ANALYSIS OF RECOVERY OF DEBTS

DUE TO BANKS AND FINANCIAL

INSTITUTIONS ACT, 1993

Raj Deepak Chaudhary

B.B.A LL.B (7 t h Sem.)

A8121512017

INTRODUCTION

As the name of the Act suggest, it was enacted for recovering debts which are due to banks & other financial
institutions1. In 20th century Banks and financial institutions were experiencing considerable difficulties in
recovering loans and enforcement of securities charge with them, the earlier procedure for recovery of debts
due to the banks and financial institutions, has resulted in a significant portion of the funds blockage2. Thus
to ensure speedy recovery of dues ‘Recovery of Debts Due to Banks and Financial Institutions Act, 1993’
(RDDB ACT,1993) came into picture.

The rationale behind the Act is contained in the Tiwari Committee Report, which stated3:

"The civil courts are burdened with diverse types of cases. Recovery of dues due to banks and financial
institutions is not given any priority by the civil courts. The banks and financial institutions like any other
litigants have to go through a process of pursuing the cases for recovery through civil courts for unduly
long periods."

1
See C.Srivenkatesh Prabhu ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’, available at
http://lawyerslaw.org/the-recovery-of-debts-due-to-banks-and-financial-institutions-act-1993/
2
See The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 by Debt Recovery Appellant Tribunal,
Chennai, pg. 5.
3
See Praveen Raju, ‘Recovery of Debts Due to Banks and Financial Institutions’, available at
http://www.legalserviceindia.com/articles/raju.htm
Apart from performing the key-functions of providing liquidity and payment services to the real sector and
managing financial intermediation process, the banking industry has been able to provide major credits to
all sections of economy4.

HISTORY
In recent years an urgent need was felt to work out a suitable mechanism through which the dues, to the
banks and financial institutions could be realised. In 1981 a committee under the Chairmanship of Shri T.
Tiwari examined the legal and other difficulties, faced by banks and financial institutions and suggested
remedial measures including changes in law. This committee also suggested setting up of Special Tribunals
for recovery of dues of the banks and financial institutions by following a summary procedure. Keeping in
view the recommendations of the above Committees, the Recovery of Debts due to Bank and Financial
Institutions Bill, 1993 was introduced in the Parliament. It was said that the Bill seeks to provide for the
establishment of Tribunal and Appellate Tribunals for expeditious adjudication and recovery of debts due
to banks and financial institutions5.

MEANING OF DEBT, BANK, FINANCIAL INSTITUTION, TRIBUNAL &

APPELANT TRIBUNAL UNDER RDDB ACT, 19936
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(g). “Debt” means any liability (inclusive of interest) which is claimed as due from any person
by a bank of a financial institution or by a consortium of banks or financial institutions during the course
of any business activity undertaken by the bank or the financial institution or the consortium under any law
for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether
payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage
and subsisting on, and legally recoverable on, the date of the application;

4
See G.S. Dubey, ‘An Introduction to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993- A
Study’, available at www.manuptra.com
5
See Supra note 2
6
See Bare Act RDDB Act,1993
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 3. Establishment of Tribunal.—(1) The Central Government shall, by notification, establish one
or more Tribunals, to be known as the Debts Recovery Tribunal, to exercise the jurisdiction, powers and
authority conferred on such Tribunal by or under this Act.

Section 8. Establishment of Appellate Tribunal — (1) The Central Government shall, by notification,
establish one or more Appellate Tribunals, to be known as the Debts Recovery Appellate Tribunal, to
exercise the jurisdiction, powers and authority conferred on such Tribunal by or under this Act.

ABOUT TRIBUNAL
These Tribunals are new set-up of legal instructions to deal with recovery cases relating to Banks and
Financial Institutions. These Tribunals are forum quite different from other legal forums like Civil Courts.
Here only the Banks and Financial Institutions have right to file the original applications for recovery of
their dues. This type of classifications to provide such privilege to the Banks and to the Financial Institutions
is a classifications taking into accounts the NPA’s (Non-Performing Assets) of the Banks and Financial
Institution which affect the economy of the country as such as classification seems permissible under Art.
14 of the Constitution of India. Summary Procedure are followed in this Tribunal for early disposal of
cases.7

Central Government shall establish 1 or more Tribunal & Appeal Tribunal for recovery of debts under
Section 3 & 8 of RDDB Act respectively. The Tribunal under both the section (s.3 & s.8) shall consist of
one person only referred as Presiding officer under section 4 who is qualified to be or has been or is a
district judge8 & Chairperson of Appellant Tribunal under section 9 of the Act who is qualified as or has
been or is a judge of High Court, member of Indian Legal Services or has been presiding officer of tribunal

7
See Supra note 4
8
Section 5 of RDDB Act, 1993
for at least 3 years9. The term of the office of presiding officer is 5 years or until age of 62 years10, whereas
the Chairperson can hold the office of appellant tribunal for 5 years or until the age of 6511.

