Can a Bank go back from the promise of ‘Settlement of Default of Debt’ or ‘Settlement of Debt’?

It is known that while some loan transactions with the Bank like Housing Loan, Educational Loan etc. are very simple, some commercial loan transactions are very complex in nature. The Bank may provide various loan facilities to the Borrower and most of these commercial loans are complex to understand and these loans infact involve many complexities. When a Businessmen or a Corporate gets various loan facilities and if there is a default or allegation of default with regard to a particular loan facility, the Bank proceeds against the borrower and claims for the settlement of entire outstanding debt in respect of all facilities. The Banks use the provisions of “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)” which appear to be draconian in some cases while the Act is justified from another angle.  Irrespective of the long standing relation of creditor and borrower, in some cases, the Bank may be unreasonable towards a borrower and may insist for recovery of the entire outstanding dues even if the borrower commits a default in respect of only one facility among many other facilities extended to the same borrower. The Bank may say that they will proceed ‘borrower-wise’ in classifying any Account as ‘Non-performing Asset’ and proceed with the recovery process under the provisions of SARFAESI Act, 2002. Banks or the officers concerned do exercise some discretion in this regard while the Bank or the officers are left with no discretion in respect of few other cases. The Bank has to follow the RBI guidelines and the RBI circulars having binding nature from to time. It is known that the Banks should follow the guidelines of ‘Asset Classification’ prescribed by the Reserve Bank of India in classifying any loan account as ‘Non-performing Asset’. The guidelines never intended to unnecessarily and unreasonably harass the borrowers. The guidelines refers to the significance of looking at ‘risk factor’, the ‘value of security’, track record of the borrower and even getting the loan Account updated though Bank usually follows their internal guidelines.

In some cases, the borrowers do not want to litigate the issues with the Bank and may try their level best to get the default rectified and may try to get the account settled finally under ‘One-time Settlement Scheme’. The Bank or the officers concerned in most of the cases maintain written or oral communication with the borrowers when there is default. The borrowers, in-turn, explains their difficulties in view of their long standing relationship with the Bank and may seek some relaxation and may seek indulgence of the Bank to rectify the default in repayment. This communication or negotiation happens before classifying any loan Account as “Non-performing Asset” and even after the classification of account as NPA and before initiating the proceedings under the provisions of SARFAESI Act, 2002. In some cases, the borrowers negotiate with the Bank for rectifying the default or for a ‘final settlement’ even after the issuance of demand notice by the Bank under section 13 (2) of the Act. This is the reason as to why there is delay on the part of the Bank in proceeding with the recovery under the provisions of SARFAESI Act, 2002 even after the issuance of demand notice under section 13 (2). When a borrower intends to avoid litigation, he may listen or act upon the oral understanding with the officials. Sometimes, the understanding for ‘rectification of default’ or ‘settlement of loan’ can be in writing also. While the ‘rectification of default’ is oral in most of the cases, the ‘final settlement of the account’ is in writing normally.

‘Settlement of Default of Debt/Regularisation’:

