REALIGNMENT OF THE JURISDICTION OF DEBT RECOVERY TRIBUNALS IN INDIA IN THE WAKE OF PROGRESS ACHIEVED UNDER INSOLVENCY AND BANKRUPTCY CODE

The creation of Debt Recovery Tribunals (DRTS) in the early 1990s was primarily meant for providing a separate platform for the recovery of bad debts due to Banks and Financial Institutions (FIS). It is known that the creation of DRTS was necessitated due to various reasons primary one being to declog the burden of Civil Courts and provide an expeditious Recovery tool to Banks and FIS for recovery of their Bad Debts.

The procedure that was envisaged under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) was summary in nature and the Presiding Officer and the Recovery officer were the key functionaries in deciding the Recovery applications.the Jurisdiction of the DRTS was originally kept at ₹ 10 lakh and above.the banks and FIS have made use of this platform in a significant way and there were good number of recovery applications that were filed immediately after the Act came into force. Notwithstanding the inadequacies of the infrastructure and other related issues, the mechanism of recovering, bad debts through DRTS has gained acceptance. In addition to the RDB Act, the DRTS were vested with adjudication functions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).

This Act conferred powers on the secured creditors to take over the assets of the defaulting borrowers without the intervention of the court and put them to sale through various methods, including public auction and other ways. The Act also provided a mechanism to provide a remedy to the aggrieved borrowers for approaching the DRTS against the measures taken under Sec 13(4) of the SARFAESI Act, 2002.The enactment of this Act and conferring jurisdiction on DRTS to decide matters arising under this Act has resultantly enhanced the workload of the DRTS in addition to their functions under the RDB Act Provisions. With the enactment of Insolvency and Bankruptcy Code (IBC) in the year 2016 and the subsequent notifications issued from time to time, the DRTS have also been added with more functions and responsibilities in terms of adjudicating insolvency of non-corporate persons. As on date, there are 39 DRTS and 5 Debt Recovery Appellate Tribunals (DRATS) across the length and breadth of the country administering the RDB Act apart from addressing the issues related to proceedings under SARFAESI Act and the defaults of non-corporate entities and insolvencies of individuals.

The framework established under the RDB Act has addressed partially the bad debt problem. The formation of DRTS, DRATS, the framing of Rules and Regulations thereunder and the creation of both the physical infrastructure and manning this Fora has yielded a good amount of success considering the perspective from where these were set up.

CORPORATE INSOLVENCY RESOLUTION PROCESS:

The earlier regime of winding up / Liquidation of companies contained in the Companies Act of 1956 and Companies Act of 2013 gave way to a codified regime of Insolvency under the Insolvency and Bankruptcy Code (IBC). This code brought into force in 2016 is very salutary in the sense that it had provided for a regime of Insolvency Resolution process and Liquidation not only for the corporate persons but also the other forms of business entities i.e Limited Liability Partnership Firms, Partnership Firms, and personal Insolvency/ Bankruptcy.

After the enactment of code and the creation of the infrastructure there under, we have seen far reaching developments in the administration of the Corporate Insolvency. The main challenge of bringing in a timely and effective resolution of Companies in stress has been achieved to a significant extent in comparison to the regime that existed under the previous companies Act. As per the analysts, the recovery under the code has been around 68% higher than that observed under any other alternate mechanism.there have been many significant legal issues which were settled by National Company Law Tribunal (NCLT)/ National Company Law Appellate Tribunal (NCLAT)/ Supreme Court of India.

Application of the IBC: Under Part I Sec. 2 of the IBC, the provisions of the code shall apply to all Companies, Limited Liability Partnership, Personal Guarantors to corporate debtors, partnership firms and individuals.

Adjudicating Authority for Corporate Persons:

The Insolvency Code has conferred the original Jurisdiction on NCLT to administer the provisions of the Code while dealing with insolvency, Liquidation or voluntary liquidation or bankruptcy as the case may be.

Under Part II Chapter I dealing with Insolvency Resolution and Liquidation for Corporate Persons, Adjudicating Authority refers to NCLT constituted under Sec. 408 of the Companies Act. 2013.

