Sections 16 and 32 SARFAESI: Protections in Enforcement

Enforcement under the Act would stall if displaced directors could claim payouts and aggrieved borrowers could sue the creditor's officers at will. Two provisions close those doors. Section 16 denies compensation to directors who lose office when management is taken over; Section 32 shields good-faith acts under the Act from suit or prosecution. Together they protect the enforcement and push the borrower's grievance into the statutory forum. This note sets out both and their combined effect.

1. Section 16: No Compensation to Displaced Directors

Figure 1: No payout for loss of office

• No compensation, s.16. A managing director, director, manager or other person in charge of management is not entitled to compensation for loss of office when management is taken over under s.15 (Topic 31)
• Contracts to the contrary void. Any contract promising such compensation is void to that extent, so a golden-parachute clause cannot be enforced against the takeover.
• The rationale. Those displaced lost office because the business defaulted; the Act will not let them draw a payout at the secured creditor's expense out of the enforcement.
• Scope. It bites only on loss of office on a s.15 takeover; it does not touch other dues an officer may lawfully be owed, such as salary already earned.

2. Section 32: Protection of Good-Faith Action

Figure 2: Good-faith acts shielded from suit

• Good-faith immunity, s.32. No suit, prosecution or other legal proceeding lies against a secured creditor, an ARC, or their officers for anything done or intended to be done in good faith under the Act.
• Only good-faith acts. The protection covers acts done in good faith under the Act; it does not shield mala fide, reckless or wholly unauthorised conduct, which remains answerable.
• It channels the challenge. A borrower aggrieved by enforcement cannot sue the officers in an ordinary court but must take the statutory remedy before the DRT under s.17 (Topic 35)
• A common statutory shield. Such good-faith protection is a standard feature of statutes conferring coercive powers, keeping officers from personal exposure for lawful acts.

3. The Combined Effect

Figure 3: Enforcement protected, grievance channelled

• Enforcement protected. s.16 denies displaced directors a payout, and s.32 shields good-faith acts from suit, so neither can be used to frustrate a lawful enforcement.
• Ordinary suits barred. A borrower cannot tie up the enforcement with civil suits against the creditor's officers for good-faith acts, which keeps the process moving.
• Remedy is the DRT. The grievance is taken to the DRT under s.17, and on appeal to the DRAT under s.18, keeping the challenge in the statutory forum (Topics 35, 39)
• The limit remains. The shield is only for good faith: a borrower alleging mala fides or action outside the Act is not shut out, so the protection is not absolute.

4. Frequently Asked Questions

Are directors entitled to compensation when management is taken over under the SARFAESI Act?

No. Section 16 provides that, notwithstanding anything in any contract or any other law, no managing director, director, manager or other person in charge of the management of the borrower is entitled to compensation for the loss of office that results when management is taken over under Section 15. Any contract that promises such compensation is void to that extent. The rationale is that these persons lost office because the business defaulted, and the Act will not allow a payout to be drawn at the secured creditor's expense out of the enforcement. The bar is confined to loss of office on a takeover and does not affect dues lawfully earned, such as salary for past service.

Can a borrower sue the bank's officers for enforcement action under the SARFAESI Act?

Not for acts done in good faith. Section 32 provides that no suit, prosecution or other legal proceeding lies against a secured creditor, an asset reconstruction company or their officers for anything done or intended to be done in good faith under the Act. A borrower aggrieved by the enforcement must therefore take the statutory remedy, an application to the Debt Recovery Tribunal under Section 17 and an appeal to the Appellate Tribunal under Section 18, rather than suing the officers in an ordinary court. The protection is limited to good-faith action under the Act, so it does not shield conduct that is mala fide, reckless or wholly outside the Act, which remains answerable.

5. Related Topics

• Topic 31: Section 15 Takeover of Management. The takeover Section 16 attaches to.
• Topic 35: Section 17 Application. The forum a borrower's grievance goes to.