The Recovery of Debts and Bankruptcy Act, 1993

What it does

The Act provides a special forum for banks and financial institutions to recover debts. It establishes Debts Recovery Tribunals to decide applications for recovery and Debts Recovery Appellate Tribunals to hear appeals. The idea was that the ordinary civil courts, with their delays, were not suited to the recovery of loans by lenders, and a tribunal with a defined procedure and its own recovery machinery would do better.

A bank or financial institution files an application in the Tribunal for the recovery of a debt due to it. If the Tribunal decides in the lender's favour, it issues a recovery certificate, and a Recovery Officer enforces it through the methods the Act lists, which include attachment and sale of property, arrest and detention of the debtor, and appointment of a receiver. The Act bars the civil courts from entertaining a claim that falls within the Tribunal's jurisdiction.

The Act was originally titled the Recovery of Debts Due to Banks and Financial Institutions Act. It was renamed by the amendments of 2016 to the title above. The renaming does not change the debt recovery parts, which are the ones in common use.

Who it binds

Banks and financial institutions as applicants, and borrowers and guarantors as defendants. The Tribunal has jurisdiction only over debts above a minimum amount, which stands at INR 20 lakh, and a claim below it goes to the ordinary civil court. The Tribunal's territorial jurisdiction follows the place where the defendant lives or carries on business, where the cause of action arose or where the bank or institution has its branch that handles the account, as the Act provides.

What has changed, and when

The Act was amended substantially in 2016, along with the SARFAESI Act. The 2016 amendments, among other things, renamed the Act, widened the Tribunal's procedure, and brought in electronic filing and the use of electronic means for notice and for the conduct of cases. The minimum claim was raised from INR 10 lakh to INR 20 lakh by notification in 2018.

What turns on it in practice

A borrower that is sued for recovery is in a tribunal where the process moves faster than in a civil court, and the defences are more limited than a borrower may expect. The written statement, the counterclaim and the documents have to be filed in the time the Act and rules allow. The firm's banking, SARFAESI and DRT practice acts on both sides of these applications, and the first step is to settle the amount of the debt and the documents on which the bank relies.

The second point is appeal. A person who appeals to the Appellate Tribunal against an order for payment of a debt must deposit fifty per cent of the amount due as determined by the Tribunal, which the Appellate Tribunal can reduce but not below twenty-five per cent. The deposit is a condition of being heard, so the cost of an appeal has to be counted at the outset.

The third is the connection with other recovery laws. A lender can proceed under the SARFAESI Act, 2002 to enforce a security interest without going to the Tribunal, and a borrower's challenge to that enforcement also lies to the Tribunal. A company that enters insolvency under the Insolvency and Bankruptcy Code, 2016 has a moratorium against proceedings of this kind. The three statutes are read together, and the sequence in which a lender uses them is a matter of strategy.