INTRODUCTION

According to Black’s law dictionary1, A Debt is a sum of money arising upon a contract, express
or implied. In its more general sense, it is defined to be that which is due from one person to
another, whether money, goods, or services; that which one person is bound to pay or perform to
another but there’s a difference between Debt and liability, the debt is the incapacity to pay, while
the liability is a broader term and there exist a responsibility to do an act.

In a country like India, the population dominates each and every aspect of the society and debt is
also influenced by the same, the Creditors in form of banks and private players uses this population
by giving lucrative offers and terms of payment, it makes people fall into the trap to get a loan in
form of cash or kind in needy time but as the rate of interest is high, the amount payable becomes
difficult to return, the debtors unable to pay defaults the repayment and there lies a debt recovery
suits in the tribunals or courts, The need of the hour is the mechanism which will tackle these debt
recovery problems and also a smooth and innovative policy by which defaulters gets the chance to
pay their debt.

India is a developing nation and is growing at a great pace as compared to other developing
economies. Though India has a respectable position in terms of financial stability at a global level,
still its banks are suffering from the menace of ever-increasing Non Performing Assets i.e. NPA.

Technically NPAs are loans in which borrower has paid neither the interest nor the principal for at
least ninety days. In India, Public sector banks are more highly affected due to NPA. They have to
render loans to borrowers in order to facilitate the development agenda of the government. This
results in wilful defaulters who try to delay the repayment as long as they can by misusing the
provisions of the law in their favour.

1
Black’s law dictionary(Second Edition)
 Debt Recovery Laws

History

Before 1990s, there was no special mechanism for the adjudication and recovery of the debts
of financial and Banking Institutions , the usual way was to file recovery suit in the Civil
court which was not a speedy process, and the defaulters started using this as a tool for their
benefit, they took loans from the institutions and deliberately defaulted the repayment as they
knew the process through civil courts are time-consuming , this led to Banks and financial
institutions in huge losses, as the Banks work on the method of “money multiplier” in which
the amount which gets deposited by the customers in their respective accounts is to be lent as
a loan to some other person , this is the way banks survive , and as the people started
defaulting, the Banks had to reduce the interest rates on the deposits, which leads to lack of
confidence among investors.

A committee headed by Former RBI Governor Shri M. Narasimham was established to look
into all aspects of the financial system in India, the committee recommended for setting up of
the tribunals for recovery of loans and on the recommendations of the committee, the
Government enacted Recovery of debts Due to banks and financial institutions Act (RDDBFI)
in 1993. But this act was the beginning and just 10 years later, a new act was enacted as
SARFAESI ACT (Securitisation & Reconstruction of Financial Assets & Enforcement of
Security Interest) in 2002, this act also made an impact on the recovery as its enforcement
does not require the involvement of a court or a tribunal. In 2016, Insolvency and Bankruptcy
Code (IBC) was enacted it has been amended as Insolvency and Bankruptcy (Amendment)
Act,2020 which is considered as one of the biggest insolvency reforms in the economic
history of India, this act acted as an umbrella for the other Insolvency Provisions in different
acts. Some of the provisions of Arbitration and conciliation Act, 1996 allows recovery for the
debt but that is from Arbitration proceedings.

Apart from the recovery methods established for the Banks and financial institutions, there
are other Acts also which give right of recovery of the debt to Private individuals, the pre-
Constitutional laws which also give remedy for the recovery of the debt to Private
individuals, i.e.

 Code of Civil Procedure (1908)

Before this Act came into force, the recovery of Debts was more or less a taxing task for the
Banks, with no specific regulations, Institutions were finding themselves in a trap and there
was the need for a mechanism to solve this efficiently, the Narasimham committee came up
with the policy to establish a separate adjudicatory body for the debt recovery, and in 1993,
Recovery of Debts Due to Banks and Financial Institutions Act was enacted.

Under this Act, Sec-32 gives power to the Central government to set up a tribunal, by invoking
the said section the Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal
(DRAT) was established as an adjudicatory body.

Where a Bank or Financial Institution has to recover any debt, an application has to be filed in
the tribunal, in case different Banks have to recover debt from the same person, then the later
Bank or Financial Institution may join the applicant bank or Financial Institution at any stage
of the proceedings, before the final order is passed, it is interesting that even when the Banks
file application for recovery in tribunal , the defendant files written statement, as the same
process is done when a plaint is filed in civil suit and defendant files Written statement. Section
17 of the Act specifically mentions that only those applications by Banks and Financial
Institutions will be entertained which is of Debt recovery only.

For the purpose of jurisdiction ten lakh was threshold which has been changed to twenty lakh
in 2018.3 “Section 19 (19) gives power to the Tribunals to issue a certificate of recovery against
the company registered under the Companies Act, 1956”4, to the recovery officers specially
designated under this Act. The various modes of recovery as governed by Section 255 of the
Act include:

1. Attachment and sale of the movable and immovable property of the defendant
2. Arrest of the defendant and his detention in Prison.
3. Appointing a receiver for managing all the properties of the defendant.

