RDDBI 1993

Banks and financial institutions have been experiencing considerable difficulties in recovering loans and enforcement of securities charge with them. The procedure for recovery of debts due to the banks and financial institutions, which is being followed, has resulted in a significant portion of the funds being blocked.

The Committee on the Financial System has considered the setting up of the Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable mechanism through which the dues, to the banks and financial institutions could be realised. In 1981 a committee had 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.

THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993

An Act to provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions and for matters connected therewith or incidental thereto.

After a decade or working of the (RDDBI ACT) it was felt that RDDBI act was unable to achieve the desired result of efficiently recovering money from the borrower’s. This led to the enactment of the Securitization and reconstruction of final assets and enforcement of security interest act 2002.

SARFAESI 2002

The SARFAESI Act was passed on December 17, 2002, in order to lay down processes to help Indian lenders recover their dues quickly. The SARFAESI Act essentially empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers. Before this Act took effect, financial institutions had to take recourse to civil suits in the courts to recover their dues, which is a lengthy and time-consuming process.

As per the SARFAESI Act, if a borrower defaults on a loan financed by a bank against collateral, then the bank gets sweeping powers to recover its dues from the borrower. After giving a notice period of 60 days, the lender can take possession of the pledged assets of the borrower, take over the management of such assets, appoint any person to manage them or ask debtors of the borrower to pay their dues too, with respect to the asset. This recovery procedure saves banks and financial institutions a lot of time which otherwise would be long drawn out due to the intervention of courts.

With an attempt to revamp the slow pace of recovery of defaulting loans and mounting levels or non performing assets of banks and financial institutions. The SARFAESI act provides the secured creditor the right to enforce the security without the intervention of either court or tribunal by following procedure prescribed under section 13 of SARFEASI act. Thereafter the constitutional validity of SARFAESI act was challenged in Mardia chemicals Ltd V Union of India.

In the landmark judgement delivered in Mardia chemicals V Union of India the hon’ble supreme court held that provision of the securitization and reconstruction of financial assets and enforcement of security interest act 2002, SARFAESI ACT 2002, are valid except section 17 (2). Which is ultra vires of article 14 of the constitution of India.

It’s a new weapon to strengthen the hands of co-operative banks, but a small one still.

IBC 2016

The Insolvency and Bankruptcy Code 2016 offers a uniform comprehensive insolvency legislation to Corporations, Firms and Individuals (other than financial firms).

One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation.

The IBC creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.

Insolvency and Bankruptcy code is a sound legal framework of bankruptcy law is required for achieving the following objectives:-

Improved handling of conflicts between creditors and the debtor It can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.

To consolidate and amend the laws relating to re-organization and insolvency resolution of corporate persons, partnership firms, and individuals. To fix time periods for execution of the law in a time-bound settlement of insolvency (i.e. 180 days).To maximize the value of assets of interested persons.

To establish higher levels of debt financing across a wide variety of debt instruments. To deal with cross-border insolvency .To resolve India’s bad debt problem by creating a database of defaulter list.

In short we can say that SARFAESI is upgraded version of RDDBI, and IBC is upgraded version of SARFAESI.