JAIIB PPB Paper-2 Module-B Unit 8: Important Laws Relating to Recovery of Dues

19/03/2023

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JAIIB Paper 2 (PPB) Module B Unit 8: Important Laws Relating to Recovery of Dues (New Syllabus)

The Institute of Indian Banking and Finance (IIBF) has recently announced the revised syllabus and exam format for the JAIIB Exam 2023. The upcoming exam will comprise of four papers, with Paper 2 (Principles & Practices of Banking) covering Unit 8: Important Laws Relating to Recovery of Dues. This particular unit holds significant importance for candidates, as it will greatly impact their performance in the exam.

To assist candidates in comprehending the topic, we will provide all the necessary details related to Unit 8: Important Laws Relating to Recovery of Dues of JAIIB Paper 2 (PPB) Module B: Functions of Banks. We strongly recommend candidates to refer to this article and also utilize our Online Mock Test Series to enhance their understanding of Foreign Currency Accounts for Residents and other related aspects.

For candidates appearing for the JAIIB Certification Examination 2023, it is essential to comprehend each unit in the syllabus, including the Marketing unit. This unit holds great importance in the banking industry, and candidates must prepare thoroughly to excel in the exam and establish a successful career in the banking sector.

Recovery of Debts & Bankruptcy Act, 1993

Recovery through courts was a major bottleneck due to huge back log of cases with various courts. It was observed huge assets were blocked as unproductive assets, and the process of recovery required considerable manpower of the banks and financial institutions.
Hence, Recovery of Debts due to Banks and Financial Institutions Act in 1993 (DRT Act) was enacted, and ‘Debt Recovery Tribunals’ were constituted for speedy recovery. The Act was amended in 2019, including its title as “Recovery of Debts and Bankruptcy Act”.
The Act is applicable to the whole of India except the State of Jammu & Kashmir. The Act is made applicable from 24 June 1993, through the DRTs.
Cases where the amount of debt due to any bank or financial institution (defined under the Act) or their consortium is Rs. 20 Lakh or more are covered under the Act.

Debt Recovery Tribunal

The Central Government is empowered to establish tribunals called “Debts Recovery Tribunal” to exercise the jurisdiction, powers and authority conferred on under DRT Act.
The tribunal is made up of only one person called ‘Presiding Officer’(PO). A person is qualified for appointment as a PO of DRT if he is, or has been, or is qualified to be appointed as a District Judge.
The PO holds office for a term of five years from the date on which he assumes his office, or until he attains the age of 65 years, whichever is earlier.
The tribunal is provided with one or more Recovery Officers. The staff will work under the superintendence of the PO.
Disposal: The application received by the tribunal should be attempted to be disposed of finally within 180 days from receipt.

Debt Recovery Appellate Tribunal

‘Appellate Tribunal’ is established (under the Sec. 8 (1)) for the purpose of preferring an appeal against the order passed by the tribunal.
A DRAT consists of only one person called as Chairperson. A person is qualified for appointment as a Chairperson, if he is qualified to be a Judge of a High Court; has been a member of the Indian legal service and has held a post in grade I of that service for at least three years; has held office as the Presiding Officer of a Tribunal for at least three years.
The Chairperson holds office for a term of five years from the date on which he assumes his office, or until he attains the age of seventy years, whichever is earlier.
The appeal should be filed within thirty days from the date on which copy of the order is received. As per Sec. 21, 50% of the amount shown as due in the order is required to be deposited by the appellant.
Appellate Tribunal shall attempt that the appeal is disposed of finally within six months from date of receipt.

SARFAESI ACT, 2002

The SARFAESI Act empowers banks and financial institutions to enforce securities in the event of default by the borrower without the intervention of either, the Civil Court or the Debt Recovery Tribunal.
The Act extends to whole of India including the State of Jammu & Kashmir.
The Act is applicable to cases where security interest for securing repayment of any financial asset is more than Rs. 1 Lakh and the amount due is 20% or more of the principal amount and interest The Act is not applicable to any security interest created on agricultural land.
Debts owed to a secured creditor will get priority over all other claims including other debt and all revenue, taxes, cesses and dues payable to Centre and State Governments and local authorities.

Asset Reconstruction Company

An ARC has to comply with following two conditions: (i) It obtains certification of registration from RBI; and (ii) It has Net owned funds (NOF) not less than Rs. 100 crore on an ongoing basis.
An ARC must have a board approved ‘Financial Asset Acquisition Policy’. The ARC can acquire the financial asset of any bank or financial institution by any of the following ways: (i) By issuing a debenture or bond or any other security in the nature of debenture, (ii) By entering into an agreement with such bank or financial institution.
A securitisation transaction involves two stages. First, acquisition of financial assets and undivided interest therein. Second, issue of security receipts in favour of the investors for raising money from them.
The rate of interest offered in the debenture cannot be less than one and half per cent above the Bank Rate as on the date of issue of the debentures and the period of redemption of debenture cannot exceed six years.