In Section 1(4) of the Act it has been stated that:

“The provisions of this Act shall not apply where the amount of debt due to any bank or financial
institution or to a consortium of banks or financial institutions is less than ten lakh rupees or such other
amount, being not less than one lakh rupees, as the Central Government may, by notification, specify.”

So for debt amount lying b/w ₹ 1 to 10 lakhs, the provisions of this act does not apply, for such lesser
amounts, the Banks and Financial Institutions can avail the normal remedy of Civil Courts.

OVERRIDING EFFECT OF THE ACT

Section 34 of the Act states:

"Act to have Overriding Effect –

(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding
anything inconsistent therewith contained in any other law for the time being in force or in any instrument
having effect by virtue of any law other than this Act.

(2) The provisions of this Act or the rules made there under shall be in addition to, and not in derogation
of, the Industrial Finance Corporation Act, 1948, the State financial Corporations Act, 1951, the Unit Trust
of India Act, 1963, the Industrial Reconstruction Bank of India Act, 1984 and the Sick Industrial Companies
(special provisions) Act, 1985."

The Act has thus an overriding effect over all other legislations except for the ones mentioned in sub-clause
(2), viz, the Industrial Finance Corporation Act, 1948, the State financial Corporations Act, 1951, the Unit
Trust of India Act, 1963, the Industrial Reconstruction Bank of India Act 1984 and the Sick Industrial
Companies (special provisions) Act, 198512.

9
Section 10 of RDDB Act, 1993
10
Section 6 of RDDB Act, 1993
11
Section 11 of RDDB Act, 1993
12
See Supra note 3
CONSTITUTIONAL VALIDITY OF THE ACT

After 9 years of evolution of the Act was challenged for its constitutional validity in Union of India &
Another v. Delhi Bar Ass. & Others13. It was challenged on grounds of unreasonableness & that it is
violative of Art. 14 of the Constitution and that the same is beyond the legislative competence of the
Parliament.

The validity of the Act was firstly challenged before the Delhi High Court in Delhi Bar Ass. & Others v.
UOI & another14. The Delhi High Court held that the DRT (Debt Recovery Tribunal) could be constituted
by the Parliament even though it was not within the purview of Articles 323A and 323B of the Constitution
of India and that under the expression 'administration of justice ' as appearing in List IIA of the Seventh
Schedule to the Constitution which includes ‘Tribunals’ as well as 'administration of justice'.

The impugned Act was unconstitutional as it erodes the independence of the judiciary and was irrational,
discriminatory, unreasonable, arbitrary and was hit by Art. 14 of the Constitution. It also quashed the
appointment of the Presiding Officer of the Tribunal.

The aforesaid conclusions were on the basis that the Act in particular, section 17 did not have a provision
for a counter claim as provided in the C.P.C and was irrational and arbitrary. The Act lowered the authority
of the HC on the basis of the pecuniary jurisdiction and eroded the independence of the judiciary since the
jurisdiction of the civil courts had been truncated and vested in the Tribunal. The court referred to DK
Abdul Khader v. UOI15 where it was held that a Tribunal could not be constituted for any matter not
specified in Article 323A & 323B of the Constitution of India.

FINDINGS OF THE SUPREME COURT

It was held by the SC that "While Articles 323A and 323B specifically enable the legislature to enact laws
for the establishment of tribunals, in relation to the matters specified therein, the powers of the Parliament
to enact a law constituting a tribunal like a banking tribunal is not taken away."

