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BANKING LAW

Debt Recovery Tribunal- A Critical Analysis

Faculty:- Purushottam Kumar

Submitted By: Priyanka Jain

4th Year, VIIIth Semester

B.B.A.-LL.B.(Hons.)

ID:- MU13BBALLB05
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TABLE OF CONTENTS
PAG
S.N PARTICULARS
E
o
4

1. Acknowledgement

2. TABLE OF CASES 5

3. ABBREVIATIONS USED 6

4. RESEARCH METHODOLOGY 7-8

5. INTRODUCTION 9-10

6. CHAPTERS:

1) DISTRIBUTION OF LEGISLATIVE SUBJECT 11-13

BETWEEN STATE & UNION.
I. UNION LIST
II. STATE LIST
III. CONCURRENT LIST
2) DISTRIBUTION OF EXECUTIVE POWER 13
BETWEEN STATE & UNION. 14-25

3) PARLIAMENTARY LEGISLATION IN STATE

SUBJECT
I. PARLIAMENTS POWER TO LEGISLATE IN
NATIONAL INTEREST
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II. DURING PROCLAMATION OF EMERGENCY

III. PARLIAMENTS POWER TO LEGISLATE WITH
THE CONSENT OF STATE.
IV. PARLIAMENTS POWER TO LEGISLATE FOR
GIVING EFFECT TO TREATIES AND
INTERNATIONAL AGREEMENT.
V. IN CASE OF FAILURE OF CONSTITUTIONAL
BODY IN STATE.

6. CONCLUSION AND SUGGESTION 26

8. BIBLIOGRAPHY 27

ACKNOWLEDGEMENT

I would like to thank my faculty Mr. Purushottam Kumar whose guidance helped me a lot with
structuring my project.

I owe the present accomplishment of my project to my friends, who helped me immensely with
materials throughout the project and without whom I couldnt have completed it in the present
way.
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I would also like to extend my gratitude to my parents and all those unseen hands who helped me
out at every stage of my project.

Priyanka Jain
Roll No. MU13BBALLB05
SEMESTER - VIII

TABLE OF CASES
United Bank of India v/s Debts Recovery Tribunals and Others, AIR 1999 SC. 1381

Phonix Impex v. State of Rajasthan, 1998 (2) WLC 59 (Raj)

Industrial Investment Bank of India v. Marshals Power and Telecom, (2007) 1 SCC 106...

Raghunath Rai Bareja v. Punjab National Bank, (2007) 2 SCC 230...

Indian Bank v. ABS Marine Products, (2006) 5 SCC 72

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LIST OF ABBREVIATIONS
AIR ...........................................All

India Reporter

All .......

. Allahabad

Bom.

..................................

.Bombay

CJI ....Chief

Justice of India
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Ed...Edition.

J...Justice

Mad ....Madras

P&H ......

Punjab and Haryana

Raj

.Rajasthan

SCC......Supreme Court Cases

vol. ..

.Volume

v.

Versus

SC

Supreme Court

DRTDebt

Recovery Tribunal
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RESEARCH METHODOLOGY
Aims and Objectives:

The aim of this research paper is to present a detailed study of parliamentary legislation in state
field with particular emphasis on the particulars of power of parliament

Scope and Limitations:

The researcher has used the doctrinal method and has relied on the secondary sources for the
content of the research paper.

Owing to the large number of topics that could be included in the project, the scope of this
research paper is exceedingly vast.

Research Questions:

The three research questions are as follows:

1. Concept of Debt Recovery Tribunal

2. Process of recovery of debt of company in winding up
3. Critical Analysis of DRT
Sources of Data:

The researcher has relied on the following secondary sources of data:

Articles
Books
Statutes
Journals
Method of Writing

The method of writing followed in this project is both analytical and descriptive.

Mode of Citation
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The researcher has followed a uniform mode of citation in this project.

Introduction

In the early days the people live their life miserably. The conditions of the living standard of the
people were not up to the mark rather we can say that the living standard of the people was very
low. But after independence, the central government felt the need of improving the living
standard of the people. And in furtherance of attaining these living standard various types of
developmental plans were taken up by the government. The banks and the financial institutions
started playing important or significant role in the promotion of the trade and industry. Several
financial institution were established in the country since the year 1948. A planning commission
was also appointed by the government of India in December 1949 to monitor the developmental
scheme. In furtherance of the objective of the five year plans the banks spread their branches
through out the country and assisted in the enterprising business in the large way. However
recovery of dues to the banks became a serious problem as huge amount of public money were
blocked in the hands of defaulting borrowers.

