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NAME- VARUN SURI

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TITLE OF THE PAPER-CRTICAL ANALYSIS OF
RECOVERY OF DEBTS BY
BANKS: LAWS, POLICY AND JUDICIAL
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RECOVERY OF DEBTS BY BANKS: LAWS, POLICY AND JUDICIAL

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INTRODUCTION:
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the Act) is almost
a decade old. As with any legislation breaking new ground, the Act has been challenged in
various fora including the High Courts for its summary nature, the ousting of the jurisdiction
of the Civil Courts, the provisions which allow borrowers to proceed against the bank or
financial institution in the Debt Recovery Tribunals (DRT) and of course the latest challenge
to the constitutional validity of the Act. Whatever may be, the Act of 1993 was a welcome
step taken by the legislature in ensuring speedy recovery of bank dues. Civil courts had come
to the conclusion after decades of reviewing case law, that in almost all cases the suit
instituted by banks and financial institutions, there is hardly any defence and that the delay in
disposal of the cases in the court is not due to the fault of the banks or financial institutions
(AIR 1995 Bom 268). The rationale behind the Act is contained in the Tiwari Committee
Report, which stated:
"The civil courts are burdened with diverse types of cases. Recovery of dues due to banks
and financial institutions is not given any priority by the civil courts. The banks and financial
institutions like any other litigants have to go through a process of pursuing the cases for
recovery through civil courts for unduly long periods."
They suggested three modes to recover such dues, one of which was to set up quasi-judicial
bodies to deal exclusively with the recovery process of the financial sector. The Committee
on financial system chaired by Shri Narasimham in its report to the Ministry of Finance,
Government of India in November 1991, endorsed the views of the Tiwari Committee for
setting up special legislation and special tribunals to expedite the recovery process in the
financial sector. Thus came the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993.
LAWS OF DEBT RECOVERY:
The Debts Recovery Tribunal has been constituted under Section 3 of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993. The original aim of the Debts Recovery
Tribunal was to receive claim applications from Banks and Financial Institutions against their
defaulting borrowers. For this the Debts Recovery Tribunal (Procedure) Rules 1993 were also
drafted.
While initially the Debts Recovery Tribunals did perform well and helped the Banks and
Financial Institutions recover substantially large parts of their non performing assets, or their
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bad debts as they are commonly known, but their progress was stunned when it came to large
and powerful borrowers. These borrowers were able to stall the progress in the Debts
Recovery Tribunals on various grounds, primarily on the ground that their claims against the
lenders were pending in the civil courts, and if the Debts Recovery Tribunal were adjudicate
the matter and auction off their properties irreparable damage would occur to them.
Apart from the above big lacunae, there were a number of short comings too. The dues of
work men against a company, the State dues, and the dues of other non secured creditors all
got enmeshed before the Debt Recovery Tribunals. As if these were not sufficient, there was
clash of jurisdiction between the Official Liquidators appointed by the High Courts and the
Recovery Officers of the Debts Recovery Tribunals. The Official Liquidator, an appointee of
a superior authority, took into his possession all the properties, which actually belonged to
secured creditors who before the Debts Recovery Tribunal. The High Courts also took
umbrage on the activities of the Recovery Officers who away the entire amounts and paid off
to the banks leaving nothing for the other claimants, including the work men. All these and
other issues lead to drastic amendments to the Recovery of Debts Due to Banks and Financial
Institutions

Act

by

means

of

an

amending

notification

in

the

year

2000.

