAESI Act, 2002.
However, there is a conflict with regards to the pecuniary limits beyond which action can be initiated under both of these laws. A comparative analysis of Section 31(h) of the SARFAESI Act, 2002, and Section 1(4) of the Recovery of Debts and Bankruptcy Act, 1993, is required.
“31. Provisions of this Act not to apply in certain cases...
The provisions of this Act shall not apply to:
xxx xxx xxx
(h) any security interest for securing repayment of any financial asset not exceeding one lakh rupees;
xxx xxx xxx”
“1(4) Save as otherwise provided, the provisions of this Code shall not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or financial institutions is less than ten lakh rupees or such other amount, being not less than one lakh rupees, as the Central Government may, by notification, specify."
Thus, it transpires from the above that, recovery action under the SARFAESI Act, 2002, cannot commence if the debt amount is less than Rupees One Lakh, whereas the minimum threshold for filing a claim before DRT under Section 19(1) of the RDB Act, 1993 is Rupees Ten Lakh. The Government of India, vide its notification dated September 6, 2018, has increased the threshold of ten lakh rupees to twenty lakh rupees. [4]
The position that emanates from the joint reading of Section 13(10) of the SARFAESI Act and Rule 11 of the Security Interest (Enforcement) Rules, 2002, is that the procedure for recovering outstanding liabilities has to be in accordance with the provisions of the Recovery of Debts and Bankruptcy Act, 1993. The only procedure for recovering debts under the RDB Act is by filing an original application before the DRT as per the provisions contained in Section 19(1). Undisputedly, an original application under Section 19 of the RDB Act, 1993, cannot be filed before the DRT where the debt due is less than twenty lakh rupees.
Therefore, a conflict between the pecuniary jurisdictions of DRT appears to have been created in the two statutes. The Hon’ble Delhi High Court was presented with a similar issue in the case of IDFC First Bank Ltd. vs. Union of India & Ors.[5], wherein the Court went on to examine the issue of whether DRT is competent to entertain the original application under the SARFAESI Act, 2002, independent of the provisions of the RDB Act, 1993. The Hon’ble High Court gave the following findings:
“36. Sub-section (10) of Section 13 of the SARFAESI Act merely enables the secured creditor to file an application to the Debts Recovery Tribunal having jurisdiction or to a competent court, as the case may be, for recovery of the balance due to a borrower if the outstanding debt is not satisfied by the sale proceeds of the secured assets. The plain language of Sub-section (10) of Section 13 of the SARFAESI Act indicates that such an application is required to be made in the form and manner as prescribed. Rule 11 of the SIE Rules stipulates that the said application is required to be made in the form annexed in Appendix VI to the SIE Rules to the Registrar of the Bench within whose jurisdiction the case falls. In terms of the SIE Rules, the said application can also be sent by registered post addressed to the Registrar of Debts Recovery Tribunal. In terms of sub-rule (2) of Rule 11 of the SIE Rules, the provisions of the Debts Recovery Tribunal (Procedure) Rules, 1993, would apply mutatis mutandis to the said application. In terms of Subrule (3) of Rule 11 of the SEI Rules, the application is also required to be accompanied by a fee as provided under Rule 7 of the Debts Recovery Tribunal (Procedure) Rules, 1993.“
The right of the borrower to approach DRT challenging SARFAESI action initiated under Section 13 of the SARFAESI Act by filing a securitization application is an appellate right under Section 17(1) of the SARFAESI Act, 2002. The Tribunal would be exercising its appellate jurisdiction when the action initiated under the provisions of Section 13 is challenged before the Tribunal.[6]
A hypothetical presumption of conferring original jurisdiction upon DRT under Section 13(10) of the SARFAESI Act would not only extinguish the right of set-off[7] and counter-claim[8] of the borrower but also curtail the right to file an appeal against the order of DRT. It would be against the basic principles of law to assume that the intention of the legislature while adding Section 13(10) of the SARFAESI Act, 2002, would be to confer original jurisdiction upon the DRT, whereas no right of appeal, set-off, or counterclaim would be available to the borrowers. Such presumption is unfathomable because it creates a distinction between secured and unsecured financial institutions as well. A financial institution that has sold off the mortgaged property and therefore is unsecured in respect of the pending amount would be filing an original application before DRT under Section 13(10) for claims less than twenty lakh rupees, with no provision of set-off or counterclaim, whereas an unsecured financial institution would have to face all these limitations; thereafter, the cannon of appeal would also be standing in the way.
CONCLUSION
Therefore, it can be safely said that the SARFAESI Act does not confer original jurisdiction upon DRT for entertaining original applications; rather, it only enables a financial institution to take recourse to the RDB Act. Therefore, it would be necessary to refer to the provisions of the RDB Act to ascertain the pecuniary jurisdiction of DRT, which, as per the prevailing norms, is twenty lakh rupees. Any debt below this threshold can be recovered only by filing a recovery suit before a civil court.
[1] Section 2(h) of the Recovery of Debts and Bankruptcy Act, 1993.
[2] A recovery suit used to be filed prior to the enforcement of the RDB Act, 1993.
[3] AIRONLINE 2004 SC 948.
[4] Notification [S.O. 4312(E)] dated September 6, 2018 issued by the Ministry of Finance (Department of Financial Services).
[5] W.P. (C) 2550/2020 and CM APPL. 8896/2020.
[6] State Bank of Patiala v. Mukesh Jain and Anr. (2017) 1 SCC 53
[7] Section 19(6) of the Recovery of Debts and Bankruptcy Act, 1993.
[8] Section 19(8) of the Recovery of Debts and Bankruptcy Act, 1993.
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