The government of India, as a step to streamline the system appointed committees like Tiwari
Committee, Narasimham Committee. The Narasimham committee and a high level committee
headed by Shri V.S. Hedge.1 All these committee recommended in one voice for establishing
special tribunals for speedier adjudication of the claims of the banks and financial institution.
The main focus or aim of all these committee is to avoid delay in the adjudication proceeding
and attain the expeditious adjudication proceedings.

As a result a draft bill was introduced in the lok shabha on 13th may 1993. Since the parliament
was not in session, the president of India promulgated an Ordinance No. 25 of 1993, which came
in to force on 24th June, 1993. It subsequently became The Recovery of the debt due to Banks
and Financial Institutions Act, 1993 with retrospective effect from 24th June, 1993.2

1 K. Panduranga Rao, Law Relating to Debts Recovery Tribunals, 4th Edition pg. no.
01

2 K. Panduranga Rao, Law Relating to Debts Recovery Tribunals, 4th Edition pg. no.
01
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The enactment is considered as the special enactment for ensuring expeditious adjudication of
the claims of the banks and financial institutions and speedy recovery of their dues. The tribunal
and the appellate tribunal are not bound by the Code of Civil Procedure but are guided by the
principle of Natural Justice and their procedural rules. They are also vested with power to
regulate their own procedure. The provisions of the act are made applicable to the claim where
the amount of the debt due to banks and financial institution is rupees ten lakh and above or such
other amount being not less than one lakh rupee as the central government may notify. Every
pending suit or other proceeding where the amount of debt is rupee ten lakh and above in any
civil court immediately before the date of establishment of tribunal under this act shall stand
transferred to it for adjudication.

The bank or the financial institution seeking to recover debt from a borrower can make an
application to the tribunal concerned, whereupon summons are sent by it to the defendant. After
giving him an opportunity of being heard the tribunal adjudicates the claim by passing an order.
If the claim is proved the tribunal adjudicates the claim by passing an order. If the claim is
proved the tribunal will issue a recovery certificate. No court or the other authority shall have the
jurisdiction or powers to entertain and decide such claims of Banks and Financial Institutions.

Recently in the year 2002 another similar Act, Securitization and Reconstruction of the financial
assets and enforcement of security interest act 2002 was passed for the benefit of banks and
financial institutions making recovery easier and speedier under it. Very recently the DRT Rules
1993 have also been amended omitting the most controversial rule 10 and changing certain other
provisions.

Objective of the Act:

The Recovery of Debts Due to Banks and Financial Institution Act, 1993 is enacted to provide
for the establishment of Tribunals for Expeditious adjudication and the recovery of the debts due
to the bank s and the financial institution and for the matter connected therewith or incidental
thereto.3 In order to implement and the recommendation of the Tiwari Committee and
Narasimham Committee the legislation was made to establish special tribunal for the expeditious

3 K. Panduranga Rao, Law Relating to Debts Recovery Tribunals, 4th Edition pg. no.
01
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or speedier adjudications of the claims of the banks and the financial institutions and recover the
debt to from the defaulter. The preamble of the act reveals the purpose and the scope of
legislation. It also indicates the aims and objectives of the Act that is the establishment and the
Tribunals.

The importance of this act can be understood in the light of the expeditious adjudication of the
claims of the banks and the financial institution. The main focus of the enactment of these laws
was to reduce the delay time in the adjudication process and helps the bank to recovery the due
to banks from the defaulter as speedy as possible. So it can be said that the two important aims or
objective of enacting this law was for:-

a) Expeditious adjudication of the claims of the banks and financial institutions

b) Speedy recovery of the debts from the borrower

Expeditious adjudication:

In the case of United Bank of India v/s Debts Recovery Tribunals and Others 4, the Supreme
Court of India emphasized the view that while dealing with the cases under the Act relevant
provisions have to be construed bearing in the mind the objectives for which the parliament
passed the enactment. The prime objective of the act is the establishment of tribunals for the
expeditious and speedier adjudication and recovery of the debt due from the banks and financial
institutions.

The above case laws lays emphasis on the main objective of the enactment of this act that is the
expeditious adjudication of the claims of the banks and financial institutions and also the speedy
recovery of the debt due to the banks and financial institutions. It helps in avoiding delay in the
adjudication proceeding in this regards.