While the amending notification of 2000 did bring in some amount rationalization in the
jurisdiction of the Debts Recovery Tribunal, yet it was not sufficient to coax the big
borrowers to acquiesce to the jurisdiction of the Debts Recovery Tribunal easily. The lenders
continued to groan under the weight of the Non Performing Assets. This led to the enactment
of one more drastic act titled as the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interests Act, also called as SRFAESI Act 1 or SRFAESIA for short.
This new Act, the SRFAESI Act, empowered the lenders to take into their possession the
secured assets of their borrowers just by giving those notices, and without the need to go
through the rigors of a Court procedure. Initially this brought in lot of compliance from
borrowers and many a seasoned defaulter coughed up the Bank dues. However the tougher
ones punched whole in the new Act too. This led Supreme Court striking down certain
provisions and allowing the borrowers an adjudicatory forum before their properties could be
taken over by the leaders.
1 The SARFESI Act 2002.
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And the adjudicatory forum turned out to be the Debts Recovery Tribunal. The Debts
Recovery Tribunal now deals with two different Acts, namely the Recovery of Debts Due to
Banks and Financial Institutions Act as well as the Securitization 2 and Reconstruction of
Financial Assets and Enforcement of Security Interests Act. While the aim of the both the act
is one and the same, but their route is different.
.
The Debts Recovery Tribunal have to deal with extraordinary complex commercial laws
within the narrow ambit of the two laws. Over the years the Debts Recovery Tribunals have
evolved into fine bodies with lot of expertise. There is a plethora of judgments from the
Supreme Court as well as the various High Courts which have paved the way of the Debts
Recovery Tribunals to chart their courses. The Debts Recovery Tribunal of India have
become model institutions for many a country to follow.
POLICY OF DEBT RECOVERY:
Keeping in line with the international trends on helping financial institutions recover their
bad debts quickly and efficiently, the Government of India has constituted thirty three Debts
Recovery Tribunals and five Debts Recovery Appellate Tribunals across the country.
The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to
Banks and Financial Institutions (RDDBFI) Act, 1993 and also Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act,
2002.
Under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993
banks approach the Debts Recovery Tribunal (DRT) whereas, under Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act,
2002 borrowers, guarantors, and other any other person aggrieved by any action of the bank
can approach the Debts Recovery Tribunal (DRT).
Debts Recovery Tribunal is located across the country. Some cities have more than one Debts
2 The process through which an issuer creates a financial instrument by combining other
financial assets and then marketing different tiers of the repackaged instruments to investors.
The process can encompass any type of financial asset and promotes liquidity in the
marketplace.
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Recovery Tribunals. New Delhi, Chennai, Kolkata and Mumbai have three Debts Recovery
Tribunals. Ahmadabad and Chandigarh have two Debts Recovery Tribunal (DRT) each. One
Debts Recovery Tribunal has been constituted at Allahabad, Aurangabad, Bangalore,
Coimbatore, Cuttack, Ernakulum, Guwahati, Hyderabad, Jabalpur, Jaipur, Lucknow,
Madurai, Nagpur, Patna, Pune, Vishakhapatnam and Ranchi.
There are a number of States that do not have a Debts Recovery Tribunal. The Banks &
Financial Institutions and other parties in these States have to go to Debts Recovery Tribunal
located in other states having jurisdiction over there area. Thus the territorial jurisdiction of
some Debts Recovery Tribunal is very vast. For example, the Debts Recovery Tribunal
located in Guwahati has jurisdiction over all the seven North Eastern States. Similarly, the
territorial jurisdiction of the Debts Recovery Tribunal-2 Chandigarh too has a very wide
jurisdiction

over

the

States

of

Punjab,

Himachal

and

Haryana,

Chandigarh.

