NON PERFORMING ASSETS – REDRESSAL TO THE BORROWER BEFORE DEBT RECOVERY TRIBUNAL AND APPELLATE TRIBUNAL

[Mr. M. GOVINDARAJAN]

Non performing asset

Prior to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘Act’ for short) an asset/account was considered as ‘Non Performing Asset’ (‘NPA’ for short) based on the concept of ‘past due’.   An NPA was defined as credit in respect of which interest and/or installment of principal had remained due for more than 30 days.   SARFAESI Act was introduced in the year 2002. 

Section 2(1)(o) of the Act as amended in the year 2004 defines the term ‘Non Performing Asset’ as an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset-

• in case such bank or Financial Institution is administered or regulated by any authority or body established or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classification by such authority or body;
• in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank.

Now the SARFAESI Act enables banks and financial institutions to have an identical level playing field compared with other participants in global financial matters, so as to ensure security interest with power to take possession of the securities and to sell them.   It aims at expeditious recovery of NPAs of banks of financial institutions.

Enforcement of Security Interest

Section 13(2) of the Act provides that where any borrower makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified as NPA, then the secured creditor may require the borrower by notice in writing, giving the details of amount payable, to discharge the liability to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise of all any of the rights under Section 13(4).

On receipt of the notice, the borrower may make a representation or any objections.   The secured creditor shall consider the representation or objection and if the secured credit comes to a conclusion that the representation or objection is not tenable, the same shall be communicated to the borrower within one week from the date of receipt of such representation or objection.   In this communication the secured creditor shall give the reasons for non acceptance of such representation or objection.  This shall not give confer any right upon the borrower to file an appeal to the DRT under Section 17 or under Section 17A.

In ‘Mardia Chemicals Limited V. Union of India’ – 2004 (4) TMI 294 - SUPREME COURT OF INDIA it was held that under Section 13(2) it is incumbent on the secured creditors to serve 60 days notice before proceeding to take any of the measures as provided under Section 13(4) of the Act.  After service of notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for non accepting the objections, however brief they may be, must be communicated to the borrower.  The reasons so communicated shall only be for the approach the DRT under Section17 of the Act at that stage.

In ‘India Finlease Securities Limited V. Indian Overseas Bank and others’ – 2015 (1) TMI 463 - ANDHRA PRADESH HIGH COURT it was held that till the sale is confirmed by the secured creditor as required under the Rules, there is no valid transfer of property within the meaning of Section 13(8) and the borrower has the right to repay the dues of the secured creditor, in which event, the secured creditor shall not be transferred.  The legislature intended confirmation of the sale by the secured creditor and not by the authorized officer who accepts the bid.

In ‘Mathew Varghese V. M. Amritha Kumari’ – 2015 (1) TMI 461 - SUPREME COURT the Supreme Court held that after giving 30 days clear notice to the borrower, no sale took place as scheduled for reasons which cannot be solely attributed to the borrower, the secured creditor cannot effect the sale or transfer of the secured asset on any subsequent date by relying upon the notification issued earlier.   The earlier notification having lapsed, the procedure prescribed will have to be followed afresh.

In ‘K.R.  Krishna Gowda and another V. Chief Manager/Authorized Officer, Kotak Mahindra Bank’ – 2013 (9) TMI 940 - KARNATAKA HIGH COURT it was held that there is mandatory requirement under the Act read with the Rules that in order to enable the borrower to know the date on which possession would be taken by the secured creditor.   Rule 8(1) and (2) would have to be complied with by issuing notices indicating the date on which possession would be taken.  The other purpose of issuing such notice is to enable the borrower to discharge the liability to secured creditor.   If application under Section 14 has to be filed before the Magistrate, there is no provision for issuance of a notice to the borrower before an order to take possession is issued.   However non issuance of the mandatory notice constitutes violation of Section 13(4) which is appealable under Section 17.

‘Measures’ that may be taken by the secured creditor

The secured creditor under Section 13(4) may take recourse to one or more of the following measures to recover the secured debt:

• take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset;
• take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset; the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security of the debt; where the management of whole of the business  or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is related to the security for the debt;
• appoint any person to manage the secured assets the possession of which has been taken over by the secured creditor;
• require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.

All costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower.  If the dues of the secured creditor along with all costs, charges and expenses to the secured credit at any time before the date fixed for sale the secured asset shall not be sold or transferred by the secured creditor.

Assistance of court in taking possession of secured assets

Section 15 of the Act provides that the secured creditor for the purpose of taking possession or control of any such secured assets, may request in writing the Chief Metropolitan Magistrate or District Magistrate and the same may help the secured creditors to take possession of the assets.

In ‘Mansa Synthetic (P) Limited and others V. Union of India and another’ – 2015 (1) TMI 462 - GUJRAT HIGH COURT it was held that under Section15, Chief Metropolitan Magistrate of District Magistrate is only executing the power and assisting the secured creditor to take possession of the secured assets.   No appeal or any other proceedings will lie against the orders passed under Section 14.  The right of judicial review under Article 226 and 277 of the Constitution of India cannot be taken away.   But that power can be exercised only in cases where the concerned Magistrate or the Commissioner as the case may be exceeds the power or refuse to exercise his jurisdiction vested in him under the law.

In ‘Amish Jain and another V. ICICI Bank Limited’ – 2015 (1) TMI 320 - DELHI HIGH COURT it was held that the provisions of Section 14 and 17  clearly establishes the nexus of the appeal under Section 17(1) to the place where the secured asset is situated and Section 14 vests the territorial jurisdiction, for filing of an application by the bank/Financial Institution for assistant in taking over possession of the secured asset in the Chief Judicial Magistrate or District Magistrate within whose jurisdiction the secured asset is situated.