It is frequently alleged now-a-days by the borrowers that the Bank or the officers of the Bank agrees for the ‘settlement for rectification of default’, receives the money from the borrower and later-on, insists for the full settlement of the outstanding due. Inspite of updating the loan account, the Bank may choose to proceed under the provisions of SARFAESI Act, 2002 and may say that they are acting on the basis of classification and they never agreed for ‘regularizing the loan account’. This happens even after the demand notice issued under section 13 (2). Even after the demand notice, the borrower can negotiate with the Bank and the Bank may receive some substantial amount of money in-between and even then, suddenly may choose to proceed with the issuance of notice under section 13 (4). These are the usual allegations from the borrowers against the Bank when it comes to ‘regularization of loan accounts’.  The allegation in some cases is that the Banks goes back from their promise and in some cases, the Bank is not co-operating for regularization as even the RBI guidelines refer to the regularization if other factors like the track-record, risk-factor, value of security etc. are justified. Another thing is that the intention behind giving notice to the borrower under section 13 (2) of the Act is to invite objections if any. Law mandates the Bank to give a reasoned reply to the objections raised by the borrower under section 13 (3A). But, what happens is that the Banks agree for some kind of settlement either orally or in writing even after the issuance of notice under section 13 (2). Later on, after a gap of some one year and when the borrower makes the substantial payment, the Bank acts upon the demand notice and issues a possession notice under section 13 (4) of the Act. This is infact incorrect. If something notable has taken place with regard to the recovery of loan after the issuance of notice under section 13 (2) and if the Bank is silent in acting on section 13 (2) for a considerable time in view of the payments made by the borrower, then, it is incumbent upon the Bank to issue the demand notice afresh taking note of subsequent developments and this fresh demand notice under section 13 (2) of SARFAESI Act can give an opportunity to the borrower to include his objections afresh without taking a direct recourse to an appeal to Debt Recovery Tribunal (DRT) or without having to approach the High Court seeking intervention at times. But, this is not happening. In most of the cases, unless the Debt Recovery Tribunal sets the SARFAESI proceedings aside, the Banks do not issue demand notice twice under section 13 (2) and instead acts upon the demand notice issued earlier irrespective of time gap or lapse. These are the usual problems being faced by the borrowers in getting his or their account regularized or updated. The borrowers are infact left with no remedy in these cases as the scope of powers of DRT under section 17 of the Act does not include the power to give direction to the Banks to agree for regularization. These kinds of cases mostly come to High Court and the High Courts usually issues suitable directions noting the interests of the Bank and the rights and plight of the borrower.

‘Settlement of Debt/One-time Settlements’:

The second issue is with regard to ‘final settlement of debts’. In many cases, Banks are going back from their promise of ‘one-time settlement’. The Banks agree for ‘final settlement of account’ with the borrower. The Banks may ask the borrower to give an offer letter in a format and with some averments and then, the Banks will agree for settlement. When the substantial amount is paid, the Banks may say and are saying in most of the cases that the RBI guidelines do not allow them to get the account settled under ‘One-time Settlement’. Again, the Banks may say that the borrower has not disclosed all the facts with the Bank while coming forward with the ‘One-time Settlement Proposal’. Once the settlement proposal is agreed, the Banks will be very silent till the substantial amount is deposited with the Bank and finally, they can say that they do not have right to go for ‘settlement’ or can blame the borrower that he has not disclosed the whole facts.  These things do happen regularly now-a-days. The DRT normally do not look into these issues and the DRT may at best, look at the procedural irregularities if any and even the disputes pertaining to outstanding are not entertained as such though the DRT can look into those issues. The DRT normally goes with the stand taken by the Bank unless the Bank is apparently wrong in their approach. Public Sector Banks should concentrate on the recovery of money and at the same time, can not harass the borrowers who are willing to get their accounts regularized or willing to get their account finally settled. Even, the RBI guidelines hint at this. When there is security lying with the Bank and when original documents are with the Bank, the Banks pressurize the borrowers with all kinds of things and using the provisions of SARFAESI Act, 2002 to their advantage. The DRT in these cases proves to be ineffective and the borrower is not entitled to approach the Civil Court in these cases in view of the bar under section 34 of SARFAESI Act, 2002. Though there is a scope for the Civil Court to entertain even the SARFAESI related matters in some cases in a limited sense pursuant to the Mardia Chemical’s case, it is very difficult to persuade the Civil Court with regard to its jurisdiction in SARFAEI matters and this can be attributed to the lack of expertise on the part of the Civil Courts with the Securitisation Law.

Conclusion:

When there is a borrower willing to get his account regularized and willing for settlement, the Banks can not harass those borrowers. In most of the cases, where the borrowers allege wrong treatment or breach of promise on the part of Banks with regard to ‘settlement for regularization’ and ‘final settlement of outstanding due’, the borrowers do approach the High Court and in most of the cases, High Courts do justice to the Petitioner or the borrower keeping the interests of the Bank and borrowers in view. High Courts are very careful in interfering with the SARFAESI proceedings initiated by the Banks as it can not be seen as an alternative to the Debt Recovery Tribunals (DRTs). But, in fit cases, the High Courts may not agree with the arguments of the Banks with regard alternative forum and may exercise the jurisdiction under Article 226 of Constitution of India. 