DEBT RECOVERY TRIBUNAL

With the enactment of the DRT Act, the banking sector expected that most of the NPAs would be
easy to recover, as against the conventional system of recovery of loan through civil courts,
where considerable time, money and efforts were required to recover debt. However, in spite of

4 AIR 1999 SC. 1381

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DRT Act, on account of non-realisation of the NPAs, the Banks and Financial Institutions were
facing problems relating to liquidity and asset liability mismatch, since their assets were blocked
for considerable time in unproductive asset4. There was no legal provision for facilitating
securitisation of financial assets, and banks had no power to take possession of securities created
in their favour in order to secure the facilities. This led to further reforms in the process and
curtailing the delay in adjudication. In furtherance of financial reforms and extending the object
of RDDBFI Act, 1993, the Government has enacted The Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002. It is the SARFAESI Act that
brought a greater change in the debt recovery scenario in the country. One of the important
changes that SARFAESI has brought is that it allowed the banks (according to Sec.13
SARFAESI) to take over possession from the defaulter, without going through the stringent court
procedure, once the loan account has been categorised as a NonPerforming Asset

Definition: Section 2(d) bank means- (i) banking company; (ii) a corresponding new bank;
(iii) State Bank of India; (iv) a subsidiary bank; or (v) a Regional Rural Bank;

Section 2(h) financial institution means- (i) a public financial institution within the meaning of
Section 4A of the Companies Act, 1956 (1 of 1956); (ii) such other institution as the Central
Government may, having regard to its business activity and the area of its operation in India by
notification, specify;

Section 2(g) debt means - any liability (inclusive of interest) which is alleged as due from any
person by a Bank or Financial Institution or by a consortium of Banks. But, it should be
subsisting one and recoverable also. Since the Act is a fiscal law, the delegated authority i.e. the
Tribunal has to act strictly within the parameters of the authority delegated to it under the Act.
Jurisdiction conferred in relation to debt is a very special kind of jurisdiction conferred upon the
Tribunal and is strictly limited in extent though; without doubt the ambit of the powers
exercisable within those limits is wide5

RECOVERY OF DEBT OF COMPANY IN WINDING UP

Leave of the Company Court for transfer of cases
5 G. S. Dubey, The Term DEBT; Its Definition, Scope Before Debts Recovery Tribunal An analysis,
http://www.manupatra.co.in/newsline/articles/Upload/6FDEB5C4-14EF-48ED-B223-19A4003D8410 Accessed on 30/04/2016 07:30
PM
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There is no need for a bank or FI to seek leave of company court (the tribunal i.e. NCLT) to proceed
with its claim before the DRT or in respect of the execution proceedings before the Recovery Officer
against a company in liquidation. Nor can the proceedings be transferred to the Company court 6.

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. 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 RDDBFI Act8

Critics Points:

A failure due to lack of suitable appointments & infrastructure

Delay
Many gray areas in the law
No improvement in recovery.

Section 17 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [RDB
Act] provides that the DRT shall have jurisdiction to entertain and decide applications from
banks and financial institutions for recovery of debts due to such banks and financial
institutions. Debt is defined in s. 2(g) as any liability which is claimed as due by a bank during
the course of business activity. Thus, the jurisdiction of the DRT extends not just to debts as
traditionally understood, but to any claim of money that a bank makes during the course of
business. S. 18 provides that no court except the Supreme Court and the High Court under Art.
226 shall have any jurisdiction in relation to these matters. In 1995, the constitutionality of the
DRT was challenged successfully before the Delhi High Court, which held that the Tribunal

6 C. R. Datta, C R Datta On Company Law, 6th Edition 2008 Lexix Nexis, Page No. 6180

7 (1996) 86 Comp Cas 255 (SC)

8 M L Tannan, Tannans Banking: Law and Practice in India, Lexis Nexis Butterworths
Wadhwa, Nagpur, 23rd ed., 2010, Page No. 1984
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could not function validly since it did not have any provision for filing counterclaims.
Subsequently, the RDB Act was amended and the constitutionality of the amended act was
upheld by the Supreme Court. As things stand, borrowers are entitled to file counterclaims
under s. 19 of the RDB Act.

The question is whether borrowers must choose this remedy or whether they are also entitled to
file an independent suit in the appropriate civil court. There are two conflicting Supreme Court
decisions on this point, and two others which are ambiguous.

In Indian Bank v. ABS Marine Products, (2006) 5 SCC 72, Indian Bank asked for a suit filed by
ABS Marine in the Calcutta High Court to be transferred to the DRT. The Supreme Court held
that such an independent suit filed by a borrower could not be transferred to the DRT without his
consent, since his right to approach a civil court cannot be taken away. This decision raised fears
that the jurisdiction of the DRT could be easily evaded by a borrower filing an independent suit
in civil court asking for the exact opposite of what the Bank was asking for in the DRT.