Redressal to the borrower

Debt Recovery Tribunals (‘DRT’ for short) are established for giving redressal to the borrowers against the action taken by the secured creditors.  Debt Recovery Appellate Tribunals (‘DRAT’ for short) are there to entertain appeal against the order

Application to Debt Recovery Tribunal

If any person or the borrower aggrieved by the action taken by the bankers under Section 13(4) of the Act, is entitled to challenge before the DRT having jurisdiction under Section 17 of the Act within 45 days from the date on which such measure had been taken.

• Any application to the DRT shall be made in the Form given in Appendix VII to Security Interest (Enforcement) Rules, 2002;
• Every application shall be accompanied by a fee as detailed below by means of demand draft drawn in favor of the Registrar of the Tribunal:

• Where the application is filed by the borrower-

• If the borrowed amount of debt is less than ₹ 10 lakhs – Fee is ₹ 500/- for every Re.1 lakh or part thereof;
• If the amount of debt is more than ₹ 10 lakhs – Fees – ₹ 5000/- + ₹ 250/- for every ₹ 1 lakh or part thereof in excess of ₹ 10 lakhs subject to a maximum of ₹ 1 lakh;

• Where the application is filed by any aggrieved by any person other than the borrower-

• If the borrowed amount of debt is less than ₹ 10 lakhs – Fee is ₹ 125/- for every Re.1 lakh or part thereof;
• If the amount of debt is more than ₹ 10 lakhs – Fees ₹ 1250/- + ₹ 125/- for every ₹ 1 lakh or part thereof in excess of ₹ 10 lakhs subject to a maximum of ₹ 50,000/-;

• Any other application by any person – ₹ 200/-

• The DRT, after examining the facts and circumstances of the case and evidence produced by the parties comes to the conclusion that any of the measures taken by the secured creditor is not in accordance with the provisions of the Act and the rules made there under, may declare that the measure taken by the secured creditor is invalid and direct the restoration of the assets to the borrower;
• The application shall be disposed by DRT as early as possible and dispose within 60 days from the date of receipt of application;
• The said period may be extended from time to time for reasons recorded in writing but such extension shall not exceed four months from the date of receipt of the application;

As on date 33 DRTs have been established in Ahamedabad, Allahabad, Aurangabad, Bangalore, Chandigarh, Chennai, Coimbatore, Cuttack, Delhi, Ernakulam, Gauhati, Hyderabad, Jabalpur, Jaipur, Kolkatta, Lucknow, Madurai, Mumbai, Nagpur, Patna, Pune, Ranchi, and Vishakhapatnam.

The DRT and the Appellate Tribunals are not be bound by the procedure laid down by the Code but shall be guided by the principles of Natural Justice and subject to the rules framed.   They have been conferred powers to regulate their own procedure as given to them

Appeal to Debt Recovery Appellate Tribunal

The action taken by the bank is subject to assail before DRT and a further appeal to the DRAT.    Section 18 provides that an appeal against the order of DRT may be filed before the Appellate Tribunal within 30 days from the date of receipt of the order, after depositing 50% of the debts due form him as determined by the DRT.  The Appellate Tribunal may reduce the deposit to 25% after recording reasons for the same.

Any application to the Appellate Tribunal shall be in the form given in Appendix IX to the Security Interest (Enforcement) Rules, 2002.  The fee payable is as to that of the fee applicable for the application to be filed before the DRT.

The Act does not provide for the Appellate Tribunal to condone the delay for the appeal filed after the limitation period. In ‘Dr. Zubida Begum and others V. Indian Bank’ – 2015 (1) TMI 319 - MADRAS HIGH COURT it was held that Section18 mandates that appeal should be filed within 30 days from the date of receipt of the order passed by the DRT.  There is no express provision in Section 18 either extending the limit prescribed in Section 5 of the Limitation Act or its exclusion.   Therefore the Appellate Tribunal has no power to condone the delay as preferring statutory appeal and the Writ Petition challenging the order of Appellate Tribunal refusing to condone delay in filing appeal is liable to be dismissed.

Right of borrower to receive compensation and costs in certain cases

Section 19 provides that if the DRT or the Court of District Judge on an application made under Section 17 and 17A or the Appellate Tribunal or High Court on an appeal preferred under Section 18 or Section 18A holds that the possession of the secured assets by the secured creditor is not in accordance with the provision of this Act and the rules made there under and directs the secured creditors to return such secured assets to the concerned borrower, such borrower shall be entitled to the payment of such compensation and costs as may be determined by such Tribunal or Court of District Judge or Appellate Tribunal or the High Court referred to in Section 18B.

Civil court has no jurisdiction

In ‘Jagadish Singh V. Heeralal and others’ – 2014 (3) TMI 73 - SUPREME COURT the Supreme Court held that the Civil Court has no jurisdiction to entertain against the measure taken by a secured creditor under Section 13(4) against which an aggrieved person has the right of appeal before the DRT or the Appellate Tribunal to determine as to whether there has been any illegality in the measures taken.

In ‘Kingfisher Airlines Limited v. State Bank of India’ – 2014 (12) TMI 486 - KARNATAKA HIGH COURT the High Court held that the jurisdiction of all civil courts to entertain any suit or proceeding, in respect of any matter, which a DRT or an Appellate Tribunal is empowered to determine under the Act is barred.  The provisions of the Act would prevail over other laws notwithstanding any inconsistency as declared by Section 35 of the Act.   Banks can choose to stand outside winding up, but the company court, cannot exercise jurisdiction over the secured property.

Conclusion

The intendment of the legislation is for speedy recovery of dues to the bank.   The Tribunals are expected to act in quite promptitude regard being had to the nature of the lis and see to it that an ingenuous litigant does not take recourse to dilatory tacts.