2
Sec-3 of Recovery of Debts Due to Banks and Financial act(RDDBFI) ,1993
3
RDDBFI (Amendment) Act, 2018
4
Sec-19 of RDDBFI ACT , 1993
5
Sec- 25 of RDDBFI ACT,1993
 SARFAESI ACT, 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security

The SARFAESI Act, 2002 was passed to give support to the Debt Recovery law and to give
Banks and Financial Institutions(secured Creditors) more freedom while recovering the Bad
Debts which RDDBFI lacked, by proper assessment it can be said that when a debtor defaults
a payment and the Banks shows that Debtor in Non-Performing Asset , it gives right to Banks
to proceed with Sec 13 of the act6 which deals with the enforcement of the Security Interest by
the Secured Creditors after giving notice to the parties to discharge their liabilities within 60
days, failing which the Banks and Institutions are empowered to Auction Residential or
Commercial properties that has been pledged with the Banks as a security to recover loans from
borrowers,Sec-13(4) is invoked when the liabilities is not discharged within 60 days 7 of
notice ,and it includes

1. Taking possession of the secured assets of the borrowers which has been pledged.
2. Taking over the management of the business of the borrower
3. Appoint any person to manage the secured assets of the borrower.

No Secured creditor shall be entitled to take action under Sec 13(4), unless the claim is made
within prescribed period of Limitation Act,19638.

If any person gets aggrieved by the measures which have been taken by invoking Sec 13(4), he
can file an appeal in Debt Recovery Tribunal but if he is borrower no appeal shall be entertained
by the DRT until or unless, the borrower has deposited Seventy five percent of the amount that
has been claimed in the Notice so served.

As this law bars the adjudication of matters by Civil Courts , Had it been no enactment of this
act, the usual way was to recover by taking the course of civil suit which is a lengthy and time
consuming process.

6
SARFAESI ACT,2002
7
Sec-13(4) of SARFAESI ACT,2002
8
Sec-35 of SARFAESI ACT ,2002
As the appeal lies on the stage of invoking sec 13(4), it is a bypass to the tribunal or courts
authority to adjudicate the matter when the right to sue accrues. The Act is an Executory Act,
as adjudication is first done by the Banks itself and then appeal lies to Debt Recovery Tribunals.

INSOLVENCY AND BANKRUPTCY CODE, 2016

This code was much needed as the rising NPAs is a concern for a Developing Nation. The
overlapping laws related to Insolvency and Bankruptcy in various Acts such as SARFAESI
Act (2002), RDDBFI (1993), and Companies Act (2013), left Creditors in dilemma for
Insolvency laws, to cater the need a structural framework was required which not only
eliminate the confusion between the creditors in which specific law their case will fall but also
for speedy trial and adjudication, Former Finance Minister late Shri. Arun Jaitley proposed the
bill and the Insolvency and Bankruptcy Code (IBC) 2016 was enacted. This act gave overriding
power over all other Insolvency laws and this became single law for the Insolvency and
Bankruptcy. The Act covers companies under Companies act 2013 as well as the Companies
registered in any special Act for the time being in force, Limited Liability Partnership Act,
Partnership firms and Individuals.

The Objective of the Act is to give structural Framework to insolvency Laws, time constrained
process and to help in ease of Doing Business as the FDI increase when there is a way through
which the debts can be recovered from debtors as smooth legal policies increase trust among
the foreign investors. The Act covers the corporate debtors, corporate insolvency cannot be
filed unless the liability is not more than one crore9. An Application is filed before the NCLT
(NATIONAL COMPANY LAW TRIBUNAL) for the insolvency by either the Corporate
Creditor or Corporate debtor itself, by moving an application the NCLT appoints the
insolvency professional who is a private professional who acts as an intermediary who helps
creditors with a plan for recovery of their dues.

The fast track corporate insolvency process which can be filed by convincing the Tribunal from
the facts and the process shall be completed within 90 Days, which can be extended for 45 days
on the basis of the procedure followed.10

9
MCA notification S.O.1205(E) dated 24-03-2020
10
Sec-55 of Insolvency and Bankruptcy code,2016
CODE OF CIVIL PROCEDURE (1908)

 The civil proceeding under order IV (ordinary suit) or Summary Suit under order
XXXVII can be instituted by the Creditors in order to recover the debt amount, this
relief was used by the banks and Financial Institutions when there was no specific Act
for the recovery of debts due to Banks.
 Summary suits can be instituted in certain documents such as Bill of Exchange,
Hundies and promissory notes.
 Under Order XXXVII, one can file a summary suit which takes effect faster and
efficiently than ordinary suits, because the right to defend is allowed on the discretion
the Courts, and if the leave to defend is not allowed to Defendant or he defaults on the
date of appearance, an Ex- parte Decree is passed and to set aside the decree the
defendant has to show a sufficient cause to the court that on that given all possibilities
he could not attend the proceeding.