Banking, Finance, NCLT & DRT

How Do SARFAESI and DRT Proceedings Operate across India?

Banking and financial recovery law in India balances the statutory enforcement powers granted to banks, Non-Banking Financial Companies (NBFCs), and Asset Reconstruction Companies (ARCs) with the procedural safeguards available to borrowers, MSMEs, guarantors, and third-party property owners. In Uttar Pradesh, specialized debt and security litigation is heard primarily before the Debt Recovery Tribunal (DRT), India (with appellate jurisdiction lying before the Debt Recovery Appellate Tribunal [DRAT] at Prayagraj).

When a loan account is classified as a Non-Performing Asset (NPA) following a 90-day delinquency under Reserve Bank of India (RBI) Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP), secured creditors typically invoke the SARFAESI Act, 2002 to enforce security interests without early court intervention:

1. Section 13(2) Demand Notice & Section 13(3A) Representation: The Authorised Officer of the bank/NBFC issues a 60-day written notice under Section 13(2) detailing the debt and the secured assets intended to be enforced. Upon receiving a Section 13(2) notice, the borrower should immediately examine whether the account was lawfully classified as an NPA (especially if the borrower is an MSME covered by the RBI Framework for Revival and Rehabilitation of MSMEs) and submit a detailed representation under Section 13(3A). The secured creditor is statutorily bound to consider the objection and communicate reasons for non-acceptance within 15 days.
2. Section 13(4) Possession & Section 14 DM/CMM Assistance: After the 60-day notice period expires, the creditor may take symbolic or physical possession of the secured asset under Section 13(4) read with Rule 8 of the Security Interest (Enforcement) Rules, 2002, and apply to the District Magistrate or Chief Judicial Magistrate under Section 14 for administrative assistance in taking physical possession.
3. Section 17 Securitisation Application (SA) Before jurisdictional DRT: Under Section 34 of the SARFAESI Act, civil courts have no jurisdiction to entertain suits or grant injunctions in respect of actions taken under the Act. Instead, any aggrieved party—borrower, guarantor, tenant with a registered prior lease, or third-party owner—must file a Securitisation Application (SA) under Section 17 before jurisdictional DRT within 45 days of the Section 13(4) measure. DRT scrutinizes whether the creditor complied strictly with statutory notice periods, Rule 8(5) valuation requirements, and Rule 8(6)/9(1) e-auction notice timelines.

Where a bank or financial institution seeks a money decree / Recovery Certificate for debts of ₹20 lakh or more (including enforcement against personal assets not mortgaged under SARFAESI, or recovery of shortfall after auction), it institutes an Original Application (OA) under Section 19 of the Recovery of Debts and Bankruptcy (RDB) Act, 1993 before the DRT.

How Does Corporate Insolvency Work Before the NCLT Allahabad Bench?

Unlike the RDB Act or SARFAESI Act—which are debt recovery mechanisms—the Insolvency and Bankruptcy Code (IBC), 2016 is a statutory framework for the time-bound resolution and reorganization of insolvent corporate entities (and personal guarantors). For companies whose registered office is situated anywhere in Uttar Pradesh, the Adjudicating Authority is the National Company Law Tribunal (NCLT), Allahabad Bench located in Prayagraj.

Provided the minimum default threshold of ₹1 crore under Section 4 of the IBC is met, a Corporate Insolvency Resolution Process (CIRP) can be triggered through three distinct routes:

• Financial Creditors (Section 7): Banks, NBFCs, debenture holders, or allottees in a real estate project (subject to the statutory threshold of at least 100 allottees or 10% of total allottees in the same project) can file a Section 7 petition upon establishing the occurrence of a financial default, supported by financial contracts and Information Utility (NeSL) records.
• Operational Creditors (Section 8 & Section 9): Unpaid suppliers of goods or services must first serve a mandatory statutory Demand Notice in Form 3 or Form 4 under Section 8 of the IBC. The corporate debtor has 10 days from receipt of the Section 8 notice to either pay the unpaid operational debt or bring to notice the existence of a pre-existing dispute (or record of pendency of a suit or arbitration filed before the receipt of the notice). If neither occurs within 10 days, the operational creditor can file a Section 9 petition before the NCLT.
• Corporate Applicant (Section 10): A defaulting corporate debtor may itself apply to initiate CIRP following a special resolution passed by at least three-fourths of its shareholders.

What Happens Once a Company Enters CIRP Under the IBC?

When the NCLT admits a Section 7, 9, or 10 petition, two immediate legal consequences take effect under Sections 13, 14, and 17 of the Code:

1. Statutory Moratorium (Section 14): The NCLT declares a moratorium prohibiting the institution or continuation of suits or proceedings against the corporate debtor, the transfer or encumbrance of its assets, and any action to foreclose, recover, or enforce any security interest created by the corporate debtor (including actions under the SARFAESI Act, 2002). Note, however, that under Section 14(3)(b), a moratorium does not automatically bar enforcement against a third-party personal or corporate guarantor unless separate proceedings under Section 95 are active.
2. Board Suspension & CoC Control: The powers of the existing Board of Directors are suspended and vest in the Interim Resolution Professional (IRP), who issues a Public Announcement inviting claims from all creditors (Form B for operational creditors, Form C for financial creditors, Form CA for homebuyers/class creditors). The Resolution Professional constitutes the Committee of Creditors (CoC), which evaluates competing Resolution Plans under Section 30.

Informational only; not legal advice.