Karnataka HC Ends Four-Year Account-Freeze Protection, Says Old Restructuring Proposal Alone Can’t Bar SARFAESI Recovery Measures

The petitioner, a borrower whose loan account had been classified as a non-performing asset, sought a direction requiring LIC Housing Finance Limited to accept and consider its improved one-time restructuring proposal.

It also sought to restrain the lender from taking measures under Section 13(2) of the SARFAESI Act, set aside the demand notice dated 17 May 2022, and obtain an account statement.

The proposal had been made in the context of COVID-19-related disruption to the mall industry; the petitioner had resumed operations, but did not place updated material showing the proposal’s status, subsequent negotiations, or any concluded arrangement with the lender.

An interim order dated 24 August 2022 had directed the lender not to freeze the petitioner’s account and remained in force while the petition was pending.

Under the SARFAESI Act, a secured creditor may pursue statutory recovery remedies, including measures following a demand notice under Section 13(2), subject to the Act.

A borrower’s submission of a restructuring proposal does not, by itself, create an enforceable right to restructuring or bar the secured creditor from pursuing lawful recovery measures.

The Court’s jurisdiction under Articles 226 and 227 of the Constitution does not warrant indefinitely restraining those remedies in the absence of a demonstrated subsisting right or concluded restructuring arrangement.

The Court found that the proposal arose from pandemic-related business disruption but was several years old, and that the petitioner had resumed operations without providing updated information about the proposal, negotiations, or the loan account.

Nothing showed that the lender had accepted the proposal or that a binding arrangement subsisted.

Because a restructuring request alone did not prevent the lender from pursuing its statutory remedies, and the petitioner had not justified continuation of the interim protection despite benefiting from it for nearly four years, the Court found no basis to grant mandamus or maintain the restraint.

It held that the dismissal did not prevent the petitioner from independently submitting a fresh restructuring or settlement proposal, if permissible in law; any such proposal would be for the lender to consider under the applicable statutory and regulatory framework.