The issue as to whether the Banks can go back from the ‘settlement of default’ or ‘settlement of loan’ will depend upon the facts of the case and especially the contents of written offer and agreement by the Banks.

Note: the views expressed are my personal. 

Points to be raised in a SARFAESI Appeal and getting relief?

It has almost settled and become like a regular practice for the borrowers to question the proceedings initiated by the Banks at the last stage under the provisions of “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. In fact, the law mandates that the aggrieved can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 within 45 days from the date of issuance of notice under section 13 (4) of the Act. However, as the process of recovery of money do not end at the issuance of section 13 (4) of the Act and as it is likely that the Bank can commit mistakes in the process and process even after the issuance of notice under section 13 (4), it is settled that the borrower is entitled to question all steps initiated by the Bank under the provisions of SARFAESI Act, 2002. The borrowers have started questioning the Sale Process conducted by the Bank and also started questioning the order of the Magistrate under section 14 of the Act before the High Court regularly and as a result, the Courts have consistently held that the borrower is entitled to question all the steps initiated by the Bank under the provisions of SARFAESI Act, 2002. There is another point in this. If the borrower is silent even after the receipt of notice under section 13 (4) and do not prefer any appeal, there can be an argument from the Bank that there is nothing wrong in the proceedings initiated by the Bank till the notice under section 13 (4). If such an argument is accepted and if the borrower is silent even after the receipt of notice under section 13 (4) of the Act, then, the scope of Appeal preferred by the borrower at a subsequent stage gets narrowed-down. If the Borrower challenges the Sale Process only, the borrower may have to confine himself to the illegalities committed by the Bank in the Sale Process. However, if the borrower could offer some kind of explanation as to why he could not challenge the proceedings initiated by the Bank under section 13 (4) of the Act, then, he must be allowed to raise all the points in his Appeal under section 17 of SARFAESI Act, 2002.

When an Appeal is prepared or preferred under section 17 of the SARFAESI Act, 2002, there will be usual grounds with the intention of getting some time to repay the loan. The usual grounds are vague and are like:

1. The borrower is not a willful defaulter.

2. The classification of Account as ‘Non-performing Asset (NPA)’ is incorrect.

3. The interested charged is exorbitant.

4. No notice or caution is issued by the Bank before classifying the Account as ‘NPA’.

5. The outstanding claimed by the Bank is incorrect.

6. The value of the ‘secured asset’ mortgaged with the Bank is much more than the outstanding loan.

7. The Bank has not issued any notice or demand notice under section 13 (2) or 13 (4) of the Act etc.

These are the usual grounds in any SARFAESI Appeal preferred by the borrower under section 17 of the Act. As the law is settled that the procedure prescribed under the provisions of SARFAESI Act, 2002 is mandatory, the Debt Recovery Tribunal has to give a serious thought to the averment made in the Appeal that no demand notice is received by the borrower under section 13 (2) or 13 (4). If that is established, then, the Appeal deserves to be allowed straight-away and without any further enquiry. But, for knowing this, the DRT may give notice to the Bank to file their counter and to ascertain the truth. This process will take time as there will be a procedure for the paper work done legally in any Public Sector Bank. At times, it may take few months also.  In view of the averments in the Appeal that no notice is issued under section 13 (2) or 13 (4), the DRT may consider granting relief to the Appellant or the borrower. While doing so, the Debt Recovery Tribunal will consider the outstanding payable, the security and the averments with regard to the value of security mortgaged with the Bank.  In view of these practical and procedural difficulties, the DRT may be forced to grant an interim-stay of further proceedings initiated by the Bank and the DRT may insist that the borrower remits some deposit and usually it can be from 10% to 30% depending upon the discretion of the DRT. It all depends upon the averments made in the Appeal. It would be extremely difficult for the DRT to ascertain the facts by looking at the averments in the Appeal and if the DRT refrains from granting any interim-order, then, there is a possibility that the Bank proceeds with the process and even can complete the Sale Process at times creating some third party interest which will further complicate issues.

