[By Upanshu Shetty]
The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.
Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), was enacted to empower financial institutions with a framework to recover non-performing assets without resorting to time-consuming litigation. A key feature of the SARFAESI Act is Section 17, which grants borrowers the right to challenge enforcement actions taken by secured creditors under Section 13(4). Over the years, judicial interpretations of Section 17 have evolved, particularly in the context of One-Time Settlement (OTS) agreements, where borrowers often seek relief when banks revoke settlement offers or enforce security interests after an alleged breach.
While OTS schemes are designed to facilitate amicable resolution between lenders and borrowers, disputes often arise when borrowers fail to comply with the settlement terms, leading banks to cancel OTS agreements and proceed with asset recovery. In such cases, borrowers have sought to invoke Section 17 before the Debts Recovery Tribunal (DRT) to challenge the enforcement of security interests. However, the judiciary has taken a nuanced approach to these cases, weighing the contractual nature of OTS agreements against the statutory framework of SARFAESI. The evolving jurisprudence suggests that while borrowers can approach the DRT to challenge wrongful enforcement, they cannot use Section 17 to seek enforcement of an OTS agreement itself.
The Role and Scope of Section 17 under SARFAESI
Section 17 of SARFAESI provides an appellate remedy to any person aggrieved by measures taken under Section 13(4), which empowers secured creditors to take possession of secured assets or manage them in a manner they deem fit. The provision is intended as a safeguard against arbitrary or unlawful enforcement, ensuring that creditors act within the bounds of the law while exercising their rights. In Hindon Forge Private Limited v. State of Uttar Pradesh, the Supreme Court reaffirmed that a borrower can approach the DRT at the stage of the possession notice itself, thereby ensuring a fair opportunity to challenge enforcement proceedings.
However, a fundamental question remains: does Section 17 apply to disputes concerning OTS agreements? Courts have generally held that DRT jurisdiction is limited to reviewing measures taken under Section 13(4) and does not extend to general contractual disputes between banks and borrowers. In Bijnor Urban Co-operative Bank Ltd. v. Meenal Agarwal, the Supreme Court categorically ruled that a borrower cannot claim OTS as a matter of right and that no writ of mandamus can be issued directing a bank to grant such a settlement. This principle suggests that an aggrieved borrower cannot invoke Section 17 solely to enforce an OTS agreement but may do so if the revocation of an OTS results in wrongful enforcement under SARFAESI.
The Enforceability of OTS Agreements and Borrower Rights
OTS agreements are contractual arrangements governed by the policies of individual banks and subject to the regulatory framework set by the Reserve Bank of India (RBI). While they provide borrowers an opportunity to settle dues at a reduced amount, they do not confer an absolute right to settlement. Courts have consistently upheld the discretionary nature of OTS schemes, emphasizing that banks must be allowed commercial autonomy in deciding whether to accept or reject a settlement proposal.
In Amrik Singh v. DCB Bank Ltd., the High Court held that once a bank frames an OTS policy in compliance with RBI guidelines, it must act in good faith while considering applications. Arbitrary rejection or revocation of an OTS offer, particularly if the borrower has demonstrated bona fide intent to comply, may invite judicial scrutiny. However, this does not imply that a borrower can force the bank to accept an OTS or claim an automatic extension of time to make payments. In State Bank of India v. Arvindra Electronics Pvt. Ltd., the Supreme Court ruled that borrowers cannot demand an extension of OTS terms as a matter of right, reaffirming the principle that OTS agreements remain subject to mutual agreement rather than legal compulsion.
OTS Breach and the Availability of Remedies Under Section 17
A key legal question arises when a borrower defaults on an OTS agreement, and the bank, consequently, proceeds with SARFAESI enforcement. In such instances, the borrower may attempt to challenge the action under Section 17, arguing that the bank’s revocation of the OTS was unjustified. However, the judiciary has generally restricted the scope of Section 17 to reviewing enforcement measures rather than adjudicating contractual disputes.
