Important Laws Relating to Recovery of Dues
Principles & Practices of Banking | Unit C · Chapter 29
Chapter 28 (NPAs) showed when a loan fails to perform. This chapter covers what the law allows the bank to do about it — five statutes that together form the legal arsenal for debt recovery: the DRB Act 1993 (tribunals), SARFAESI 2002 (enforcement without court), IBC 2016 (insolvency resolution), the Legal Services Authorities Act 1987 (Lok Adalats), and the Limitation Act (time limits for legal action).
📌 Why This Chapter Matters in JAIIB
Expect 8–10 questions spread across five statutes — this is one of the widest-coverage chapters in PPB Unit C. The examiner tests three clusters hard: (1) Numbers — ₹20L DRT threshold, 60-day SARFAESI notice, 50%/25% DRAT deposit, 180/330-day CIRP window, ₹1cr IBC threshold, ₹20L Lok Adalat ceiling; (2) Constitutional validity cases — Mardia Chemicals and Delhi High Court Bar Association; (3) IBC timelines — CIRP 180+extension, Fast Track 90+45, PPIRP 120 days with 90-day RP submission, IBBI composition (3+1+5 members). Limitation periods (3/12/30 years) are near-certain numerical questions.
Key Numbers & Thresholds — Chapter 29 at a Glance
Recovery of Debts & Bankruptcy Act, 1993 — Tribunals & Setup
Why the DRB Act Was Needed
Before 1993, banks had no dedicated forum — they had to queue behind ordinary civil litigants in district courts. Backlogs stretched recovery timelines to decades. Huge assets sat blocked as unproductive, draining bank productivity. Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now called the Recovery of Debts and Bankruptcy Act — DRB Act) to create a fast-track, dedicated tribunal system.
Constitutional Validity — The Landmark Case
The Delhi High Court Bar Association challenged the DRB Act before the Delhi High Court, which declared it unconstitutional. On appeal, the Supreme Court in Union of India vs Delhi High Court Bar Association (2002) 4 SCC 275 reversed that finding and upheld the Act's constitutional validity. The Act remains fully operative.
DRT & DRAT — Key Structural Facts
🧠 Mnemonic — DRB Act Key Numbers
"Twenty Lakhs, Four Years, Thirty Days, Half and Quarter" — the DRT number ladder.
DRB Act Procedure — Application to Recovery
Step-by-Step: Filing to Recovery Certificate
Doctrine of Election — DRT vs SARFAESI
Can a bank simultaneously pursue DRT proceedings AND SARFAESI enforcement? The Doctrine of Election says "if you choose one remedy, you cannot use another inconsistent remedy." It applies only when all three elements coexist:
Element 1
Two or more remedies exist
Element 2
The remedies are inconsistent with each other
Element 3
A choice of one has been made
⚠️ Supreme Court Ruling
DRT and SARFAESI are not inconsistent — they are complementary remedies. Therefore the Doctrine of Election does not apply. A bank may simultaneously pursue both or switch between them. Withdrawal of DRT application is NOT a pre-condition for taking SARFAESI action.
Overriding Effect & Priority
- →DRB Act has overriding effect over the Companies Act — leave of the company court is NOT needed to file a DRT case even if winding-up proceedings are pending (Allahabad Bank vs Canara Bank AIR 2000 SC 1535).
- →Recovery Officer has powers equivalent to a Tax Recovery Officer under Income Tax Act 1961 (Third Schedule).
- →Secured creditors have priority over all other debts including government dues — subject to IBC provisions.
- →Recovery certificate is deemed a court decree and can initiate winding-up proceedings against a company.
SARFAESI Act, 2002 — Fundamentals & Constitutional Validity
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is the most powerful tool in a bank's recovery arsenal. It allows secured creditors to enforce security interests — take possession and sell mortgaged/hypothecated assets — without going to court or DRT. The powers override the Transfer of Property Act.
Two Qualifying Conditions (Both Must Be Met)
⚖️ Landmark Case — Mardia Chemicals Ltd. vs Union of India (2004)
A three-member Supreme Court bench upheld SARFAESI as constitutionally valid — except for the original Section 17(2). That section required a borrower to deposit 75% of the amount claimed by the lender before the DRT would even hear their appeal against enforcement. The Court struck it down as unreasonable, oppressive, arbitrary and violative of Article 14 (Right to Equality).
