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)

Major Resolutions of Corporate Entities Under Ibc:

The Reserve Bank of India has advised Banks and FIs to initiate Corporate Insolvency Resolution Process (CIRP) in respect of the following major corporate that were facing severe debt burden at that point of time:

Essar Steel Ltd
Monnet Ispat & Energy Ltd
Bhushan Steel Ltd
Bhushan Power & Steel Ltd
Era Infra Engineering Ltd
ABG Shipyard Ltd
Jaypee Infra Tech Ltd
Amtek auto Ltd
Alok Industries Ltd
Jyothi Structures Ltd
Lanco Infra Tech Ltd
Electro steels Ltd

The code has witnessed major Insolvency Resolutions taking place in the form of 10 out of the 12 big Corporates and liquidation order passed in respect of 2 companies (Lanco Infratech Ltd & ABG Shipyard Ltd) referred by RBI as stated above. The Resolution of these corporates was not only a success but also it resulted in solving the NPA problems of Banks and other creditors. The outstanding claim against these companies were of ` 3.45 lakh crore against a liquidation value of ` 73,220 crores only. The resolution resulted in realisation involving amounts ranging from 115% of the liquidation value (Jaypee Infratech Ltd) 387% in respect of Jyoti Structures.

Another significant aspect of the implementation of the IBC is not only the resolution of the non-performing assets for the bankers and other creditors but has put the corporates back on the rails and in a way revival of corporate’s as big as Essar steel, etc. have shown that the IBC is efficient and has avoided the dangers of closure of the industries by adopting Resolution mechanisms as provided under the Insolvency code.

As on 31/03/2023, out of 6571 Corporate Debtors (CDs) against whom CIRP was commenced, the code has rescued 2485 CDs (678 through resolution, 959 through settlement, appeal, review, etc, 848 through withdrawals) and 2030 were sent for liquidation taking total number of cases to 4515. CIRP continues in respect of balance 2056 CDs.

It is also necessary to remind ourselves of the fact that the personal guarantor to CDs have also come under the ambit of NCLTs and comparatively a larger number of applications were filed for determination of personal insolvency in the NCLTs.

Under the code the NCLTs have been made adjudicating authorities for personal guarantors in relation to CDs as mentioned above.

In the light of the progress made over the last few years, under Insolvency Regime an attempt is made here to explore the feasibility and suggest the realignment of the jurisdiction of DRTs and DRATs in discharging their functions under different Acts.

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:

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

Suggestions for restoring the threshold for CIRP:

In order to bring uniformity and to streamline the existing mechanism, it is suggested that the following mechanism may be considered:

NCLTs be made the single platform for all the debts that have become defaults in respect of corporate entities.
The current limits of default of ` 100 lakh can be revised and the originally stipulated amount for filing applications under NCLTs of ` 1 lakh be restored, since we have appeared to have overcome the Corona situation which was the basis for increasing the default amount to ` 100 lakh from the originally pre-prescribed amount of ` 1 lakh. Enhancement of limit has also put the Operational Creditors (OCs) at disadvantage. As can be seen from the trend of applications filed by OCs, the number of applications filed has declined after enhancement of limit. The OCs are generally MSMEs which supply the larger corporates and the threat of insolvency, helped them realise their dues, even before the admission of the cases. In bigger cases, being unsecured lenders and the liquidation value being much lower than the dues of secured lenders, OCs generally get much less than their dues. The OCs realised around 17.6% of their claims as against 34.2% in respect of FCs in CIRPs since inception till March 31, 2023, as per the IBBI data. While bringing the provision of Prepack insolvency resolution vide notification dated April 09, 2021, it was envisaged that defaults of CDs in the range of ` 10 lakh to ` 100 lakh will be addressed under this provision. However, even after around 2 years, as on March 31, 2023, only 4 applications have been admitted out of which one has since been withdrawn leaving just 3 cases. Therefore, bringing down the CIRP initiation threshold to ` 1 lakh will fill up the gap and help the MSMEs in 2 ways. They can resolve their debts under CIRP by filing application u/s 10 (no consent of FC required) and also recover their dues from supplies to large corporates by filing application u/s 9 irrespective of the due amount (above ` 1 lakh).

Recommendations & Suggestions

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)
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.
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).
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:

ECHANISM: 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.

Disclaimer: 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.

Jurisdiction of DRTs & Progress Achieved under IBC: Time to Reboot?

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V. SATYA VENKATARAO