Banking, DRT & SARFAESI
For borrowers, promoters, guarantors and businesses facing recovery action by banks and financial institutions, and for creditors seeking to recover substantial debts, before the Debt Recovery Tribunals at Bengaluru and the High Court of Karnataka.
Recovery by banks moves on strict timelines
When a loan account is classified as a non-performing asset, a bank or financial institution can enforce its security without going to court under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and can recover the debt through the Debt Recovery Tribunal under the Recovery of Debts and Bankruptcy Act, 1993. Each stage has its own short time limit, and rights that are not exercised in time are often lost.
The practice accepts a limited number of matters for businesses, promoters and guarantors facing such action, and for creditors with substantial claims. Matters before the Debt Recovery Tribunals at Bengaluru are conducted personally, with appeals to the Debt Recovery Appellate Tribunal at Chennai and writ proceedings before the High Court of Karnataka where available. Recovery and insolvency often overlap; see also NCLT & Company Law.
SARFAESI Notices, Possession & Auction
A demand notice under Section 13(2) gives the borrower sixty days to pay. Within that period an objection may be made under Section 13(3A), and the bank must give its reasons within fifteen days if it rejects it. After the bank takes possession or another measure under Section 13(4), or obtains an order under Section 14 for physical possession, an application lies to the Debt Recovery Tribunal under Section 17 within forty-five days. The constitutional validity of this scheme, and the borrower's right to be heard, were considered by the Supreme Court in Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311. Defects in notices, valuation and the conduct of an auction are frequent grounds of challenge.
Objections to demand notices
Section 17 applications to the DRT
Challenges to auctions and valuation
Appeals to the DRAT
Recovery Applications Before the DRT
Banks and financial institutions recover debts of twenty lakh rupees and above through original applications before the Debt Recovery Tribunal under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993. Matters include defending the application, filing a counter-claim or set-off against the bank, contesting the amount and the interest charged, and proceedings on the recovery certificate that follows. For creditors that are themselves financial institutions, the same forum is used to recover. Where a company borrower is in default, insolvency proceedings under the Insolvency and Bankruptcy Code may run in parallel.
Defence of recovery applications
Counter-claims against the lender
Interest and amount disputes
Recovery certificate proceedings
Wilful Defaulter & Fraud Classification
Classification as a wilful defaulter or of an account as fraud has severe consequences for a business and its promoters, including exclusion from further institutional finance and, for fraud, reporting to investigating agencies. The Reserve Bank of India's Master Direction on Treatment of Wilful Defaulters and Large Defaulters, issued on 30 July 2024, prescribes a show-cause notice, an opportunity to respond in writing, and a decision by a Review Committee on the recommendation of a separate Identification Committee. Before an account is classified as fraud, the borrower must be heard (State Bank of India v. Rajesh Agarwal, 2023). Representations are prepared to the bank's committees and, where the procedure is not followed, writ petitions are filed before the High Court.
Replies to show-cause notices
Written representations to the bank
Fraud classification challenges
Writ petitions in the High Court
Guarantors & Settlements With Lenders
Promoters and family members who have given personal guarantees are often pursued alongside, or before, the company. A guarantor's liability is co-extensive with the borrower's under Section 128 of the Indian Contract Act, 1872, and personal guarantors of companies may face insolvency proceedings under Part III of the Insolvency and Bankruptcy Code, which the Supreme Court upheld in Dilip B. Jiwrajka v. Union of India, 2023. Many recovery matters are best resolved by a negotiated one-time settlement; the proposal, its documentation and the withdrawal of pending proceedings are handled so that the settlement is binding and complete.
Personal guarantor liability
One-time settlement proposals
Settlement documentation
Withdrawal of pending proceedings
Applicable Laws: SARFAESI Act 2002 and Security Interest (Enforcement) Rules 2002, Recovery of Debts and Bankruptcy Act 1993, Insolvency and Bankruptcy Code 2016, Indian Contract Act 1872, RBI Master Direction on Treatment of Wilful Defaulters and Large Defaulters 2024.
Banking & Recovery: Frequently Asked
I have received a notice under Section 13(2) of the SARFAESI Act. What should be done?
The notice gives sixty days to discharge the amount demanded. Within that time the borrower may send a representation or objection under Section 13(3A), and the bank must consider it and communicate its reasons within fifteen days if it does not accept it. This is also the stage at which the account's classification, the amount demanded and the possibility of a settlement should be examined. A challenge before the Debt Recovery Tribunal under Section 17 is generally available once the bank takes a measure under Section 13(4), such as taking possession.
The bank has taken possession of the secured property. Can this be challenged?
Yes. An application can be filed before the Debt Recovery Tribunal under Section 17 of the SARFAESI Act within forty-five days of the measure taken by the bank. If the Tribunal finds that the measure was not in accordance with the Act and the Rules, it can declare it invalid and restore possession. An appeal from the Tribunal's order lies to the Debt Recovery Appellate Tribunal under Section 18, subject to a pre-deposit of fifty per cent of the debt claimed or determined, which may be reduced to not less than twenty-five per cent.
Can a bank declare a borrower a wilful defaulter or a fraud without a hearing?
No. The Reserve Bank of India's Master Direction on Treatment of Wilful Defaulters and Large Defaulters, issued on 30 July 2024, requires a show-cause notice, an opportunity to respond in writing, and a decision by a Review Committee on the recommendation of a separate Identification Committee. Before an account is classified as fraud, the Supreme Court has held that the principles of natural justice apply and the borrower must be heard (State Bank of India v. Rajesh Agarwal, 2023).
I am a guarantor for a company loan. Can the bank proceed against me before the company?
Generally yes. Under Section 128 of the Indian Contract Act, 1872 the liability of a guarantor is co-extensive with that of the principal debtor, and the Supreme Court has held that the creditor need not first exhaust its remedies against the borrower (Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297). Personal guarantors of companies may also face insolvency proceedings under Part III of the Insolvency and Bankruptcy Code. The terms of the guarantee and the conduct of the bank must be examined carefully.
Request an Appointment
Send a WhatsApp message or email with a short description of the matter and the date of the latest notice received from the bank. Consultations are by appointment, in person or by video. An enquiry does not create a lawyer-client relationship.
Informational only, per Rule 36 of the Bar Council of India Rules. No solicitation of work is intended.