Section 17(2) was subsequently amended: the pre-deposit requirement is now 50% (reducible to 25% by the DRT).
Enforcement Procedure — Key Steps
Order of Appropriation of Sale Proceeds
Rights of the Borrower Against Enforcement
- →Apply to the DRT within 45 days of the enforcement measure being taken (no pecuniary limit — even sub-Rs 20L cases can go to DRT under SARFAESI).
- →Appeal to DRAT within 30 days of DRT order, with 50% deposit (reducible to 25% by DRT).
- →If DRT finds enforcement was not in accordance with the Act and directs return of the asset, the borrower is entitled to compensation and costs as determined by the tribunal.
SARFAESI — ARC, NARCL, Management Takeover & CERSAI
Asset Reconstruction Companies (ARC)
- →ARC must register with RBI and maintain minimum Net Owned Funds (NOF) of Rs 300 crore on an ongoing basis.
- →ARCs registered on or after October 11, 2022 must commence business with minimum NOF of Rs 300 crore.
- →ARCs acquire NPAs from banks by issuing debentures, bonds, or entering agreements. Rights of the original bank in the security vest in the ARC.
- →ARCs raise funds from Qualified Buyers (QBs) by issuing Security Receipts (SRs) under separate schemes — not offered to general public.
- →Funds raised under each scheme are held in a resultant trust; on ARC liquidation, money goes to the beneficiary QBs — not the liquidator.
- →ARC may also act as manager for secured assets taken by banks, agent for collection, or receiver if appointed by a court.
- →NARCL (National Asset Reconstruction Company Ltd) was set up to clean up legacy stressed assets with bank exposure of Rs 500 crore and above — offering a mix of cash and Security Receipts.
Effect of Management Takeover
When a secured creditor takes over management, it publishes a notice in two newspapers (English + regional language) appointing directors (for a company) or an administrator (for others).
Key Effect — Automatic Vacation
On publication of this notice, the existing directors of the company (or persons holding superintendence/direction/control in other cases) are deemed to have vacated their offices automatically — no court order needed.
- →Shareholders cannot appoint new directors without secured creditor approval.
- →No winding-up or receivership proceedings can be initiated without secured creditor consent.
- →On full recovery of the secured debt, the secured creditor must restore management to the borrower.
- →Directors vacating office by this process are NOT entitled to compensation for loss of office.
Central Registry — CERSAI
Full name
Central Registry of Securitisation Asset Reconstruction and Security Interest of India
Operational since
March 31, 2011
Purpose
Registers securitisation, reconstruction, and creation/modification/satisfaction of security interests
Public notice effect
Registration constitutes public notice from the date AND TIME of filing — not from processing date
No enforcement without registration
A secured creditor cannot exercise SARFAESI rights unless the security interest is registered with CERSAI
Satisfaction report
ARC/secured creditor must report full payment/satisfaction to CERSAI within 30 days. CERSAI then gives 14 days to show cause before recording satisfaction.
⚠️ Limitation Period
SARFAESI enforcement actions must be taken within 3 years from when the cause of action arose (Section 36 of the Limitation Act). After selling the security, if the shortfall claim is not filed within the limitation period, it is time-barred.
Section 31 Exclusions — SARFAESI Does NOT Apply To
Insolvency & Bankruptcy Code, 2016 — Framework & IBBI
The IBC, which came into force in December 2016, is fundamentally different from DRT/SARFAESI. It is not a recovery statute — it is a resolution statute. Instead of one creditor enforcing its security, IBC coordinates all creditors together to either revive the business or liquidate it in an orderly way. It replaced multiple overlapping laws and set a single, time-bound framework.
Coverage & Minimum Default Thresholds
Insolvency and Bankruptcy Board of India (IBBI) — Established October 1, 2016
IBBI is the regulatory backbone of IBC — it registers, regulates and oversees Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs) and Information Utilities (IUs). It writes and enforces rules for all resolution and bankruptcy processes.
IBBI Composition (Central Government appointments)
🧠 Mnemonic — IBBI Members
1 Chair + 3 Ex-officio (Finance/Corp/Law) + 1 RBI + 5 Others (min 3 whole-time)
"One Chair, Three Ministers, One RBI, Five Nominees" → 1+3+1+5 = 10 total members.
Four Pillars of IBC Institutional Infrastructure
IBBI
Regulatory body — registers and oversees all market participants under IBC.
