Overview of the SARFAESI Act

Borrowers cannot pray to Court to grant One Time Settlement Scheme as a matter of right, rules SC in the case Bijnor Urban Cooperative Bank Ltd. v. Meenal Agarwal.

Brief Facts:

The borrower had obtained a credit facility from a bank categorized as "Non-Performing Asset (NPA)". The bank initiated proceedings under the provisions of the SARFAESI Act, 2002. The borrower applied to the bank to consider her case under the One Time Settlement (OTS) Scheme. The bank rejected the application saying that she was not eligible for settlement under the OTS Scheme as her loan account had been declared as NPA. The loan could be recovered by auction of the mortgaged property.

Normally borrower is confused between the two terms loan closure and one-time settlement, both are different. The loan closure can be both organic and inorganic. An organic closure will be when you pay the outstanding amount over the course of a loan. Similarly, when you prepay the loan from your own sources before the stipulated tenure, it will also amount to an organic closure. But when you close the loan amount via a balance transfer, it will be called inorganic closure. Yes, with a balance transfer, your loan with the existing lender closes and you, in turn, have to pay the loan EMIs at the new lender. Whereas OTS is an agreement to close the loan to reduce the debt amount.

The One-time Settlement (OTS) tool is?used by lenders to recover dues from individuals with a default payment history. The lender agrees for a one-time settlement amount which will be lower than the total amount due. As a borrower, you need to repay the agreed amount at once within the time you are given to do so.

So in the above case Bijnor Urban Cooperative Bank Ltd. v. Meenal Agarwal. The borrower filed a writ petition before the High Court to challenge the order passed by the bank rejecting her application for giving the benefit of the OTS scheme. The High Court issued a writ of mandamus and directed the bank to positively consider her application for grant of benefit under the OTS Scheme.

Supreme Court's Ruling On appeal, the Supreme Court held that no borrower could, as a matter of right, pray for a grant of benefit of the One Time Settlement Scheme. The Apex Court observed that it might happen that a person would borrow a considerable amount, for example, Rs. 100 crores. After availing of the loan, he may deliberately not pay any amount towards instalments, though able to make the payment. He would wait for the OTS Scheme and then pray for a grant of benefit under the OTS Scheme, under which always a lesser amount will be paid than the amount due and payable under the loan account. This, despite all possible recovery of the entire loan amount, can be realised by selling the mortgaged/secured properties.

The Apex Court ruled that no writ of mandamus can be issued by the High Court in the exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to grant the benefit of OTS to a borrower positively.

Given the above, the High Court, in the present case, has materially erred and has exceeded in its jurisdiction in issuing a writ of mandamus in the exercise of its powers under Article 226 of the Constitution of India by directing the appellant Bank to positively consider/grant the benefit of OTS to the original writ petitioner.

The Apex Court quashed and set aside the order passed by the High Court, holding it to be unsustainable.

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