Enforcement of Security Interest

13(2) of SARFAESI Act provides that a secured creditor may give a notice to the borrower, who has defaulted in making the repayment and whose account is classified as NPA to discharge his liabilities in full within 60 days from the date of the notice.
In case of multiple secured creditors, no secured creditor can exercise any right unless this is agreed upon by the secured creditors representing not less than 60% in value of the amount outstanding and such action shall be binding on all the secured creditors.
The secured creditor is required to serve, a possession notice on the borrower and by affixing the same on the outer door or at a conspicuous place at the It is also to be published in two leading newspapers, including in the local vernacular language.
Thirty days before sale of the immovable property, the borrower should be given a notice about the sale.
On acceptance of the offer by the secured creditor, the purchaser has to deposit 25% of the offer price on the same day or the next day. The balance amount shall be paid on or before the fifteenth day of confirmation of sale or such extended period as agreed upon but maximum three months. On compliance with the payment terms, a sale certificate is issued indicating that the property is free from any encumbrance or otherwise.

Rights Of Borrower

Right to Prefer Application to DRT: Borrower, aggrieved by any of the measures taken by the secured creditor for taking possession of the security may make an application along with the prescribed fees, to the DRT within forty-five days from the date on which such measures are taken. The DRT is required to dispose of the application within sixty days.
Appeal to Appellate Authority: Any person aggrieved by any order made by the DRT can prefer an appeal to the Appellate Tribunal within thirty days from the date of receipt of the order. No appeal can lie unless the borrower deposits 50% (can be reduced to 25% by DRT) of the debt claim.
Right of the Borrower for Compensation and Costs: If the DRT or the appellate tribunal: holds the possession of secured asset is not in accordance with the provisions of the Act, and directs the secured creditor to return the secured asset to the borrower. then such borrower is entitled to payment of such compensation and costs as determined by the tribunal or the appellate tribunal.

Central Registry

The Central Government has set up a ‘Central Registry’ for registration of following transactions: (i) Securitisation of financial assets, (ii) Reconstruction of financial assets, and (iii) Creation of security interest under SARFAESI Act.
The Central Registry of Securitization and Asset Reconstruction and Security Interest of India (CERSAI) was set up under SARFAESI to maintain and operate the Central Registry for and on behalf of the Central Government for various types of transactions/charges that are required to be filed by banks and financial institutions.
The actions that secured creditor can take against the security under the SARFAESI Act are required to be taken within the limitation period as per Section 36 of the Limitation Act. That means, the action has to be taken within three years from the date on which the cause of action arose.

Insolvency & Bankruptcy Code, 2016

IBC was enacted that came into force in December 2016. IBC essentially has three sets of provisions covering –

Matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one crore rupees
Matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees
Matters relating to establishment of the Insolvency and Bankruptcy Board of India.

IBC is not for recovery proceedings through enforcement of security or court attachment, etc. It is essentially for having coordinated independent machinery that will enable arriving at a mutually beneficial course of action to resolve the financial crisis of the debtor through various possible alternatives. These could be restructuring, change in management or promoters/ owners, disposal of assets, liquidating the unit, etc.

The institutional set-up for IBC comprises the following:

The Insolvency and Bankruptcy Board of India (IBBI)
Resolution Professionals Agencies (RPA)
Resolution Professionals/ Resolution Professional Entities (RPs)
National Company Law Tribunal for Corporates and Limited Liability Entities
Debt Recovery Tribunal for Individuals and Partnership Firms
National Company Law Appellate Tribunal/ Debt recovery Appellate Tribunal

Pillars of IBC, 2016

Legal Services Authorities Act, 1987

This Act was enacted to constitute legal services authorities to provide free and competent legal services to the weaker sections of the society to ensure that opportunities for securing justice are not denied to any citizen by reason of economic or other disabilities, and to organize Lok Adalats to secure that the operation of the legal system promotes justice on a basis of equal opportunity.
For banks and financial institutions for loans up to Rs. 20 lakh this channel can be availed. Under the law, Lok Adalats have been set up so that the public does not have to spend time and money in merely accessing forum for settling disputes among them.
The approach followed by Lok Adalats is of resolving the dispute by mutual discussions between the parties, if required through mediation by the professionals. They are guided by the principles of justice, equity, fair play and other legal principles.

The Law of Limitation

The law of limitation is vital in respect of recovery of loans through legal process. It is important to file application or complaint for recovery within the limitation period; else the application will not be admitted by the adjudicating authority.
It is also important to keep the loan documents current through either taking an acknowledgement or revival letter or periodical repayments from the borrower.
In computing the period of limitation for any suit, the time during which the defendant has been absent from India and from the territories outside India under the administration of the Central Government shall be excluded.
The period of limitation can be exceeded by acknowledgement of debt by borrower in writing or by payment made on account of a debt or of interest made before period of limitation expires