The Debts Recovery Tribunal and the SARFAESI Act: A Guide for Lenders

A bank or financial institution has two statutory routes to recover a secured or unsecured loan without a full civil suit: an application to the Debts Recovery Tribunal, and enforcement of its security under the SARFAESI Act. They are different remedies, with different conditions, and they are often used together. This note explains how each works and how a lender chooses between them. It is general information, not advice on a particular loan.

The Debts Recovery Tribunal

The Recovery of Debts and Bankruptcy Act, 1993 (the RDB Act) established Debts Recovery Tribunals to adjudicate debts due to banks and financial institutions. A tribunal has jurisdiction where the debt claimed is not less than the amount fixed by notification, which is at present twenty lakh rupees. Below that amount, a lender must go to the civil court.

The procedure

• Original Application. The lender files an Original Application under Section 19 with the documents showing the debt, the security and the default.
• Defence and counterclaim. The defendant may file a written statement and a counterclaim or set-off.
• Final order and recovery certificate. If the tribunal finds the debt due, the Presiding Officer issues a recovery certificate, which is sent to a Recovery Officer for execution.
• Interim protection. The tribunal can order attachment before judgment and restrain the disposal of assets, which is often what the lender needs most.
• Appeal. An appeal lies to the Debts Recovery Appellate Tribunal under Section 20, within thirty days. The appellant must deposit fifty per cent of the amount due, and the appellate tribunal may reduce this to not less than twenty-five per cent for reasons recorded.

The SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 allows a secured creditor to enforce its security without going to a court or tribunal first. It applies only where the account has been classified as a non-performing asset in accordance with the Reserve Bank of India's directions, and where the lender holds a security interest in the borrower's assets.

The steps

1. Demand notice, Section 13(2). The lender calls on the borrower in writing to discharge the liability within sixty days.
2. Representation, Section 13(3A). If the borrower makes a representation or raises an objection, the lender must consider it and communicate the reasons for any rejection, within fifteen days.
3. Enforcement, Section 13(4). If the borrower does not pay within the sixty days, the lender may take possession of the secured asset, take over the management of the business, appoint a manager, or require the borrower's debtors to pay it directly.
4. Sale. Under the Security Interest (Enforcement) Rules, 2002, a secured asset may be sold only after a notice of at least thirty days to the borrower, with a valuation and a published sale notice.
5. Assistance with possession, Section 14. Where the borrower resists, the lender can apply to the Chief Metropolitan Magistrate or the District Magistrate for help in taking possession.

The borrower's remedy

A borrower aggrieved by any measure taken under Section 13(4) may apply to the Debts Recovery Tribunal under Section 17, within forty-five days. An appeal from that order lies to the appellate tribunal under Section 18, with a deposit of fifty per cent of the amount claimed, which may be reduced to not less than twenty-five per cent. The Supreme Court upheld the Act's validity in Mardia Chemicals Ltd. v. Union of India (2004), and in Transcore v. Union of India (2006) held that a lender may use the SARFAESI Act and the RDB Act together.

Choosing the route

• Secured loan in default: a SARFAESI notice is usually the first step, because it is quick and needs no adjudication, and it puts the borrower on notice.
• Shortfall after sale, or unsecured debt: an Original Application before the tribunal recovers the balance.
• Disputed facts or contested security: an Original Application provides a full hearing; SARFAESI enforcement taken on a contested record invites a challenge under Section 17.
• Insolvent borrower: the Insolvency and Bankruptcy Code may be the better course; once a moratorium is in force, enforcement of security is barred.

The common source of failure is procedure: a notice that misstates the amount, a classification that does not comply with the directions, or a sale that skips a required notice. Each step should be documented as it is taken, with a view to the challenge that may follow.