In SBI v. Ranjan Chemicals Ltd., (2007) 1 SCC 97, the Supreme Court held that its power to
transfer a suit did not depend on the consent of the parties. It is difficult to reconcile this decision
with ABS Marine, especially since the Court ordered the transfer of an independent suit on the
ground that it would avoid duplication of evidence, counsel, expenses etc, The concern that this
decision raised is that the DRT may be unable to handle suits which involve complex questions
of law or fact, and that the Bank could prevent a borrower from approaching a civil court to
resolve these questions by merely filing a claim in the DRT. The DRT has summary proceedings
and has traditionally been considered ill-equipped to consider claims like misrepresentation or
fraud, which require cross-examination of witnesses. Other decisions of the Supreme Court do
not clarify this matter either, for one seems to support Ranjan Chemicals (Industrial Investment
Bank of India v. Marshals Power and Telecom, (2007) 1 SCC 106) while another seems to
favour ABS Marine (Raghunath Rai Bareja v. Punjab National Bank, (2007) 2 SCC 230). Thus,
the law on the point is unclear.

This dispute has important implications for the role of the DRT in Indian law and commerce, and
the ability of the borrowers to have legitimate disputes adjudicated by the civil court important,
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however, is ensuring that the objective of setting up the DRT expeditious disposal of banking
cases is not hampered by allowing borrowers to frustrate its jurisdiction.

The tribunal has no jurisdiction to adjudicate to entertain application for winding up of a

company, as an application for winding up is a special right or remedy given under the
Companies Act, 1956. Tribunal has no jurisdiction over co-operative banks: Sec 2 (d) of the
Banking Regulation Act, 1949 does not includes co-operative banks. (Phonix Impex v. State of
Rajasthan, 1998 (2) WLC 59 (Raj) (DB)).

Impact of Failure of Debt Recovery Tribunal Profitability NPA means booking of money in
terms of bad asset, which occurred due to wrong choice of client. Because of the money getting
blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to
opportunity cost also as that much of profit invested in some return earning project/asset. So
NPA does not affect current profit but also future stream of profit, which may lead to loss of
some long-term beneficial opportunity Another impact of reduction in profitability is low ROI
(return on investment), which adversely affect current earning of bank.

Involvement of Management

Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities which would have given good returns. Now days, banks have special
employees to deal and handle NPAs, which is additional cost to the bank.

Credit Loss

If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of market
for credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting in their money in the banks.

CONCLUSION AND SUGGESTIONS

With the objective, therefore, of providing banks and financial institutions with a speedier and
more efficient mode of recovery of debts, the legislature has provided for the establishment of
special courts for the purpose, designating them as Debt Recovery Tribunals. Lack of judicial
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training for recovery officers as they are officers appointed by the GOI for assisting the presiding
officers, inconsistent procedures followed by different DRTs, significant delay in proceedings as
the recommended time is six months, whereas proceedings actually last for two years or more,
are some of the reasons for ill working of DRTs.

The functioning of DRTs needs to improve to ensure banks are able to recover their existing
loans and offer fresh advances at cheaper rates. In the current scheme, there is no mechanism in
place to ensure that the tribunal disposes the case in a timely manner. There is a strong need to
bring in more accountability for the DRT. There are Small number of DRTs and Debt Recovery
Appellate Tribunals, where judgments of DRTs can be appealed. While there are 33 DRTs, there
are only five Debt Recovery Appellate Tribunals in the country. There is certainly a need for
more number of DRTs. The biggest challenge, it appears, is their ability to deal with a subject
with speed. The system that was designed is clearly not working. Probably, there should be a
feedback mechanism and people involved with DRTs should be encouraged to point out the areas
of pain.

Our judicial system is both clogged and inadequate in infrastructure, which slows down any redressal
process. Recovery can be speeded up only when there is a fixed time-frame for all disposals, and
realisation of assets could be speeded up by having special courts to deal with such recoveries.

The functioning of DRTs is also keeping the Reserve Bank of India (RBI) worried. If bankers
cannot get their money back, they are not going to give loans at cheap price. So, making sure
debt recovery tribunals work better, making sure that we dont have excess number of stays,
excess number of appeals this is also needed to be focused.

Finally, the law should be strengthened to ensure mandatory time-bound disposal of cases. Also,
performance indicators of the adjudicating officer could be used to improve the efficiency of the
system. And, stay petitions should be analysed before being accepted as there have been
instances where advocates exploit the loopholes of the Act and plead for stays, leading to piling
up of cases.
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Bibliography

Books

Agarwal, O.P. et.al., (2006). Principles of Banking, Indian Institute of Banking and
Finance, New Delhi: Macmillan Publication.
Batra, G.S. (2001). Financial Services and Markets, New Delhi: Deep & Deep
Publication.
Bedi, H.L. (1972). Practical Banking Advances, Bombay: New Age Printing Press.
Beyer, Glenn H. (1968). Housing and Society, New York: Macmillan Publication.

Websites

. www.manupatra.in
www.lexinexis.com
www.iloveindia.com 246
www.indiahousing.com
www.contentmart.com
www.investorvillage.com
www.wikipedia.org
www.worldbank.org
www.banknetindia.com
www.iba.org.in
www.ssrn.com