Insolvency Professional Agencies (IPA)
Enrol and regulate Insolvency Professionals; set professional conduct standards.
Insolvency Professionals (IP)
Handle CIRP, liquidation, bankruptcy, and fresh start proceedings as Resolution Professionals or Bankruptcy Trustees.
Information Utilities (IU)
Collect, authenticate and disseminate financial information to eliminate disputes about debt records at the point of default.
IBC — CIRP, Fast Track, PPIRP & Individual Bankruptcy
CIRP — Corporate Insolvency Resolution Process Timeline
Three IBC Corporate Resolution Processes Compared
| Feature | CIRP | Fast Track CIRP | PPIRP (MSMEs) |
|---|---|---|---|
| Who can use | Any corporate debtor (Rs 1 cr+) | Small corporates / low-debt debtors | MSMEs only (MSMED Act) |
| Standard period | 180 days | 90 days | 120 days total |
| Max extension | Up to 330 days total | 45 days max | No extension — 120 days is outer limit |
| Creditor approval to initiate | Not required from debtor | Not required from debtor | 66% financial creditors (non-related) must approve |
| Management | Vests in RP (IRP first) | Vests in RP | Remains with Board of Directors unless CoC votes to change |
| RP deadline | Submit plan to AA by 180 days | Submit plan within 90 days | Submit CoC-approved plan within 90 days of commencement |
Appeal Timelines Under IBC
Bankruptcy Process for Individuals & Partnership Firms
- →Minimum default: Rs 1,000 — very low threshold to ensure the mechanism covers everyone.
- →Adjudicating Authority: DRT (not NCLT) — having territorial jurisdiction over where the individual debtor actually lives, works or carries on business.
- →Bankruptcy order: AA must pass it within 14 days of receiving confirmation/nomination of the bankruptcy trustee from IBBI.
- →Discharge order: The bankruptcy trustee must apply for it at the expiry of 1 year from the bankruptcy commencement date OR within 7 days of CoC approval of completion of administration — whichever is earlier.
- →False information penalty: Providing materially false information to the RP is punishable with up to 1 year imprisonment OR fine up to Rs 5 lakh OR both.
- →Extortionate credit: Transactions within 2 years before insolvency commencement involving exorbitant payments can be avoided by the RP/liquidator.
🧠 Mnemonic — IBC Key Numbers
Legal Services Authorities Act, 1987 — Lok Adalats
Lok Adalats ("People's Courts") are quasi-judicial forums that provide a fast, cheap alternative to formal litigation. For banks, they are particularly useful for loan recovery up to Rs 20 lakh — the proceedings are informal, the outcome is a negotiated compromise, and the award is final with no court fee and no right of appeal.
Jurisdiction
Civil disputes and compoundable offences — either pending in court or pre-litigation stage within the court's jurisdictional limits.
Monetary ceiling
Rs 20 lakh for civil disputes (banks use this for loan recovery up to Rs 20L).
Exclusion
Offences that are NOT compoundable under any law cannot be brought before Lok Adalats.
Who refers
(a) Parties themselves; (b) One party applies to court; (c) Court on its own satisfaction; (d) Authority/committee organising Lok Adalat on application.
Nature of award
Deemed to be a DECREE of a civil court or an ORDER of any other court — executeable as such.
Court fee
Court fee paid is REFUNDED in full when a settlement is reached through Lok Adalat.
Appeal
NO appeal lies against a Lok Adalat award in any court. Award is final and binding on all parties.
No settlement
If no compromise is reached, the case is returned to the court where it was pending and proceedings continue from where they stopped.
🧠 Lok Adalat in 4 Points
Rs 20L ceiling → Award = court decree → No appeal → Court fee refunded. Non-compoundable offences are excluded. If parties can't agree, the case goes back to the regular court — nothing is lost by trying Lok Adalat.
Law of Limitation — Periods & Revival
Every legal remedy has an expiry date. The Limitation Act prescribes the maximum period within which a suit, appeal, or application must be filed. Once the period expires, the court must dismiss the case — even if the defendant hasn't raised it as a defence (Section 3 of the Limitation Act). For banks, tracking limitation is critical: a bank that recovers NPA interest but lets the limitation period lapse loses its legal remedy forever.