It was further specified that the recovery of dues is an essential function of any banking institution. In
exercise of its legislative powers relating to banking, parliament can provide the mechanism by which

13
(2002) 4 SCC 275
14
AIR 1995 Del 323
15
AIR 2001 Kant 176
monies due to banks and financial institutions can be recovered. The preamble to the Act states
"... for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters
connected therewith or incidental thereto” this would squarely fall within the ambit of entry 45 of List I of
the Constitution. The SC disagreed with the view taken by the Delhi High Court that the provisions of the
Act are in any way arbitrary or bad in law. In fact it held that the Act has been amended and whatever
lacunae or infirmities existed have now been removed by the amending Act with the framing of more
rules. The view taken by the Delhi High Court was that the Act eroded the independence of the judiciary
since the jurisdiction of the civil courts had been truncated and vested in the Tribunal. The SC held that the
decision of the Delhi High Court proceeds on the assumption that it is an absolute right of anyone to demand
that a civil court adjudicate his dispute. Whereas Arts 323A &323B contemplates the establishment of
Tribunals and this does not erode the independence of the judiciary, there is no reason to presume that the
banking tribunals and the appellate tribunals so constituted would deny justice to the defendants or that the
independence of the judiciary would stand eroded.16

APPLICATION & JURISDICTION

Section 2(b) defines Application as the application made to the Tribunal under section 19 of the Act. Section
19 states how the application is made to the Tribunal. Sub section 1of section 19 says that a bank or financial
institution for recovery of debt shall make the application to the Tribunal that comes under its local
jurisdiction. On receipt of application for recovery, the tribunal shall issue a summons requiring the
defendant to show cause within 30 days of service of summons as why the relief prayed should not be
granted. The defendant has to present a written statement against summon within these 30 days 17. The
defendant can either use set-off of debt [sec. 19(6)] or can file a counter claim [sec. 19(8)] then under sub-
sec. 20, the Tribunal may, after giving the applicant and the defendant an opportunity of hearing, pass as
such order as it thinks fit to meet the end of justice. A copy of every order passed shall be send to both the
parties [sec. 19(21)] and a certificate shall be issued to recovery officer under sub- sec. 22, this all shall be
done by the Tribunal within 180 days from the date of application [sec.19 (24)].

The Tribunal exercise its jurisdiction under section 17 & 17A of the Act, Debt Recovery Tribunal is a
Tribunal and is not a court. The proceeding before it are initiated on an application and not by suit. The
Tribunal does not pass decree; instead it issues a Recovery Certificate which is to be executed through
Recovery Officer which partakes a character of a decree and section 18 excludes the jurisdiction of the

16
See Supra note 3
17
Section 19(4) of RDDB Act, 1993
Civil Courts and other authorities in regard to matters given in sec. 17. Section 22 states that Debt Recovery
Tribunal shall not be bound by the procedure laid down by the Civil Procedure Court but shall be guided
by the principals of natural justice and shall have powers to regulate its own procedure.18

APPEAL
A person aggrieved by the order of the Tribunal can pursue Appellant Tribunal under section 20 of the Act.
Sub- section 3 of section 20 says that an appeal shall be filled in an Appellant Tribunal within 45 days from
the date of the order made by Tribunal. Section 20(6) says that appeal filled before the Appellant Tribunal
shall be dealt with by it as expeditiously as possible and shall be finally disposed of within 6 months.

Section 21 says that an appeal shall not be entertained by the Appellant Tribunal unless the person preferring
the appeal has deposited 75% of the amount of the debt due from him as determined by the Tribunal but
Appellant Tribunal has a right to dispense with such condition in appropriate cases19.

PROCEDURE FOR RECOVERY OF DEBTS

Section 25 of the Act provides 3 modes for recovery of debts, namely:

 Attachment and sale of the movable or immovable property of the defendant;

 Arrest of the defendant and his detention in prison; and
 Appointing a receiver for the management of the movable or immovable properties of the
defendant.

Section 28 of Act provides other mode of recovery of debts by recovery officer. The Act covers recovery
of both recovery of both secured and unsecured debts20.

MISCELLANEOUS - CHAPTER VI
Section 31 speaks about transfer of pending cases and Section 31A clarifies that Tribunal can pass order on
the basis of Civil Court decree. Section 32 speaks that employees and officers of the Tribunal shall be

18
See Supra note 4
19
Ibid.
20
Ibid.
deemed to be public servant within the meaning of Sec. 21 of I.P.C. Section 33 protects from suit.
Prosecution or other prosecution or other proceedings to Central Government and other officers of Tribunal
for the actions which have been taken by them in good faith. Section 34 provides overriding effect to the
Act which has earlier been discussed. Section 35 empowers Central Government to make provisions for
removing the difficulties in application of the Act. Section 36 tells about the power of Central Government
to make rules, by notification, to carry out the provisions of the Act. Section 37 puts legal sanctity to the
actions taken under the Recovery of Debts Due to Banks and Financial Institution Ordinance, 1993.21

Thus we can observe that an efficient mechanism is provided in the form of Debts Recovery Tribunal and
the mechanism has proved its worth and utility in the past years by providing necessary reliefs.

21
See Supra note 4.