Legal Implications of Non-Regularisation of Loan Accounts Following NPA Declaration Under the SARFAESI Act

When a financial institution classifies a loan as a Non-Performing Asset (NPA), the relationship between the borrower and the lender shifts from a contractual credit arrangement to a statutory recovery process. A frequent point of contention in these proceedings is the non-regularisation of account, where borrowers seek to restructure their debts or pay overdue amounts in installments to halt the enforcement of security interests. However, the legal framework governing these requests is stringent, and judicial precedents suggest that banks are not legally obligated to grant regularisation once the recovery machinery of the SARFAESI Act has been set in motion.

Understanding Loan Account Regularisation in the Context of SARFAESI

In banking terms, regularisation refers to the process of bringing a delinquent account back to a 'standard' status. This is typically achieved by clearing all arrears through a lump-sum payment, a one-time settlement (OTS), or an agreed-upon restructuring plan. While banks may be open to such requests during the early stages of default, the landscape changes once a loan is declared an NPA—which generally occurs when repayments are overdue for 90 days.

Once the NPA status is triggered, the bank typically issues a demand notice under Section 13(2) of the SARFAESI Act. At this stage, the borrower has a statutory window of 60 days to submit objections or a request for the discharge of the liability under Section 13(3A). If the bank rejects these objections, it can proceed toward possession of the secured asset under Section 13(4). Many borrowers attempt to plead non-regularisation of account at this late stage, arguing that the bank failed to consider their request to settle the dues. However, the courts have consistently maintained that The failure of the Bank to consider the request for regularisation of the loan account does not necessarily grant the borrower a right to stall the recovery process 2018 1 Supreme 471.

Judicial Perspectives on the Right to Regularisation

The Indian judiciary, including the Supreme Court, has repeatedly clarified that borrowers do not have an automatic right to have their accounts regularised after a Section 13(2) notice has been issued.

The Priority of Statutory Remedies Over Writ Petitions

A critical trend in SARFAESI litigation is the court's refusal to entertain writ petitions under Article 226 when a statutory alternative exists. In cases where borrowers seek interim relief to prevent property auctions on the grounds that the bank refused to regularise the account, the Supreme Court has set aside such reliefs. The court has emphasized that Writ petition ought not be entertained due to alternate remedy under Section 17 before DRT 2018 1 Supreme 471. Essentially, the Debt Recovery Tribunal (DRT) is the designated forum for these disputes, and High Courts are encouraged to avoid granting hasty stays in financial matters without substantial reasoning 2018 1 Supreme 471.

The Doctrine of Waiver and Estoppel

Borrower conduct plays a significant role in how courts view requests for regularisation. In Andhra Bank v. Alphine Pharmaceuticals, the court examined a situation where a borrower repeatedly sought restructuring to delay bank action. The court held that ignoring such conduct would be unreasonable, especially when third-party rights (such as an auction purchaser) have been created. The court applied the doctrine of waiver and estoppel, noting that intentional relinquishment of known rights via conduct prevents a borrower from later challenging the sale of the asset 2022 1 Supreme 665.

Challenges Faced by Third Parties and Auction Purchasers

The enforcement of the SARFAESI Act extends beyond the primary borrower to include tenants and auction buyers.

1. Tenants and Post-Mortgage Leases: Tenants often attempt to block possession by claiming tenancy rights. However, if a lease is oral or unregistered and created after the mortgage, the court may view such a tenant as a tenant in sufferance and akin to trespassers 2019 0 Supreme(SC) 998. Under Section 13(13), the mortgagor's right to lease the property is extinguished once the enforcement process begins.
2. Auction Purchasers: Even those who purchase properties at a SARFAESI auction are subject to the Act's framework. If an auction buyer defaults on payments, the forfeiture of their deposit under Rule 9(5) is considered part of the Section 13(4) measures. The only appropriate remedy for such a buyer is to challenge the action under Section 17(2) before the DRT 2017 0 Supreme(SC) 1119.

The Role of RBI Directions and IBC Limitations

The interplay between SARFAESI and other financial regulations can further complicate account recovery. For instance, certain RBI circulars regarding stressed assets have been scrutinized for their compliance with the law. It has been held that general powers under Section 35A/35AB of the Banking Regulation Act cannot override the specific requirements of Section 35AA regarding referrals to the Insolvency and Bankruptcy Code (IBC) 2019 4 Supreme 40.

Furthermore, for those seeking relief through the IBC’s Corporate Insolvency Resolution Process (CIRP) under Section 7, the timeline is critical. Under Article 137 of the Limitation Act, the application must generally be filed within three years from the date of default. Applications filed beyond this window—such as a default in 2011 with a filing in 2018—are typically viewed as time-barred unless there is a clear acknowledgment of the debt 2020 5 Supreme 159.

Discretionary Relief from High Courts

Despite the strict statutory framework, some High Courts occasionally grant discretionary indulgence. In certain instances, courts have directed banks to accept overdue payments in installments to allow for the regularisation of the account 2021 Supreme(Online)(KER) 27992 and 2022 Supreme(Online)(KER) 6275. For example, a court may allow a borrower to clear overdues in a specific number of installments to avoid coercion 2021 Supreme(Online)(KER) 27992. However, this is a discretionary act of the court and not a statutory right; if the borrower misuses these opportunities, the bank retains the full right to proceed with enforcement 2014 Supreme(Online)(KER) 26052.

Summary of Key Takeaways for Borrowers

Navigating a SARFAESI proceeding requires a proactive approach rather than a reactive legal strategy. Based on judicial trends, borrowers should keep the following in mind:

• Timing is Everything: Requests for regularisation are most effective before the account is declared an NPA or before the Section 13(2) notice is issued. Once the recovery process begins, regularisation is entirely at the bank's discretion.
• Exhaust Statutory Remedies: Avoid rushing to the High Court via writ petitions. The Debt Recovery Tribunal (DRT) under Section 17 is the primary and most effective forum for challenging possession or auction measures 2017 0 Supreme(SC) 1119 and 2018 1 Supreme 471.
• Avoid Delay Tactics: Courts are unlikely to assist borrowers who use restructuring requests merely to stall auctions, as this may trigger the doctrine of estoppel 2022 1 Supreme 665.
• Document Good Faith: To seek the discretionary indulgence of a court, borrowers should provide documented evidence of their genuine intent to pay, such as partial payments made during the dispute.

In conclusion, while the SARFAESI Act provides a powerful mechanism for banks to recover dues, the law provides specific channels—namely the DRT—for borrowers to raise legitimate grievances. Because outcomes depend heavily on the specific facts of each case, borrowers should engage with their lenders constructively and seek specialized legal counsel to navigate the DRT process.