Recovery of debts due to Banks & Financial institutions Act, 1993- Important facts

We are fifth largest developing economy in the world and just left behind UK and France few days back. We are second largest country in the world in case of population. We have largest young skilled workforce in the world. For sustainable development of a country a sound and perfect, protected system of banking is required. Banks and Financial Institutions are backbone of a country. Through a sound system of banking a country will develop very fast.

In Indian, we have a robust and sound banking system, that is regulated by Reserve Bank of India. RBI is the central bank and regulating all banks, financial institutions and non-banking financial institutions. The Banks/ Financial Institutions or NBFCs play crucial role in development of mini, micro and large industries in India. Mini, Micro and Large industries have employed more than 40% workforce of India and to protect them we have to protect interests of banking systems.

We have seen large number of frauds in previous years in which greedy politicians and banking personnel for their interest cheated a large number of banks and money of general public. Some of banks such as PMC, Yes Bank, State Bank of India, Bank of India, ICICI Bank etc., suffered huge losses. They have not only cheated banks but also hamper interest of genuine borrowers and public.

There are large numbers of Non-Performing Assets on Balance Sheets of majority banks and these assets are non-recoverable in some cases.

The Non-Performing Assets at last treated as Bad Debts. Recovery of these debts by banks through normal court procedure is a Herculean Task and takes long years.

The Government to remove these difficulties and to give Banks /Financial Institution an edge on the debtors passed “Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act,1993) on 24^th June, 2006. The act was amended in 1995, 2000, 2003 and 2013. The Act was again amended in year, 2016.

The Act is renamed as “Recovery of Debts due to Banks and Financial Institutions and Bankruptcy Act, 1993”

The Main Features of 2016 Act are;

1. Financial Leasing and Conditional Sale (like Hire purchase) transactions and Transactions in intangible assets brought in definition property and security interest.

2. Debenture Trustees and Assets Reconstruction Companies brought within definition of “Financial Institutions” and “Secured Creditors”.

3. DRT Act amended to cover liabilities over debt securities and security interest.

4. Appeal against order of DRT before DRAT with 50% pre deposit against 75% earlier.

5. Presiding Officer of DRT Act proposed to function also as Adjudicating Authority under Insolvency and Bankruptcy Code, 2016.

6. Chairperson of DRAT will also function as Appellate Authority under Insolvency Code.

The main purpose of the Act is to establish Tribunals for expeditious adjudication and recovery of debts due to Banks and Financial Institutions. Now Act is applicable whole India.  

Applicability Of Debt Recovery Act;

The Act is applicable on Banking Companies, SBI, Subsidiaries of SBI, Regional and Rural Banks and Multistate Co-operative Banks, Financial Institutions, Assets Re-construction Companies, the Debenture Trustees registered with SEBI and other as specified by government.

DRT Act is also applicable on Cooperative Banks.

Greater Bombay Cooperative Bank Vs. United Yarn Tex(P) Ltd.(2007) 78SCL 42 (Mag)(SC): it was held that provisions of Sections 5( c) and 56(a)(i) of Banking Regulations Act are also applicable to Cooperative Banks and hence provisions of DRT Act are also applicable to Cooperative Banks and Registrar of Societies ,when DRT has been established in relation to any dispute related to cooperative bank has nothing to say.

M Babu Rao Vs. Dy. Registrar of Cooperative Societies (2005)63 SCL339(AP HC FB): it was held that disputes regarding recovery of debts due to cooperative banks are to be adjudicated by DRT and Registrar of Cooperative Societies has no jurisdiction to adjudicate upon the dispute.

Monetary Limit:

Save as otherwise provided, the provisions are applicable where amount of debt due to bank or FIs or consortium of banks/FIs is Rs. 10.00 Lakhs or more.

The Central Government through amendment reduce the monetary limit from Rs.10.00 Lakhs to Rs. 1.00 Lakhs in 2016.

Some More Facts;

Transcore Vs. UOI (2008) 1SCC 125(73) SCL (11)135; it was held that RDDBFI Act, 2016 and SARFAESI Act are complementary to each other.

The provisions of Limitation Act are applicable for making applicable before DRT.

Section 34(1) of provides that provisions of Act have overriding effect. However, the provisions are in addition to and not in derogation on provisions of IFCI Act, State Financial Corporation Act, UTI Act, IRBI Act and SICA.

Section 34(2) provides that provisions of DRT Act overrides provisions of Companies Act, 2013.

Kingfisher Airlines Limited Vs. State Bank of India (2) (2015) 130 SCL 378(52) 523(Karn HC DB): it was held that Company Court would not have jurisdiction to interfere with proceedings of SARFAESI Act, in particular when order for winding up or appointing provisional liquidator has not been made in company petition.

Jagdish Singh Vs. Heeralal(2014)1SCC479(41)408(124) SCL291(SC): it has been held that “any person” includes “any person” who intends to raise objection against action of Bank. He has to approach DRT and not Civil Court. Civil Courts have no jurisdiction, as the Act has overriding provisions.

Hira Lall Vs. Lakshmi Commercial Bank(2002)39SCL159(112) Comp Cas3 SC; the petitioner (who as defendant before DRT) had obtained Letter of Credit from bank. The bank honoured the Letter of Credit even when ship carrying goods was sunk and despite non-acceptance of documents by the borrower. The petitioner lodged a complaint before insurance company and insurance company has declined his claim. The petitioner has filed a suit against insurance company. The suit was pending before High Court. The petitioner (borrower) has requested to transfer the case from DRT to High Court. it was held by SC that DRT has exclusive jurisdiction under DRT Act and suit cannot be transferred to High Court.

SECURITISATION ACT; overrides DRT Act; it was held in Swarup Packaging Vs. State Bank of India (2004)53 SCL394(ALL HC DB), that SARFESI Act,2002 is special act and prevails over DRT Act.

Provisions of Section 230 of Companies Act, 2013; are not applicable in case any matter before DRT. The provisions of DRT Act prevail over Schemes and Arrangements under Sections 391 and 394 of the Companies Act, 2013.

JP Builders Vs. Ramdas Rao (2011) 1SCC 429; it was held that DRT is not a Civil Court. Independent suit field by debtor before Civil Court cannot be transferred to DRT. Such transfer can be allowed with the consent of both parties and subject matter is inextricably connected.

PROCEEDINGS BEFORE DRT IS NOT TREATED AS” SUIT”.

State Bank of India Vs. Sagar (2011)106 SCL497(9) 315 Bom HC; it was held that Section 34 of DRT Act does not completely oust jurisdiction of Civil Court. The Civil Court’s jurisdiction is barred only to the extent of matters which DRT or DRAT is empowered to determine under the Act. Where jurisdiction of Civil Court is not barred, it can give consequential relief also.

SICA will prevails over DRT Act; since provisions of DRT Act are in addition and not in derogation of SICA.

Conclusion: in next article we shall read various definitions and provisions of the DRT Act and analyse various decisions of Courts. The DRT Act is a system available to banks/ financial institutions to recover their debts from faulty debtors within short span of time. There is limitation of filing of application and decisions by DRT. The most important feature of this DRT Act is it has overriding effect and Civil Courts barred from entertaining any case which falls under jurisdiction of DTR.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.