10 April 2024 Bankruptcy & Insolvency Law >> Business & Commercial Law   |   Recovery >> Civil/Debt  

In a recent case, borrowers who defaulted on a loan secured by property challenged a court order demanding repayment. The twist? The lender pursued recovery through two separate Acts, and the borrowers argued this was unfair. The High Court shut down their challenge, highlighting that both methods are legal and can be used simultaneously.

Background:

The borrowers in this case took out a loan with a lender, using their property as security. Unfortunately, they fell behind on repayments. To recoup their losses, the lender initiated recovery proceedings under two different Acts:

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act): This Act allows lenders to enforce their security interest, meaning they can sell the mortgaged property to recover the debt.
• The Recovery of Debts Due to Banks and Financial Institutions Act (RDDB Act): This Act empowers tribunals to adjudicate debt recovery cases and determine the outstanding amount owed by the borrower.

The Challenge: Can a Lender Use Both Recovery Methods?

The borrowers argued that the lender couldn't pursue them under both Acts simultaneously. They claimed they had to "choose" between the SARFAESI and RDDB processes, essentially forcing them to pick one method to challenge.

The Court's Decision:

The High Court dismissed the borrower's challenge. Here's why:

• Supreme Court Precedent: The court pointed to previous rulings by the Supreme Court that established both the SARFAESI Act and RDDB Act can be used concurrently for debt recovery. These cases clarified that the Acts offer complementary tools, not conflicting options.
• No "Election of Remedy": The borrowers' argument that they had to choose one Act over the other was deemed irrelevant. The court explained that the Acts provide additional remedies, not force an exclusive choice.
• Complementary Roles: The court highlighted the distinct roles of each Act:
• SARFAESI focuses on enforcing the security interest, which in this case meant selling the property.
• RDDB focuses on determining the exact amount of debt owed by the borrowers.

Why This Matters: Streamlining Debt Recovery and Borrower Obligations

This case clarifies that borrowers cannot exploit loopholes in recovery processes to delay repayment. By allowing parallel proceedings under both Acts, the court streamlines debt resolution, especially in situations where the secured property might not cover the entire debt.

The key takeaway? Borrowers facing recovery actions cannot avoid their obligations by challenging the methods used by lenders. Both the SARFAESI Act and RDDB Act offer legitimate tools for creditors to recoup their losses, and using them together can expedite the process.

  Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002    RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993