The Supertech Realtors Pvt. Ltd. v. Bank of Maharashtra, decision underscores this principle by holding that OTS agreements are purely contractual in nature and that disputes concerning their breach should be adjudicated through civil proceedings rather than writ petitions or SARFAESI appeals. However, there have been exceptions. In Anu Bhalla v. District Magistrate, Pathankot, the High Court exercised its writ jurisdiction to extend the OTS period based on the borrower’s bona fide intent to pay. This ruling highlights the judicial balancing act between upholding contractual obligations and ensuring fairness in lender-borrower relationships.
While the courts have largely maintained that Section 17 does not provide recourse for enforcing OTS agreements, they have recognized limited exceptions where the borrower can demonstrate that the bank acted in bad faith or violated due process. If the revocation of an OTS is arbitrary and is immediately followed by disproportionate enforcement under SARFAESI, the borrower may have grounds to challenge the action before the DRT. However, such challenges must be rooted in procedural violations rather than the mere expectation that an OTS should have been granted.
The Interplay Between Section 17 and Writ Jurisdiction Under Article 226
A significant aspect of this debate is whether borrowers can bypass the limitations of Section 17 by invoking Article 226 of the Constitution. The Supreme Court has consistently discouraged the use of writ jurisdiction in SARFAESI matters, emphasizing that statutory remedies under the Act must be exhausted before approaching the High Courts. In G. Vikram Kumar v. State Bank of Hyderabad, the Court ruled that challenges to e-auction notices must be brought before the DRT rather than through writ petitions.
However, there are instances where courts have entertained writ petitions in SARFAESI matters, particularly where procedural irregularities or issues of natural justice are involved. In Hindon Forge Private Limited, the Supreme Court permitted the borrower to file a Section 17 application at the stage of possession notice, highlighting the importance of procedural fairness. These cases indicate that while writ jurisdiction is not a substitute for SARFAESI remedies, it may be invoked in exceptional circumstances where statutory alternatives are inadequate.
Practical Implications for Borrowers and Lenders
For borrowers, the legal position on OTS breaches under Section 17 underscores the importance of strict compliance with settlement terms. Given that courts have upheld the enforceability of SARFAESI measures following OTS breaches, borrowers must ensure timely payments to avoid losing the benefits of settlement. At the same time, they must be aware that their ability to challenge enforcement is limited unless they can establish bad faith or procedural lapses by the bank.
For financial institutions, the evolving jurisprudence affirms their discretion in granting and revoking OTS benefits but also places an obligation on them to act transparently and in good faith. Arbitrary rejection of an OTS proposal or inconsistent application of settlement policies may invite judicial scrutiny. While banks have the right to recover dues through SARFAESI, they must ensure compliance with regulatory norms and procedural fairness to mitigate litigation risks.
The Need for Regulatory Clarity and Reform
The conflicting judicial interpretations on the applicability of Section 17 in OTS breaches highlight the need for legislative clarity. A potential amendment to the SARFAESI Act could explicitly define the scope of DRT jurisdiction concerning OTS disputes, ensuring uniformity in judicial approaches. Additionally, the RBI could introduce stricter guidelines mandating standardized criteria for OTS eligibility and revocation, reducing the scope for arbitrary decision-making by banks.
The SARFAESI framework, while designed to expedite asset recovery, must also uphold principles of fairness and due process. Strengthening procedural safeguards, such as requiring mandatory notice periods before OTS revocation or providing a structured grievance redressal mechanism, can enhance the legitimacy of enforcement actions while protecting borrower rights.
Conclusion
The intersection of Section 17 of SARFAESI and breaches of OTS agreements presents a complex legal challenge. While borrowers have limited remedies under Section 17 to challenge wrongful enforcement, they cannot invoke the provision to enforce OTS terms against a bank’s discretion. The courts have largely upheld the principle that OTS is a contractual privilege rather than a statutory right, reinforcing the autonomy of financial institutions in granting settlements. However, judicial intervention remains a possibility in cases of bad faith or procedural lapses.
Moving forward, clearer legislative and regulatory guidance will be crucial in resolving ambiguities surrounding OTS disputes under SARFAESI. As the legal landscape continues to evolve, ensuring a balance between creditor rights and borrower protections will be key to maintaining the integrity of the financial system.