Important Limitation Periods — Schedule to the Limitation Act
| Type of Suit / Action | Period | Starting Point |
|---|---|---|
| Money lent under agreement to pay on demand (demand loans) | 3 years | When the loan is made — NOT from the date of demand |
| Bill of exchange payable at sight or after sight (not at fixed time) | 3 years | When the bill is presented |
| Bill of exchange or promissory note payable at a fixed time | 3 years | Expiry of the fixed time |
| Promissory note / bond payable by instalments | 3 years per instalment | Expiry of each instalment's due date |
| Arrears of rent | 3 years | When the arrears become due |
| Specific performance of a contract | 3 years | Date fixed for performance, or when plaintiff notified performance is refused |
| SARFAESI enforcement action | 3 years | When the cause of action arose |
| Enforce payment of money secured by mortgage or charged on immovable property | 12 years | When the money sued for becomes due |
| Mortgagee: suit for possession of immovable property | 12 years | When the mortgagee becomes entitled to possession |
| Execution of a civil court decree | 12 years | Date of the decree |
| Mortgagee: suit for foreclosure | 30 years | When the money secured by the mortgage becomes due |
| Any suit with no other period prescribed in the schedule | 30 years | When the right to sue accrues |
| Recovery of loss caused by fraud | 3 years | From the date of the fraud |
| Appeal to High Court against lower court judgement | 90 days | From the date of the decree |
| Appeal to any other court against lower court judgement | 30 days | From the date of the decree |
🧠 Mnemonic — Limitation Periods
"Three for Loans, Twelve for Mortgages, Thirty for Foreclosure"
Demand loans: the 3-year clock starts when the loan is made — NOT when demand is made. This is a classic exam trap.
Two Ways to Get a Fresh Period of Limitation
1. Written Acknowledgement
If before the period expires, the debtor (or a person through whom they derive title) signs a written acknowledgement of the liability, a fresh period of limitation begins from the date of that acknowledgement. The writing must be signed — an unsigned document does not count.
2. Part Payment
If before the period expires, any payment is made on account of the debt by the person liable (or their authorised agent), a fresh period of limitation begins from the date of that payment. Even a small payment resets the clock. Note: "debt" here does not include money payable under a court decree.
Quick-Fire Revision — Common Exam Questions
Q: Minimum debt for DRT jurisdiction?
A: Rs 20 lakh.
Q: DRT is composed of how many members?
A: One person — the Presiding Officer only.
Q: DRT Presiding Officer's term of office?
A: 4 years from assumption, or until age 70 — whichever is earlier.
Q: DRAT appeal: deposit required and minimum?
A: 50% of amount in DRT order; DRAT can reduce to not less than 25%.
Q: Under what Schedule of the IT Act does the Recovery Officer recover dues?
A: Third Schedule to the Income Tax Act, 1961.
Q: SARFAESI 60-day notice — what triggers it?
A: Sec 13(2): account classified NPA; notice to discharge liabilities in full within 60 days.
Q: Which provision of SARFAESI was struck down in Mardia Chemicals?
A: Original Sec 17(2) — requiring 75% pre-deposit to appeal to DRT against enforcement. Amended to 50%.
Q: CERSAI — when did it become operational?
A: March 31, 2011.
Q: When does SARFAESI public notice take effect?
A: From the date AND TIME of filing with CERSAI — not from a later processing date.
Q: NARCL acquires assets with bank exposure of?
A: Rs 500 crore and above.
Q: IBC CIRP minimum default (corporate)?
A: Rs 1 crore.
Q: IBC IBBI — established on?
A: October 1, 2016.
Q: IBBI composition?
A: 1 Chairperson + 3 ex-officio (Finance/Corp/Law) + 1 RBI nominee + 5 others (min 3 whole-time) = 10 total.
Q: CIRP outer time limit including extensions?
A: 330 days from the insolvency commencement date.
Q: PPIRP — who can use it and creditor approval required?
A: MSME corporate debtors only. Financial creditors (non-related) holding 66%+ in value must approve before application.
Q: Bankruptcy order for individuals — timeline?
A: Within 14 days of IBBI confirming/nominating the bankruptcy trustee.
Q: Lok Adalat award — can it be appealed?
A: No. The award is deemed a civil court decree and no appeal lies against it in any court.
Q: Limitation for demand loan (payable on demand)?
A: 3 years — starting from when the loan is made, NOT from the date of demand.
Q: Limitation for foreclosure of mortgage?
A: 30 years from when the money secured by the mortgage becomes due.
Q: Limitation for execution of a civil court decree?
A: 12 years from the date of the decree.
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