Government of India Volume I: Analysis and Recommendations

ANNEXES
issue by providing a list of documents to be filed with a Section 14 petition under
SARFAESI. In our view, the proposal in the Debt Laws Amendment Bill (2011) would
be sufficient for addressing this issue. This WG recommends the same list of documents
to be filed with a Section 14 petition.
39. A petition for enforcing security interest under Section 14 SARFAESI can only be filed
with a District Magistrate or a Chief Metropolitan Magistrate. In present day administrative
services, the Deputy Commissioner of a particular district also acts as a
District Magistrate. A Deputy Commissioner is an administrative officer principally
responsible for overseeing revenue collection, such as collection of land revenue
and other public dues. A Chief Metropolitan Magistrate on the other hand, does not
exercise executive and judicial function but is the administrative head of metropolitan
courts in India. Since both District Magistrates and Chief Metropolitan Magistrates
are involved more in administrative functions than actual day to day judicial
functions, there is considerable delay in addressing petitions under Section 14 of
SARFAESI. The Debt Laws Amendment Bill (2011) addresses this issue by allowing
the District Magistrate or the Chief Metropolitan Magistrate to authorise any officer
subordinate to him to take actions for enforcing the security interest. On this issue,
it is the view of this WG that the proposals in the Debt Laws Amendment Bill (2011) is
sufficient to address the problem. If the District Magistrate or the Chief Metropolitan
Magistrate is allowed to authorise any officer subordinate to him to take actions
for enforcing the security interest it would help in reducing delays.
40. In India our laws give preference to crown debt in the form of taxes and statutory
dues over the claims of secured creditors during insolvency and bankruptcy proceedings.
Though reforms in certain tax laws now provide priority of secured creditors.
Tax dues under Customs Act, 1962, Central Excise Act, 1944, and service tax
under the Finance Act, 1994 are subject to the claims of secured lenders under RD-
DBFI and SARFAESI. While these reforms have only partly addressed the issue, the
general principle of priority of secured lenders over crown debts and debts under
other welfare legislations such as labour laws is not specifically provided for in our
laws. This WG endorses the recommendations of the Raghuram Rajan Committee
Report (2009) on rationalising insolvency and bankruptcy proceedings:
(a) While it is important to protect employee claims such as overdue wages, there
must be a limit, say six months, to which such pay is protected. After the expiry
of this period employees must also join the ranks of unsecured creditors.
(b) The government, which has substantial powers to recover arrears to it prior to
bankruptcy, should not stand ahead of secured creditors.
(c) Statutory priorities of a firm should be well disclosed so that creditors can act
well in time, before they get crowded out by other claims.
41. The purpose of setting up DRTs was to ensure speedy recovery of debts by setting
up a special tribunal system which follows a summary procedure as opposed to a
detailed procedure followed by the civil courts. DRTs in India are now plagued with
the same problems that afflict civil courts: Huge backlog of cases and insufficient
infrastructure. An efficient tribunal system has sufficient resources at its disposal
and has well trained and competent staff. If the objective and purpose of setting
up DRTs are to be given effect to, one cannot ignore the infrastructure issues that
afflict the DRTs.
To address the infrastructure issues that afflict DRTs in India, there is a need to rethink
and overhaul the legal framework under RDDBFI:
(a) Objective of DRT: Amend RDDBFI to clearly state the objective of RDDBFI, as
a special tribunal for providing a mechanism for recovery of debt that is fair,
just, economical and quick.
188 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION