1. A Research on Legal Remedies in the field of
Housing Finance Industries
BY:
VINOD MUKUNTHAN

2. Section I – Background
A healthy and sound banking system are very essential for an economy in order to grow and remain
in this competitive environment. The best indicator of health of banking industry is its level of Non
Performing Assets (NPAs). It reflects the performance of banks. NPAs becomes a major concern for
the Indian economy. It has a direct impact on the profitability, liquidity and solvency position of the
bank.
NPAs are an inevitable burden on the banking industry. Banks need to monitor their standard asset
regularly in order to prevent any account becoming an NPA. Today the success of the bank depends
upon the proper management of NPAs and keeping them within the tolerance level
Rise in npa due to bad loans is a great concern to emerging lenders in recent years. Even giants in
banking industries like ICICI, Federal, HDFC, Kotak Mahindra and Axis banks face the pressure on
asset quality due to non- performing assets but only few managed. This spike in NPAs for the
lenders occurred after a systemic review carried out by the Reserve Bank of India (RBI), which has
asked banks to recognise certain assets in the December- and March-ended quarter of this financial
year.
According to a CARE Ratings review, gross NPAs of these 16 banks, which includes primarily
private banks, moved up from 2.21 per cent to 2.29-2.71 per cent in three years.

3. In housing finance industry, NPAs in entire home loan segment adds upto around Rs.6000 crore,
which is less than the amount involved I sticky loans to some of the corporate houses such as Vijay
Mallya’s kingfisher Airlines.
Non-performing assets (NPAs) in the housing loan segment of public sector banks have shot up by
over Rs.1000 crore to around Rs.6200 crore during the first six months of calendar 2014.
(NPAs) in the segment have increased from 1.38 per cent to 1.54 per cent of advances in
September, according to data complied by the finance ministry. NPAs of 17 banks increased in the
latest six-month period.
The first half of the fiscal witnessed a slow GDP growth. Rising inflation and high borrowing costs
could have added to delinquencies in the home loan segment. While inflation increased, the slow
growth in income levels and job creation played their part in higher NPAs
There are several notable impacts of NPA such as it reduces earning capacity of the assets, blocking
capital for maintaining capital adequacy, increases cost of capital and reduces EVA.
Inorder to cater to these disastrous effects of NPA, SARFAESI act is an effective tool to handle with
it.

4. Section II – Legal recourses
LAWS DEALING WITH NPA’S:
1. DRT ACT,1993:
in India the remedy available to lenders has been to file an ordinary money suit for recovery against
the defaulting borrower for the outstanding amounts or to file a summary suit as provided for
under “Order 37 of Code of Civil Procedure 1908”.
Another option available to the lender was to apply for foreclosure of mortgage, where borrower or
guarantor had provided security by way of mortgage, in respect of outstanding towards the lender.
Foreclosure and money suits have proved to be a long drawn battle in the court, consuming several
years in litigation, owing to the delay on account of various reasons. The Indian courts, lower courts
as well as high courts, were saddled with cases filed by the domestic banks, foreign banks and
financial institutions. The delay in the disposal of such cases was deplorable.
In 1981, a committee under the Chairmanship of Shri T Tiwari had examined the legal and other
difficulties faced by banks and financial institutions and suggested remedial measures including
changes in law.
The Tiwari Committee had also suggested setting up of special tribunals for recovery of dues of the
banks and financial institutions by following a summary procedure.

5. Consequently, the Recovery of Debts Due to Banks and Financial Institutions Act 1993 in short DRT
Act was passed. The DRT Act definitely eased the pressures on the courts at an all India level and
the Debt Recovery Tribunals (DRT) is today deemed to be effective tribunals to redress the
grievances of the lenders.
According to his committee’s report,
The civil courts are burdened with diverse types of cases. Recovery of dues due to Banks and
Financial Institutions is not given any priority by the civil courts. The Banks and Financial
Institutions like any other litigants have to go through a process of pursuing the cases for recovery
through civil courts for unduly long periods.”
The Constitutional validity of the Act was challenged on grounds of unreasonableness & that it
violates Article 14 of the Constitution and that the same is beyond the legislative competence of the
Parliament.
The preamble to the Act states “… for expeditious adjudication and recovery of debts due to banks
and financial institutions and for matters connected therewith or incidental thereto’ this would
squarely fall within the ambit of entry 45 of List I of the Constitution.
DRT Act, 1993:
 Under Section 19(18) the DRT is also empowered on grounds of equity to appoint a
receiver of any property, before or after grant of certificate for recovery of debt.
 Under Section 19(19), a recovery certificate issued against a company can be enforced by
the DRT which can order the property to be sold and the sale proceeds to be distributed
amongst the secured creditors in accordance with the provisions of Section 529-A of the
Companies Act, 1956.
 Section 25 provides for three modes of recovery of debts namely, (a) attachment and sale;
(b) arrest of the defendant; and (c) appointment of a receiver for the management of the
properties of the defendant.
 Section 28 states that where a certificate has been issued by the DRT to the Recovery Officer
under Section 19(7), the Recovery Officer may, without prejudice to the modes of recovery
specified in Section 25, recover the amount of debt by any one or more of the modes
mentioned in Section 28.

6.  Section 13(6) inter alia provides that once the bank/FI takes possession of the secured
asset, then the rights, title and interest in that asset can be dealt with by the bank/FI as if it
is the owner of such an asset and the asset will vest in them free of all encumbrances and
the secured creditor would be entitled to give a clear title to the transferee in respect
thereof.
Problems in the DRT Act, 1993 leads to the passing of SARFAESI Act, 2002:
1. With the enactment of the DRT Act, the banking sector expected that most of the NPAs
would be easy to recover, as against the conventional system of recovery of loan through
civil courts, where considerable time, money and efforts were required to recover debt.
However, in spite of DRT Act, on account of non-realisation of the NPAs, the Banks and
Financial Institutions were facing problems relating to liquidity and asset liability
mismatch, since their assets were blocked for considerable time in unproductive asset.
There was no legal provision for facilitating securitisation of financial assets, and banks had
no power to take possession of securities created in their favour in order to secure the
facilities. Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBFI
Act, 1993, the Banks could not recover its dues to the extent expected. This led to further
reforms in the process and curtailing the delay in adjudication.
Despite constituting special Tribunals like Debt Recovery Tribunals under RDDBFI Act,
1993, the Banks could not recover its dues to the extent expected. This led to further
reforms in the process and curtailing the delay in adjudication.
2. In furtherance of financial reforms and extending the object of RDDBFI Act, 1993, the
Government has enacted The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. The SARFAESI Act, 2002 is to curtail the delay in
the process of adjudication between the Banks and its borrowers. The question of recovery
by the Banks and Financial Institutions will arise when the borrowers commit default in
repaying the debt. When there is default, then, the Banks will categorize the account as Non-
performing Asset in accordance with the norms prescribed by the Reserve Bank of India.
3. Therefore, to improve the health of the economy as well as the banking sector, stimulus was
required to be given in the form of legal provisions, empowering banks with more powers
to recover the assets blocked in Non-performing Assets.

7. SARFAESI Act – 2002
The full form of SARFAESI Act as is Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool for bad
loans ( NPA) recovery. It is possible where non-performing assets are backed by securities charged
to the Bank by way of hypothecation or mortgage or assignment, Upon loan default, banks can seize
the securities (except agricultural land) without intervention of the court.
SARFAESI Act, 2002:
 To enable the banks and FI to realise long-term assets, manage problems of liquidity,
asset liability mismatch and to improve recovery of debts by exercising powers to take
possession of securities, sell them and thereby reduce non-performing assets by
adopting measures for recovery and reconstruction.
 To provide for setting up of asset reconstruction companies (ARCs) which are
empowered to take possession of secured assets of the borrower including the right
to transfer by way of lease, assignment or sale.
 To empower ARCs to take over the management of the business of the borrower.
 To remove the fetters which were in existence on the rights of the secured creditors.
 To accelerate the process of recovery of debt and to remove deficiencies/ obstacles
in the way of realisation of debt under the DRT Act.
 To give discretion to the bank/FI to take steps in order to protect its assets from being
alienated, transferred or disposed of in any other manner.

8. Under Section 17(2) of the NPA Act, the DRT is required to consider whether any of the measures
referred to in Section 13(4) taken by the secured creditor for enforcement of security are in
accordance with the provisions of the NPA Act and the Rules made thereunder.
The SARFAESI proceeding and litigation goes as follows:
1. The Bank will classify a loan account as NPA (Non-performing Asset) as per the RBI
guidelines on Asset Classification etc. It is debatable as to whether it is right to apply the
guidelines issued by the RBI mechanically or not. There may be cases where the Bank or
the concerned officials believe in the credentials and credit worthiness of a borrower
due to past record. Even in these cases, the Bank normally classifies the account as NPA
if the borrower fails to meet the agreed commitments and the Bank will rely on the
guidelines issued by the Reserve Bank of India. There can be two views on this. If the
discretion is given to the Bank in classifying an Account as NPA, will it really benefit the
bonafide borrowers?. As such, the law in this regard is that the Bank should follow the
RBI guidelines in classifying an Account as NPA and RBI guidelines are mandatory. The
classification of an Account as NPA is the preliminary thing before proceeding further in
recovering the dues under the provisions of SARFAESI Act, 2002.
2. After classifying an account as NPA, the Bank or the authorized officer of the Bank will
issue a demand notice to the borrower under section 13 (2) of the Act demanding the
borrower to pay the entire outstanding due as on date.
3. The borrower can raise his objections if any to the demand being made by the Bank under
section 13 (2). It is to be noted that if the borrower is silent to the demand notice, the
same will be noted when the borrower files an appeal before the Debt Recovery
Tribunal under section 17 of the Act.
4. If the borrower raises any written objections to the Bank’s demand notice under section
13 (2), then, the Bank should reply to the objections. The reply is mandatory. The courts
have emphasized the need on the part of the Bank to apply its mind properly to the
objections raised by the borrower. Borrowers contend that the Bank will not listen to
the objections and mechanically reject those. If the Bank finds merit in the objections
raised by the borrower, then, the Bank can correct itself and proceed accordingly.

9. 5. If the Banks rejects the objections raised by the borrower under section 13 (3A), then, the
Bank will issue a possession notice under section 13 (4) of the Act. It is called symbolic
possession.
6. The possession notice issued by the Bank under section 13 (4) of the Act provides a right
to the borrower to approach the Debt Recovery Tribunal and file an Appeal if he feels
aggrieved.
7. The borrower should pay the prescribed fee while filing an appeal under section 17 and
normally the borrower prays for a stay of SARFAESI proceedings. Many borrowers feel
that the Debt Recovery Tribunal will ask the borrower to deposit some amount while
granting stay if the DRT comes to a conclusion to grant a stay. I feel that the borrower
need not make a deposit always and the DRT will grant a stay directly without asking
for any deposit in some cases based on facts. If the DRT is not inclined to grant a stay
and if the DRT dismisses the application seeking stay, then, the borrower is entitled to
file an appeal to the DRAT (Debt Recovery Appellate Tribunal).
8. In case where the borrower did not approach the Tribunal and in case where the
borrower fails to meet the demand made by the Bank, the Bank will take such steps in
taking physical possession of the property under section 14 and can sell the secured
asset in public auction etc.
Pre-conditions for initiating SARFAESI Act -2002:
 The debt is secured
 The debt has been classified as an NPA by the banks
 The outstanding dues are one lakh and above and more than 20% of the principal loan
amount and interest
Initiating the proceedings as per the Act:
 Only an Authorised Officer (AO)of the Company can initiate the proceedings and Chief Manager
of the Company only can be designated as the Authorised officer.

10.  As per the guidelines of the RBI, the Secured Creditor has to classify an account as non-
performing asset.
 Under Section 13(2) demand Notice has to be served to the borrower, stating to discharge the
full liabilities to the secured creditor within sixty days from the date of notice.
 Demand notice under Section 13 (2) to be made by delivering or transmitting at the place
where the borrower resides with acknowledgement due, addressed to the borrower to accept
the service or by Speed Post or courier or fax message or electronic mail service.
In case the Authorised officer has reason to believe that such service will be avoided then the
demand notice shall be affixed on the outer door or some other conspicuous part of the house or
building where the borrower ordinarily resides or carries on business and publish the contents of
Demand notice in two leading newspaper one in vernacular language.
Once a notice has been served on the borrower, the borrower shall not transfer secured asset
referred in the notice either by way of Sale, Lease or otherwise, without the prior consent of the
secured creditor.
 On receiving the notice if the borrower takes objection to the contents of the notice within
60 days, then the Secured Creditor has rejoined the same reasonably ie., he has to answer to
the claimant’s reply.
 After the expiry 60days of the rejoinder or the Original notice in case the borrower had
failed raise the objection, if the borrower still fails to discharge his liability, the secured
creditor can exercise all or any of rights / options available to recover under Section 13(4)
of the Act.
Rights of the Secured Creditor U/s 13(4) of the Act
1. Take possession of the secured assets including the right to transfer by way of lease,
assignment or sale to get the money back.The banks are conferred with this right without
resorting to filing cases in courts or Debt Recovery Tribunals
2. Take over the management of the secured assets of the borrower including the right to
transfer by way o f lease, assignment or sale to get the money back

11. 3. Appoint any person (manager) to manage the secured assets taken over by the “Secured
Creditor
Give notice to any person who has acquired the Secured Asset and money is due to the “Secured
Creditor”. Such third party shall pay the money as is sufficient to pay the outstanding debt.
Differences between DRT Act and SARFAESI Act:
1. DRT Act did not provide for assignment of debts to Securitisation companies and
therefore, secured assets also could not be liquidated in time. Under NPA Act, authority is
given to the banks/ FIs, which is not there in the DRT Act, to assign the secured interest
to securitisation company/ asset reconstruction company.
2. The NPA Act proceeds on the basis that the liability of the borrower to repay
has crystallized; that the debt has become due and that on account of delay the account of
the borrower has become sub-standard and non-performing. Therefore, there is no scope of
any dispute regarding the liability.
3. Meaning of ‘debt’ under DRT Act is broader and covers secured, unsecured and assigned
debts. It also covers debts payable under a decree, arbitration award or under a mortgage.
4. DRT Act provides for adjudication of disputes as far as the debt due is concerned.
5. DRT Act does not rule out applicability of the provisions of the Transfer of Property Act, in
particular Sections 69 and 69A of that Act. Section 35 of NPA Act gives it an overriding effect
with all other laws if such other laws are inconsistent with the NPA Act.
6. The scheme of the NPA Act does not deal with disputes between the secured creditors and
the borrower. On the contrary, the NPA Act deals with the rights of the secured creditors
inter se.
Similarities:
1. The object behind Section 13 of the NPA Act and Section 17 r/w Section 19 of the DRT Act is
the same, namely, recovery of debt.
2. The tribunal under the DRT Act is also the tribunal under the NPA Act.

12. CERSAI ACT
CERSAI maintains a central registry of mortgages in India. It can be accessed online by financial
institutions and the general public for a fee. However, the general public can access it only through
a third party like a bank or an authorised financial institution. The database contains information
on the mortgage taken on property and the entire mortgage history of the property. This allows the
lender to access information on the collateral offered by the prospective borrower. It also allows
potential buyers to examine the property's financial history. According to the government's
directives, financial institutions must register a mortgage within 30 days of its creation. CERSAI also
aims to assist lenders in securitisation and asset reconstruction
Functions of CERSAI
 To maintain a central registry of mortgaged property.
 To develop a web-based system for financial institutions and the public to access
information about such property.
 To collect information regarding the amount secured by mortgage.
 To maintain history of charges created and satisfied on a particular property.
 To enable lenders to get current information regarding the security offered by the
borrower.

13.  To provide potential buyers information about any encumbrance on the property they
intend to buy.
 To prevent fraudulent transactions arising out of the same asset being mortgaged to
multiple lenders
The government has made it mandatory for all banks and financial institutions to register the
mortgage created (security interest over property to secure loans) with CERSAI, within 30 days of
creation of mortgage.
The banks and financial institutions can access the registry website by paying a fee and verify if
there are any encumbrances over the property to be funded.
As per the provisions of CERSAI, the public will be able to verify the records of CERSAI to check if
there are any mortgages existing on the property they intend to buy.
With the setting up of CERSAI, it will be virtually impossible for any borrower to raise loans twice
or more against the same property or raise loans using forged documents. Since equitable mortgage
was found to be most convenient, which minimises stamp duty charges and avoids the hassles of
registering and releasing the mortgage with sub-registrar’s offices, almost all lenders have been
obtaining them for the past three or four decades.
CASE STUDY:
Mr.A is a Senior Software Engineer working in a reputed Company and by availing a loan from “L”
Bank; he has purchased a building property in a City (hereinafter referred to as “first loan”). Mr.A
was paying all his installments to the Bank in respect of his first loan. Thereafter a builder has
approached Mr.A to purchase another property through the Bank “L”. Though the documents were
presented by the builder to Mr.A, Mr.A has believed the Bank Officials and requested the Bank
officials to look into all the legalities and details about the property. Mr.A was assured by the Bank
Officials that he can buy the property. After the specific assurance from the officials of the Bank “L”,
Mr.A has purchased another property in the City through the Bank “L” (hereinafter referred to as
the ‘second loan’). While Mr.A was paying all the installments in respect of the two loans, he has
received a notice from a third person and in respect of his second property and he was shocked to
know that his second property doesn’t actually belong to the builder. Apart from the loan amount,
Mr.A has also paid substantial amount of money to the ‘builder’. Though Mr.A was not used to do

14. enquiries and not faced with any litigation in life, Mr.A is forced to do his independent enquiry
regarding the second property and he finally found that he was cheated by the Bank Officials and
the Builder. Mr.A found that the Bank Officials of “L” has actually helped the builder knowing fully
that the builder can not sell the property and do not possess any title over the property. Immediate
to the occurrence of fraud, Mr.A has approached some professionals to file a criminal case at the
Bank Officials and the real estate people, but, soon he has realized the difficulties in approaching
the authorities and getting justice from the Courts. Mr.A has also spent substantial amount of
money on the litigation to bring the fraudulent officials of “L” and the builders to book. While the
process of pursuing a criminal case against the Bank Officials of “L” and the builder was going on,
surprisingly Mr.A has received a notice from “L” bank asking to repay the loan amount in respect of
the Second Loan and he has also seen a demand in the demand notice from the Bank that if Mr.A
does not pay the Second Loan Amount, then, they proceed against the First Loan Property. Mr.A is
literally shocked as to why he has to pay the Second Loan Amount as he was literally cheated by the
Bank Officials itself and he is also shocked as to how the Bank can proceed against his First House
Property as he was paying all the installments in respect of his First Loan. Mr.A expressing an
opinion that all his hard earned money is invested in the property and he can not venture loosing
the property. Mr.A has come to the stage that only suicide will be a solution for him under these
circumstances.
Analysis: If we look at the problem above it is really complicated. The Bank Officials or the Bank is
concerned at getting the installments or getting the outstanding due in respect of the two loans
sanctioned to Mr.A. The Bank is not concerned at the fraud played by some of their officials while
getting the loan sanctioned to Mr.A. The Bank sought to blame Mr.A for not scrutinizing the papers
presented by the builder carefully. In the given case above, Mr.A has in fact received a notice under
section 13 (2) of SARFAESI Act, 2002 in respect of the second loan, however, the First House
Property is shown as liable to be attached in the event of failure to pay the outstanding due. On this
point, “L” Bank may not have any point as there is no secured asset in fact to straight away take
possession of the First House Property of the “A” as he has not defaulted any installments and the
Bank is only concerned with the Second Loan. But, the larger issue is as to what is the remedy
available to the Borrower Mr.A and is it correct to say that the DRT is not concerned with the fraud
played by the Bank Officials if the appeal is presented to the DRT finally. The settled legal position
under section 17 of SARFAESI Act, 2002, as perceived, is that the DRT will only look into as to
whether there are any procedural lacunae on the part of the Bank while invoking the provisions of
the SARFAESI Act, 2002. If we apply that yard-stick, Mr.A may have to face numerous problems and

15. may be confused as to how to expose his case and get justice. If Mr.A approaches the High Court, the
High Court may say that alternative remedy is available and Mr.A can not approach Civil Court in
view of the specific bar under section 34 of the SARFAESI Act, 2002.
Presidency Towns insolvency Act 1909 and Provincial insolvency Act 1920 :
Bankruptcy- Bankruptcy means being insolvent, or unable to pay your debts.
Who can file for bankruptcy: a bankrupt or an insolvent person is the one who is unable to pay
his debts. However, he can file an insolvency petition only if his liabilities exceed his assets and
making it impossible for him to pay the debt. Hence, this option is not open to all the people who
are in debt.
Procedure for filing
In India, there are two Acts that govern insolvency: the Presidency Towns Insolvency Act, 1909
(PTIA), and Provincial Insolvency Act, 1920 (PIA). The PTIA is applicable in Mumbai, Chennai and
Kolkata, while the rest of the country comes under PIA,the law concerning insolvency is the same
under both the Acts.
A petition for insolvency can be filed in a particular court only if you have resided in that place or
have conducted business for a year. Bankruptcy is filed in an individual capacity without including
the spouse, but first, you will have to hire a lawyer to help prepare the petition.

16. This document should have a statement that you are unable to pay your debts, the place where you
reside or conduct the business, details of the court order if you have been arrested, details of claims
against you, as well as the list and addresses of creditors.
After the suit has been filed, the court shall fix a date for hearing. Here, you will be required to
produce books of accounts, an inventory of your properties and the list of creditors. The court will
examine your conduct, dealings and properties in the presence of the creditors. This gives the latter
an opportunity to examine if you have made a full disclosure of your real estate holdings.
If you have filed for insolvency in Mumbai, Chennai or Kolkata, the examination will take place only
after you have been declared insolvent, while in all other areas, the examination takes place at the
time of hearing. Once you are declared insolvent and the public examination concludes, you can file
an application of discharge, which requests the removal of the status of 'insolvency'.
Declaration of bankruptcy:
The biggest advantage of filing for insolvency is that your creditors cannot chase you. Instead, they
will be directed to the court in the which the insolvency petition is being processed.
Unlike commercial banks, finance companies do not have access to the call market or RBI refinance
facility in the event of a liquidity crisis. In the recent past, several NBFCs faced a liquidity crunch as
a result of asset quality problems. Systemic illiquidity and negative shifts in sentiment toward
companies and sectors also tend to
suck out liquidity. CRISIL evaluates a finance company’s contingent liquidity plans to take care of
such eventualities. CRISIL also assesses the maturity profile of assets and
liabilities to form an opinion on the company’s liquidity and interest rate risks.In general, NBFCs
have matched asset liability maturity profiles and hence, are exposed to limited liquidity or interest
rate risks. Most HFCs, on the other hand, face significant liquidity mismatches. This is because while
the average tenure of housing loans is over 10 years, most of the borrowings (fixed deposits, bank
borrowings and debentures) are for much shorter tenures. Only the NHB refinance facility is for a
comparable tenure. However, the proportion of NHB refinance in the total resource mix of HFCs has
been on a decline. Hence, HFCs are exposed to significant interest rate risks. To overcome this,
several industry players are increasingly looking at securitisation.
Rating Criteria for Finance Companies

17. While the matter is in the court, creditors cannot file separate suits against you without prior
permission of the court. However, if you have secured credit against collateral, the lender need not
take the court's permission to acquire the mortgaged asset. In all other cases, the creditors will
have to follow the court's directives.
On being declared insolvent, the court will appoint an officer, known as official assignee or receiver,
who will take charge of your property, which will be divided among creditors to pay your debts.
You will not be associated with your property once the official receiver takes charge.
It can be difficult since the court does not consider your accommodation or other expenses that you
may need to take care of. However, if you do not have any property with which debts can be settled,
there is very little creditors can do about it. "If you deliberately transfer property before filing an
insolvency petition, the transaction can viewed as fraudulent and the court can reverse it.
India is a capital starved country and therefore it is essential that capital isn’t frittered away on
weak and unviable businesses. Quick resolution of bankruptcy can ensure this.
Today, bankruptcy proceedings in India are governed by multiple laws — the Companies Act,
SARFAESI Act, Sick Industrial Companies Act, and so on. The entire process of winding up is also
very long-winded, with courts, debt recovery tribunals and the Board for Industrial and Financial
Reconstruction all having a say in the process.
Bankruptcy is a legal status usually imposed by a Court, on a firm or individual unable to meet debt
obligations. India’s new Bankruptcy Bill attempts to create a formal insolvency resolution process
(IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring their
speedy liquidation.
The Bill envisages a new regulator — the Insolvency and Bankruptcy Board of India.
Insolvency and Bankruptcy Code, 2015:
It aims for resolution of insolvency in a speedier and time-bound manner. The bill aims at
promoting investments, freeing up banks’ resources for other productive uses, boosting credit
markets and improving ease of doing business in India.

18. An effective framework for timely resolution of insolvency and bankruptcy support for
development of credit markets and encourage entrepreneurships. It also regulates professionals,
agencies and information utilities engaged in resolution.
the corporate insolvency would have to be resolved within a period 180 days, extendable by 90
days. It also provides for fast-track resolution of corporate insolvency within 90 days.
Currently, there is no single law dealing with insolvency and bankruptcy in India. Liquidation of
companies is handled by the high courts, individual cases are dealt with under the Presidency
Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.
The Code also seeks to balance the interest of all the stakeholders including alteration in the
priority of payment of government dues.
The Code seeks to provide for designating National Company Law Tribunal (NCLT) and Debt
Recovery Tribunal (DRT) as the adjudicating authorities for corporate persons and firms and
individuals, respectively, for resolution of insolvency, liquidation and bankruptcy.
The bill also provides for priority with regard to distribution of proceeds following liquidation of
the company. In the order of priority, the first charge will be insolvency resolution process cost and
liquidiation costs to be paid in full.
Liquidation proceeds will then be used to clear debts owed to secured creditors, and then to pay
workmen’s dues for 12 months, unpaid dues to employees other than workmen, and financial dues
owed to unsecured creditors, in that order. Government taxes for two years, other debts, preference
shareholders and equity shareholders will receive last priority for payment.
It also provides for monetary penalty and jail term of up to five years for concealment of property,
defrauding creditors and furnishing false information.
The Code also provides for fast track corporate insolvency resolution process to be completed in 90
days.
(1) Negotiable Instrument Act, 1881
The Negotiable Instruments Act was enacted, in India, in 1881.Prior to its enactment, the provision
of the English NegotiableInstrument Act were applicable in India, and the present Act is alsobased
on the English Act with certain modifications. It extends to thewhole of India except the State of
Jammu and Kashmir.SECTION 138 of N.I. Act

19. CHEQUE:
A cheque is an acknowledged bill of exchange that is readily accepted in lieu of payment of money
and it is negotiable. However, by the fall of moral standards, even these Negotiable Instruments like
cheques issued, started losing their credibility by not being honoured on presentment. It was found
that an action in the civil court for collection of the proceeds of negotiable instrument like a cheque
tarried, thus defeating the very purpose of recognizing a negotiable instrument as a speedy vehicle
of commerce
Consequences of Cheque bounce:
Bouncing of a cheque invites criminal prosecution under section 138 of The Negotiable
Instruments Act, 1881. Punishment for the offence under section 138 of NI Act is imprisonment up
to two years or fine which may extend to twice the cheque amount or both. The offence is bailable,
compoundable and non- cognizable.
Important stages of a complaint filed u/s 138 of N.I. Act:
1. Cheque should be presented to the bank for encashment within its validity period i.e. 3
months.
2. Within 30 days from the receipt of return memo indicating reason of dishonour a notice
should be sent demanding the amount of dishonoured cheque to be paid within 15 days of
the receipt of the notice.
3. If the drawer does not pay the amount of dishonoured cheque within the grace period of
15 days, a complaint thereafter should be filed within one month in the relevant court of
Metropolitan Magistrate /Judicial Magistrate First Class [SEC 142(c)]
4. CHEQUE RETURN MEMO Return Memo is the most important document while filing a
complaint u/sec 138 as this document by the bank mentions the reason for dishonour.
Punishment for Cheque Bounce:
Any person committed the offence of dishonor of cheque shall be liable to be punished with
imprisonment up to two year, orwith fine up to twice the amount of the cheque, or with both.

20. 2.ECS and its provisions
ECS (Debit) is a scheme under which an account holder with a bank can authorize an ECS user to
recover an amount at a prescribed frequency or otherwise by raising a debit in his account. The ECS
user has to collect an authorization which is called ECS mandate for raising such debits. These
mandates have to be endorsed by the bank branch maintaining the account.
The ECS user, after getting itself registered with an approved clearing house, collect the mandate
forms from the participating destination account holders, with bank’s acknowledgement. A copy of
the mandate should be available with the drawee bank. The ECS user has to submit the data in
specified form through the sponsor bank to the clearing house. The clearing house would pass on
the debit to the destination account holder through the clearing system and credit the sponsor
bank’s account for onward crediting the ECS user. All the unprocessed debits have to be returned to
the sponsor bank within the time frame specified. Banks will treat the electronic instructions
received through the clearing system on par with the physical cheques. The mandate given once can
also be withdrawn or stopped. The only stipulation under the scheme is that the customer has to
give prior notice to the ECS user, to ensure that they do not include the debits.
Provisions:
The provisions as to dishonor of ECS as contained in the Act are similar to the provisions
contained in the Negotiable Instruments Act in relation to dishonor of cheques. The punishment
prescribed under the Act for ECS dishonor the imprisonment for a term which may extend to
two years, or fine which may extend to twice the amount of the electronic funds transfer, or
both.
After dishonor of ECS, the beneficiary has to give a written notice to the issuer of the electronic
fund transfer (who is the “payer”) within 30 days of receiving the information of the
dishonour. In the event the payer fails to honour the notice by making payment to the payee
within 15 days of notice then the payee shall have the remedies under section 25 of the Act
and has full recourse to chapter XVII of the Negotiable Instruments Act.
Upon dishonor of an ECS, the recourse available under the Payment & Settlement System Act, 2007
may be availed. For the purpose, the requisite notice is to be issued to the payer giving him the 15
days time to make payment in lieu of the dishonoured ECS. In case the payer fails to pay the said

21. amount within the stipulated time period of 15 days, the complaint may be initiated against the
payer within the stipulated time period as specified in the Negotiable Instruments Act i.e. 30 days,
before the Court competent to hear such complaint. The complaint may be preferred by the Reserve
Bank of India (RBI) or any of its authorized official or by the person aggrieved by the dishonour of
the electronic funds transfer as per the provisions of the Negotiable Instruments Act.
ECS debit works well since they take away the pain of writing cheques, especially for recurring
payments. It pretty much puts the cumbersome task of paying EMIs , SIPs and bills on auto pilot.
But, you must monitor your savings accounts statements regularly to spot any inconsistency
between the actual bill and the amount debited. So, use this tool to ensure that you pay bill on time
and avoid late payment fees, as well as make use ECS debit as SIPs to build wealth over time.
Arbitration and conciliation Act 1996:
Arbitration: Arbitration, is a technique for the resolution of disputes outside the courts. The parties
to a dispute refer it to arbitration by one or more persons and agree to be bound by the arbitration
decision . A third party reviews the evidence in the case and imposes a decision that is legally
binding on both sides and enforceable in the courts.
Arbitration
Arbitration is another recourse that the company could take up. For recovering money through
arbitration the company needs to follow certain guidelines as given in the Arbitration Act. They are
as follows:
 The loan agreement should clearly state the arbitration clause.
 It should state the name of the arbitrator as decided upon by both the parties.

22.  The customer should sign the loan agreement.
Appointment of Arbitrator
Arbitrator is appointed under Section 11(6) of the Arbitration & Conciliation Act 1996. This can be
done in the following two ways:
 Directly: In this case the company has to state the name of the arbitrator in the Loan
Agreement and get it signed by the customer. In case the arbitration clause does not have
the name of the arbitrator, such appointment becomes one sided and can be challenged in
the court by the other party (customer).
 Through Court: Here the decision is left on the court. The court appoints a person as it
deems fit and also decides upon the fee. Such decision is binding on both the parties.
Arbitration Process :
Step 1: The case is referred to the arbitrator when the customer defaults.
Step 2: All original documents to be presented to the arbitrator.
Step 3: The arbitrator sends notices to both the parties to appear before him so that he can
mediate between the two parties.
Step 4: The arbitrator passes an award (judgement) based on the proceedings that is final and
binding on both the parties. In case the Customer is not present for the mediation process then the
arbitrator can also pass an ex-party award that is also final and binding and cannot be challenged.
Conciliation:
The process of adjusting or settling disputes in a friendly manner through extra judicial means. Con
ciliation means bringingtwo opposing sides together to reach a compromise in an attempt to avoid t
aking a case to trial.

23. CONCLUTION:
The above mentioned laws are some of the legal remedies that a Housing Finance
company can use indored to tackle with the major issue i.e NPA faced by the finance
companies.

24. References:
1) http://www.investopedia.com/
2) http://www.lawzonline.com/bareacts/bareacts.html
3) The Constitution of India: Bare Act with Short Notes
4) http://www.iarc.co.in/content.php?cid=MjA=
5)http://www.financialexpress.com/article/india-news/sc-upholds-changes-in-sarfaesi-act-banks-
free-to-decide-npas/36267/
6) http://www.lawyersclubindia.com/experts/Cersai-charges-515451.asp
7) http://www.scribd.com/doc/109474255/The-Negotiable-Instruments-Act-1881-PPT#scribd
8) http://theindianlawyer.in/statutesnbareacts/acts/p43.html