But, when a borrower is serious in raising objections in his appeal under section 17, those objections to be in detail and specific. If the grounds in an Appeal under section 17 of SARFAESI Act, 2002 are mechanical and vague, then, it is very much possible for the DRT to come to an easy conclusion that the Appeal is preferred only to drag the proceedings and nothing more. In those circumstances, as soon as the Bank files its counter affidavit answering all the allegations in the Appeal preferred under section 17, the DRT may dismiss the Appeal. If the Appeal grounds are so vague and mechanical, it would be very difficult for the borrower to bring any new or additional facts in any further appeal proceedings before the DRAT or to the High Court subsequently. However, if the borrower chooses to file an appeal challenging the possession notice issued by the bank under section 13 (4) and while the Appeal is pending if the Bank goes ahead with further process with infirmities and illegalities, then, the Borrower is entitled to bring those further infirmities and illegalities in the form of an additional affidavit in the Appeal. As such, when the borrower is serious in his attempt to fight with the Bank challenging the SARFAESI proceedings under section 17 of the Act, pleadings to be detailed and perfect rather mechanical and vague. Even the DRT may not give much weight to the Appeal and the equities beyond a certain point if the grounds raised in the Appeal under section 17 are so vague and mechanical.

There may be instances where the borrower is not interested to fight with the Bank and instead may want to update the loan account and he must even have taken steps to do that. Under such circumstances, if the Bank is unreasonable and proceeds with their proceedings, then, the borrower can very well stick to his stand very firmly that he is not willful defaulter, has a fairly good track record in repayment issues, has the valuable security lying with the Bank and can continue to insist that the Bank is illegal in not agreeing to update the Account. It is a very interesting point if this stand is taken before the DRT. The DRT is empowered with certain powers under section 17 while entertaining an appeal from the borrower or any aggrieved person. Initially, the function of the DRT is to look into the procedural lapses committed by the Bank and nothing more. Later-on, the Courts have expanded the scope of powers of DRT and held that the DRT can look into the disputes pertaining to the outstanding claimed and all other issues and the DRT is even empowered to restore the possession back to the borrower if the physical possession of the property is taken by the Bank already. However, the DRT continues to exercise very limited powers and due this also; many Writ Petitions are filed to the High Court and even on SARFAESI issues, the High Courts issue directions to the Bank very frequently. While the DRT exercises some limited powers, there can not be any limitation on the powers or the power to issue directions by the High Court from time to time under Article 226 of Constitution of India.

Irrespective of the powers of the DRT under section 17 of SARFAESI Act, 2002, the borrowers should take-up all possible legal points in detail to the extent possible. Only due to the confusion with regard to the powers of DRT under section 17, the borrowers continue to approach Civil Courts at times and continue to approach the High Court very regularly. There can be a case where the borrower admits the minor default in repayment, he must have been other-wise good in repayment issues and must have expressed his willingness to update his account without raising any kind of litigation. If such is the attitude of the borrower, then, the borrower may prefer to approach the High Court seeking a suitable direction to allow him to get his account updated as even the RBI guidelines permit that and cautions against unnecessary harassment to the borrowers using technicalities. If this kind of cases are taken to DRT, then, apart from the expenses involved, the procedure before the DRT is different and the procedure delays the efforts of the borrower to get his account updated and the DRT may finally choose to look into the issue as to whether there is any procedural irregularity on the part of the Bank under the Act. An account which should have been updated very easily, may end-up as ‘Non-performing Asset’ forcibly and can lead to long litigation with the DRT, DRAT, High Court and Supreme Court and more interim applications in-between. It will not benefit either the borrower or the Bank and the Bank must be with the intention that they can recover the legal expenses incurred from the borrower finally.

As such, the borrowers should be very clear in their approach and should be careful in raising objections in their Appeal under section 17 of the SARFAESI Act, 2002.  

Note: the views expressed are my personal.