The setting up of a Debts Recovery Tribunal is dependent upon the volume of cases. Higher
the number of cases within a territorial area, more Debts Recovery Tribunal would be set up.
Each Debts Recovery Tribunal (DRT) is presided over by a Presiding Officer. The Presiding
Officer is generally equivalent to the rank of Dist. & Sessions Judge. A Presiding Officer of a
Debts Recovery Tribunal is assisted by a number of officers of other ranks, but none of them
need necessarily have a judicial background. Therefore, the Presiding Officer of a Debts
Recovery Tribunal is the sole judicial authority to hear and pass any judicial order.
Each Debts Recovery Tribunal has two Recovery Officers. The work amongst the Recovery
Officers of a Debts Recovery Tribunal (DRT) is allocated by the Presiding Officer of the
Tribunal. Though the Recovery Officer of the Tribunal need not be a judicial Officer, but the
orders passed by a Recovery Officer are judicial in nature, and are appealable before the
Presiding Officer of the Debts Recovery Tribunal (DRT).
The Debts Recovery Tribunal are governed by provisions of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993, also popularly called as the RDDBFI3 Act. Rules
have been framed and notified under the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993.
3 RDDBFI Act 1993 (51 of 1993).
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After the enactment of Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interests (SARFAESI) Act any aggrieved person can approach a
Debts Recovery Tribunal (DRT). Earlier only Banks were entitled to approach the Debts
Recovery Tribunal (DRT).
The Debts Recovery Tribunal (DRT) is fully empowered to pass comprehensive orders and
can travel beyond the civil procedure Code to render complete justice. A Debts Recovery
Tribunal (DRT) can hear cross suits, counter claims and allow set offs. However, a Debts
Recovery Tribunal (DRT) cannot hear claims of damages or deficiency of services or breach
of contract or criminal negligence on the part of the lenders. In addition, a Debts Recovery
Tribunal (DRT) cannot express an opinion beyond its domain, or the list pending before it.
The Debts Recovery Tribunal can appoint Receivers, Commissioners, pass ex-parte orders,
ad-interim orders, interim orders apart from powers to Review its own decisions and hear
appeals

against

orders

passed

by

the

Recovery

Officers

of

the

Tribunal.

The recording of evidence by Debts Recovery Tribunal is somewhat unique. All evidences
are taken by way of an affidavit. Cross examinations is allowed only on request by the
defense, and that too if the Debts Recovery Tribunal (DRT) feels that such a cross
examinations is in the interest of justice. Frivolous cross examinations are denied is the same
can be brought on record by way of affidavit. There are a number of other unique features in
the proceedings before the Debts Recovery Tribunal all aimed at expediting the proceedings.
OVERRIDING EFFECT OF THE ACT:
S 34 of the Act states:
"Act to have overriding effect (1) Save as provided under sub-section (2), the provisions of this Act shall have effect
notwithstanding anything inconsistent therewith contained in any other law for the time being
in force or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made there under shall be in addition to, and not in
derogation of, the Industrial Finance Corporation Act4, 1948, the State financial Corporations

4 THE INDUSTRIAL FINANCE CORPORATION ACT, 1948(15TH OF 1948).

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Act, 1951, the Unit Trust of India Act5, 1963, the Industrial Reconstruction Bank of India
Act6, 1984 and the Sick Industrial Companies (special provisions) Act, 1985."
The Act has thus an overriding effect over all other legislations except for the ones mentioned
in sub-clause (2), viz, the Industrial Finance Corporation Act, 1948, the State financial
Corporations Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank
of India Act 1984 and the Sick Industrial Companies (special provisions) Act, 1985.
LEGAL & CRITICAL ANALYSIS:
Some of the issues that led to the evolution of the Act and its interpretation that gave the Act
its present form are:

Need for the leave of the Company Court u/s 537 of the Companies Act, 1956 (the
Companies Act) before a winding up order or before the provisional liquidator is appointed
u/s 446 of the Companies Act and whether the Company Court can pass orders of stay of

proceedings before the Debt Recovery Tribunal ("DRT") formed under the Act.
Position of the non-obstante clauses in the Act and the Companies Act.
Jurisdiction of the Tribunal and the Recovery Officer.
Position of the secured creditor who stands outside the winding up provisions of the
Companies Act.
Constitutional validity of the Act.
Evolution of the Recovery of Debts due to Banks and financial Institutions Act, 1993
Leave of the Company Court for transfer of cases:
One of the earliest cases where the aspect of the overriding effect of the Act was faintly
mentioned was in Industrial Credit and Investment Corporation of India Ltd v. Srinivas
Agencies7 where the issue of whether leave should be granted by the Company Court to
continue proceedings in other civil courts and whether all proceedings should be transferred
to the Company Court:
Shri. Harish Slave, one of the appearing advocates, to buttress the submissions of the
opposing parties stated that:

