Debt recovery
under SARFAESI and the DRT.

The Code is not a collection mechanism, and its use against a debtor that is solvent but slow has been discouraged. There are practical reasons to hesitate as well. A secured creditor who takes a debtor into insolvency loses the ability to enforce its own security for the duration of the moratorium and becomes one voice among many in a collective process, with influence set by voting share rather than by the charge it holds. Where the debtor has a single valuable asset over which the creditor holds first charge, direct enforcement and the collective process produce materially different exposures. Where the debtor has many creditors and nothing realisable by way of security, the collective process may be the only sensible route. The question is answered by looking at the assets rather than at the forum.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 lets a secured creditor enforce security without the intervention of a court. It is available to banks, financial institutions, asset reconstruction companies and non-banking financial companies notified by the Central Government, and in the case of a notified non-banking financial company subject to the conditions of the notification. The security interest has to be validly created, and its registration particulars are worth checking rather than assuming. The process begins with classification of the account as non-performing in accordance with applicable guidelines, and a notice under Section 13(2) then calls on the borrower to discharge the liability in full within the period that section allows. That notice carries a good deal of weight. It has to identify the secured debt, the amount claimed, the security intended to be enforced and the consequences of failure to pay, and a defect in it affects every step taken afterwards. If the borrower makes a representation or raises objections, the secured creditor must consider them and communicate the reasons for non-acceptance within the period Section 13(3A) allows. That is not a formality, and an unreasoned rejection is a recurring ground of challenge.

On expiry of the notice period without full discharge of the liability, the creditor may take the measures set out in Section 13(4): possession of the secured asset, takeover of management of the borrower’s business, or appointment of a manager. It may then sell the asset in accordance with the Security Interest (Enforcement) Rules, 2002, which govern valuation, the notice of sale and the conduct of the auction. Each step has its own timing and service requirements, and they are read strictly, because the scheme lets a creditor act without an adjudication first. Where possession has to be taken physically, the creditor applies to the Chief Metropolitan Magistrate or District Magistrate under Section 14 for assistance, supported by the affidavit the proviso to that section requires, and the Magistrate’s satisfaction is confined to the matters that proviso lists rather than the merits of the account. Value is most often lost at the sale stage. A reserve price set from a stale valuation, or an auction advertised where no genuine bidder would see it, produces a poor recovery and usually a challenge as well.

The limits of the Act need equal attention. It does not apply to the security interests and the cases listed in Section 31, among them a security interest in agricultural land. Under Section 13(8) the borrower’s right of redemption is available until publication of the notice for public auction or the invitation to tender for sale of the secured asset. A borrower or other aggrieved person may apply to the Debts Recovery Tribunal under Section 17 within the period that section allows, and an appeal to the Appellate Tribunal under Section 18 is conditional on the pre-deposit that section requires, which the Appellate Tribunal may reduce for reasons recorded, so the first application is where the contest is generally decided. And if the borrower is admitted to insolvency, the moratorium halts SARFAESI action entirely.

The Recovery of Debts and Bankruptcy Act, 1993 establishes the Debts Recovery Tribunals and gives banks and financial institutions a dedicated forum for debts of not less than the amount fixed under Section 1(4) of that Act, as notified. Proceedings begin with an original application rather than a plaint, and the procedure is summary in form. The tribunal can grant interim relief, including attachment and injunctions restraining the disposal of assets, and that early relief is frequently worth more to a creditor than the eventual order. A successful applicant obtains a recovery certificate, executed by a recovery officer with powers of attachment and sale.

The two routes are not strict alternatives. A secured creditor may proceed under SARFAESI and also before the tribunal, using the tribunal to reach unsecured assets or to pursue the shortfall after enforcement. Sequencing and consistency then need attention, because inconsistent valuations, or a settlement in one forum that undercuts a position taken in another, will be used against the creditor. Access to the tribunal is not open to every creditor: it runs to banks and financial institutions, and to assignees of debt including asset reconstruction companies, debenture trustees and notified non-banking financial companies, subject to the applicable notifications. For other creditors recovery runs through the civil or commercial courts, by ordinary suit or by summary suit under Order XXXVII of the Code of Civil Procedure, 1908 where the claim arises on a written contract, bill of exchange or promissory note.

A guarantee is often the most collectable security a creditor holds, because it reaches assets that were never charged, and a promoter who will not put money back into the company will sometimes pay personally. Under Section 128 of the Indian Contract Act, 1872 the surety’s liability is co-extensive with that of the principal debtor unless the contract provides otherwise, and a creditor need not exhaust its remedies against the principal debtor first. The discharge provisions are a frequent basis on which guarantee claims fail. Variance in the terms of the underlying contract without the surety’s consent, release or discharge of the principal debtor, a composition or a promise to give time, and any act or omission by the creditor that impairs the surety’s eventual remedy against the principal debtor can each operate to discharge the surety, unless the guarantee provides otherwise. Those provisions therefore penalise the conduct a workout usually calls for: rescheduling, indulgence, the release of a charge over an asset the borrower wanted to sell. Lenders restructure with the borrower because the borrower is who they are dealing with, and then find that the guarantor is no longer bound.

This has direct consequences for drafting. The clauses that address the discharge provisions are those that make the guarantee continuing, that permit variation, indulgence and restructuring of the principal debt without discharge, that waive any requirement to proceed first against the debtor or to realise other securities, and that deal with revocation. It has consequences for conduct as well. Written consent from the guarantor to each variation, however routine the variation looks, is what the discharge provisions make relevant. Invocation then follows the form the document requires, addressed to the right person at the right address, for an amount that matches the account.

Personal guarantees also open a route under the Insolvency and Bankruptcy Code, 2016 against the guarantor, running in parallel with any corporate process. For a lender holding promoter guarantees, that parallel exposure is often significant.

Where a cheque has been dishonoured, Section 138 of the Negotiable Instruments Act, 1881 provides a remedy, and it depends on a chain of steps: presentation of the cheque within its validity, a demand notice given within the period Section 138 allows after information about the return is received, failure by the drawer to pay within the period that section allows after the notice, and a complaint made within the period Section 142 allows. A supplier registered under the Micro, Small and Medium Enterprises Development Act, 2006 may refer a payment dispute to the facilitation council, and Sections 15 and 16 of that Act deal with the period for payment and with interest on delayed payment.

The choice follows the assets. Where security exists over identifiable, saleable property, enforcement under the Act and proceedings before the tribunal address different assets. Where the debt is unsecured, the tribunal or the commercial court is the route, and early interim relief and tracing matter most there.