Under Part II Chapter VI dealing with Insolvency Resolution and Liquidation for Corporate Persons including Corporate Debtors and Personal Guarantors thereof shall be NCLT (Sec. 60)

Adjudicating Authority for Insolvency Resolution and bankruptcy for individual and Partnership Firms

Under Part III Chapter I dealing with Insolvency Resolution and Bankruptcy for individuals and Partnership firms thereof shall be DRTS Constituted under Subsection (1) of Sec 3 of RDB Act 1993 (Sec. 79)

Jurisdiction of Debt Recovery Tribunals:

The DRTS are dealing with matters of IBC in respect of non corporate persons i.e., Partnerships, Individuals and Personal Guarantees extended on behalf of entities other than corporate persons. In the present scheme of things, Banks can access the DRTS and NCLTS in the following manner:

A. As a Financial Creditor (FC) under IBC: Sec 7 of the Code empowers the FCS to file the application on a Corporate Debtor’s failure to repay the debt and a default has occurred. The amount of default should not be less than ₹ 100 Lakh as per the notification issued by the Ministry of Corporate affairs dated 24.03.2020.

B. As an applicant under RDB Act: Banks can file an Application under Sec 19 of the RDB Act for amounts due of not less than ₹ 20 lakh as per the notification issued dated 06/09/2018 issued by the Ministry of Finance Government of India.

C. By implication Defaults of less than ₹ 20 lakh: Banks need to file Civil Suits in civil courts and recover their dues under this classification.

D. Banks have also the option of filing Recovery applications in DRTS if there is no corporate insolvency pending as on the date of filing the Application before DRT. In short wherever there is no corporate insolvency pending, Banks can choose to file Debt recovery Applications even against Companies registered under the Companies Act for debts in default of more than ₹ 20 lakh.

It can be seen from the above that that the Banks and FIS have to still approach different Judicial Forums for addressing their default situations purely based on the pecuniary amounts prescribed in this regard or on the nature of the business entity that is in default.

RECOMMENDATIONS & SUGGESTIONS

1.Make the NCLTS the Jurisdictional Forum for all defaults committed to Banks by Corporate Debtors by restoring the original default amount of ₹ 1 lakh as originally prescribed under the code. Hence, DRTS may have no jurisdiction for Banks and FIS in respect all corporate entities defaults irrespective of the loan amount. This will reduce the burden of DRTS (As per a reply by Minister of State for finance Bhagwat Karad, to a question in Lok Sabha, as at February end 2022, there were 1,61,034 cases pending before different DRTS).

2.Do away with the need for filing civil suits in civil courts for amounts of less than ₹ 20 lakhs as per the existing framework and instead such cases be filed in DRTS.

3.DRTS be the forum deciding all recovery/resolution applications filed in respect of defaults committed by non corporate entities including individuals. (This will cover all retail defaults like personal loans, educational loans, Housing Loans etc).

4.The process and procedure to be followed for administering personal insolvency of guarantors either in relation to corporate entities or noncorporate entities be similar though the jurisdiction will be with either NCLT or DRT depending upon the nature of the business entity.

To sum up the Banks which are to handle defaults of CDS, will now focus their actions in NCLTS.

With regard to Banks exposure to non-corporate persons, i.e., individuals, Partnership, Trusts, societies, clubs, etc. the DRTS can be entrusted with complete jurisdiction over the above entities irrespective of the size of default, DRTS can continue to perform their adjudicatory functions in relation to measures undertaken u/s 13(4) of SARFAESI Act and for all other connected matters as hitherto.

DRTS can deal with personal insolvency of guarantors issued on behalf of non corporate entities as described above.

Institutionalising Lok Adalat Mechanism:

In order to reduce the burden of DRTS and to encourage non adjudicatory mechanism for addressing the default of small loans, it is suggested that an institutionalised mechanism of Lok Adalat be brought into existence.

The jurisdiction of Lok Adalat at present is upto ₹ 20 lakh, which may be enhanced to ₹ 50 lakh to reduce burden on DRTS and also to fasten recovery. To make the Lok Adalat more effective, The Legal Services Authorities (LSA) Act, 1987 needs to be suitably amended.

With the advent of technology and with the creation of information utilities, all credit related data is now in the form of electronic evidence and becomes immutable.

Taking advantage of the existing technology, the Lok Adalat mechanism be devised in such a way that the resolution proceeds only on the settlement terms and instead of getting into protracted dispute areas.

Suitable legislative measures can also be considered to make the settlements have a binding character. In other words, procedure of filing consent terms and getting it approved by a court / Tribunal can be eliminated.

Note: The views and opinions expressed in this article is those of the writer and do not necessarily reflect the views or positions of the organisation he represents.

The jurisdiction of Lok Adalat at present is up to ₹ 20 lakh, which may be enhanced to ₹ 50 lakh to reduce burden on DRTS and also to fasten recovery. To make the Lok Adalat more effective, The Legal Services Authorities (LSA) Act, 1987 needs to be suitably amended