5 THE UNIT TRUST OF INDIA,1963(ACT.52 OF 1963)

6 THE INDUSTRIAL RECONSTRUCTION BANK OF INDIA,1984(ACT.62 OF 1984)
7 [(1996) 86 Comp Case 255 (SC)].
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"...convenience may not be the guiding factor; whereas it was for the preservation of the
integrity of the substantive right of the creditor which should be the main consideration when
he referred to the Act which was then recently enacted because of the considerable difficulties
faced by banks and financial institutions in recovering loans and enforcement of securities
charged with them." Section 18 of the Act has barred the jurisdiction of other courts, except
the writ power of the higher courts, in relation to the matters specified in section 17 the same
being recovery of debts due to such institutions.
The court was of the view that the approach to be adopted by the Company court does not
deserve to be put in a straightjacket formula. The discretion to be exercised has to depend on
the facts and circumstances of each case. While exercising this power, the Company Court
should also bear in mind the rationale behind the enactment of the Act.
THE NON-OBSTANTE CLAUSE
The non obstante clause in the Act and the non obstante clause in the Companies Act were
considered in Industrial Credit and Investment Corporation of India Ltd v. Vanjinad Leathers 8
where the court opined that Section 18 of the Act creates a bar on jurisdiction of other
authorities and courts except the Supreme Court and High Courts under Articles 226 and 227
of the Constitution. The court also stated that the Act and the Companies Act is special
legislation. However since the Act was enacted after the Companies Act, 1956, the Parliament
would have certainly in mind the provisions in the earlier special law namely the Companies
Act. Therefore the latter special law will prevail over the former.
Courts have, from time to time, considered the effect of a special act enacted subsequent to a
general act or a special act. The Supreme Court in Life Insurance Corporation of India v. DJ
Bahadur & ors9 held:
1. The legislature has an undoubted right to alter a law already promulgated by it through a
subsequent legislation.
2. A special law may be altered, abrogated or repealed by a later general law through an express
provision.

8 AIR 1997 Kerala 273

9 (1981) 1 SCC 315.
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3. A later general law will override a prior special law if the two are so repugnant to each other
that they cannot co-exist even though an express provision is not provided for in that general
law.
4. It is only in the absence of an express provision to the contrary and of a clear inconsistency
that a special law will remain wholly unaffected by a later law.
LEGAL CHALLENGES:
Allahabad v. Canara Bank
A lot of issues came for discussion in Allahabad v. Canara Bank 10. The issues included
jurisdiction of the tribunal and the Recovery Officer under the Act, need for the leave of the
Company Court, power of the Company court to stay proceedings under the Act, whether
banks filing for recovery can appropriate the entire sales proceeds realized except to the
limited extent restricted under section 529A of the Companies Act, position of secured
creditors who participate in the winding up proceeds and those who opt to stand outside the
winding up proceedings.
The jurisdiction of the tribunal with respect to adjudication was held to be exclusive. The
court observed that basically the tribunal is to adjudicate the liability of the defendant and
then it has to issue a certificate u/s 19(22) of the Act, which was recently amended by
Ordinance 1 of 2000. U/s 18 of the Act, the jurisdiction of other courts (except that of the SC
and HCs under Art 226/227) is completely ousted and the power to adjudicate is exclusively
vested in the DRT.
Similarly, regarding 'execution' the jurisdiction of the recovery officer is exclusive. The
Tiwari Committee, in its report mentioned that the exclusive jurisdiction of the Tribunal must
relate not only to the adjudication of liability but also to the execution proceedings.
The next issue was whether the leave of the company court is required for continuing or
initiating proceedings in the DRT and whether the Company Court could stay proceedings in
the DRT. Questions also arose writ. to priorities u/s 529, 529A, and 530. Reliance was placed
on the judgment of the Supreme Court in Valji Shah v. LIC of India 11, where the analogy
between s18 of the Act and s 41 of the Life Insurance Corporation Act was brought out and
the court held:
10 AIR 2000 SC 1535.
11 AIR 1966 SC 135.
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" ...just as the Company Court was held incompetent to stay or transfer and decide the claims
before the LIC tribunal because the Company Court could not decide the claims before the
LIC tribunal, the said court cannot decide the claims of banks and financial institutions. On
parity of reasoning with the Valji Shah case, there is no need for the appellant to seek leave of
the Company Court to proceed with its claim before the DRT or in respect of the execution
proceedings of the recovery officer. Nor can they be transferred to the Company Court." It
further held that the Act and the special provisions in it were for a superior purpose, i.e., the
provisions of the act are superior to the provisions of s 442, 446, and 537 of the Companies
Act.
As far as priorities for creditors are concerned, the Tiwari Committee had stated:
"The Adjudication Officer will have such power as to distribute the sale proceeds to the banks
and financial institutions being secured creditors in accordance with inter-se agreements /
arrangement between them and to other persons entitled thereto in accordance with the
priorities in Law." The above recommendations have been brought in to the act with greater
clarity u/s 19(19) as substituted by Ordinance 1 of 2000.
Constitutional validity of the Act
After 9 years of evolution of the Act was challenged for its constitutional validity in Union of
India & Another v. Delhi Bar Ass. & Others12.
The Constitutional validity of the Act was challenged on grounds of unreasonableness & that
it is violative of Art14 of the Constitution and that the same is beyond the legislative
competence of the Parliament.
The validity of the Act was firstly challenged before the Delhi High Court in Delhi Bar Ass.
& Others v. UOI & Another 13. The Delhi High Court held that the DRT could be constituted
by the Parliament even though it was not within the purview of Articles 323A and 323B of
the Constitution of India and that the expression 'administration of justice ' as appearing in
List IIA of the Seventh Schedule to the Constitution includes Tribunals as well as
'administration of justice'; the impugned Act was unconstitutional as it erodes the
12 (2002) 4 SCC 275.
13 AIR 1995 Del 323.
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independence of the judiciary and was irrational, discriminatory, unreasonable, arbitrary and
was hit by Art 14 of the constitution. It also quashed the appointment of the Presiding Officer
of the Tribunal. The aforesaid conclusions were on the basis that the Act in particular, s 17
did not have a provision for a counter claim as provided in the CPC and was irrational and
arbitrary. The Act lowered the authority of the HC on the basis of the pecuniary jurisdiction
and eroded the independence of the judiciary since the jurisdiction of the civil courts had
been truncated and vested in the Tribunal.
2
The court referred to DK Abdul Khader v. UOI 14 where it was held that a Tribunal could not
be constituted for any matter not specified in Art 323A & 323B of the Constitution.
WAYS AHEAD.
The Supreme Court disagreed with the view taken by the Delhi High Court that the
provisions of the Act are in any way arbitrary or bad in law. In fact it held that the Act has
been amended and whatever lacunae or infirmities existed has now been removed by the
amending Act with the framing of more rules.
The view taken by the Delhi High Court was that the Act eroded the independence of the
judiciary since the jurisdiction of the civil courts had been truncated and vested in the
Tribunal. The SC held that the decision of the Delhi High Court proceeds on the assumption
that it is an absolute right of anyone to demand that a civil court adjudicate his dispute.
Where Arts 323A &323B contemplate establishment of Tribunals and this does not erode the
independence of the judiciary, there is no reason to presume that the banking tribunals and the
appellate tribunals so constituted would deny justice to the defendants or that the
independence of the judiciary would stand eroded.
All these issues came before various courts after the introduction of the Act nine years ago.
Now, almost all issues have come to rest and the Act is all set to take its vengeance on
defaulters of loans and debts owed to banks and financial institutions.
It was held by the SC that "While Articles 323A and 323B specifically enable the legislature
to enact laws for the establishment of tribunals, in relation to the matters specified therein, the

14 AIR 2001 Kant 176.

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powers of the Parliament to enact a law constituting a tribunal like a banking tribunal is not
taken away".
It was further specified that the recovery of dues is an essential function of any banking
institution. In exercise of its legislative powers relating to banking, parliament can provide
the mechanism by which money due to banks and financial institutions can be recovered.

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