Section 16 of the SARFAESI Act: No Compensation to Directors for Loss of Office
Section 16 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 governs compensation claims arising when a director, manager or person in charge loses office following action under the Act. It prevents claims for loss-of-office compensation but preserves independent claims for other recoverable amounts.
Text of Section 16 - No compensation to directors for loss of office
Section 16(1). Notwithstanding anything to the contrary contained in any contract or in any other law for the time being in force, no managing director or any other director or a manager or any person in charge of management of the business of the borrower shall be entitled to any compensation for the loss of office or for the premature termination under this Act of any contract of management entered into by him with the borrower.
Section 16(2). Nothing contained in sub-section (1) shall affect the right of any such managing director or any other director or manager or any such person in charge of management to recover from the business of the borrower, moneys recoverable otherwise than by way of such compensation.
Meaning and scope of Section 16
The expression "notwithstanding anything" in subsection (1) gives the prohibition overriding effect where a contract or another law would otherwise provide compensation for loss of office or premature termination of a management contract. The restriction applies to the managing director, other directors, managers and persons in charge of managing the borrower's business.
Importantly, the provision concerns loss of office or premature termination under the SARFAESI Act. It is not a general prohibition against every payment due to a former director or manager, nor does it extinguish unrelated lawful debts.
Section 16(2): Amounts that may still be recovered
Subsection (2) expressly preserves claims for money recoverable on grounds other than compensation for losing office. Depending on the governing contract, applicable law and evidence, such claims may include accrued and unpaid remuneration, reimbursable expenses or other independently established dues. Merely labelling a loss-of-office payment as a different kind of claim does not take it outside subsection (1).
Connection with Section 15: Takeover of management
Section 15 addresses the manner and effect of taking over the management of a borrower's business, including the appointment of new directors or administrators and the displacement of existing management. Section 16 addresses a related financial consequence: the displaced management cannot demand compensation solely because of the loss of office or premature termination under the Act.
Management takeover must be distinguished from the ordinary taking of possession of secured assets. Section 13(4) sets out the secured creditor's enforcement measures; Section 16 is specifically directed at the identified compensation claims.
Practical legal implications
- For directors and managers: identify separately any genuinely accrued dues, rather than claiming damages merely for termination of office.
- For secured creditors: distinguish prohibited loss-of-office compensation from independent monetary obligations of the borrower's business.
- For borrowers: examine the legal basis of management takeover and the nature of each claimed payment; Section 16 does not by itself decide every dispute about the validity of enforcement action.
Related provisions and remedies
Read Section 16 together with Section 15 (takeover of management) and Section 17 (application against enforcement measures). Whether a particular person can seek relief before the Debts Recovery Tribunal depends on the measure challenged and the statutory requirements.
Official legal resources
For the authoritative Act and amendments, consult India Code (Government of India). For regulatory information concerning banks and asset reconstruction companies, see the Reserve Bank of India. The statutory text should be read with any applicable amendments, rules and judicial decisions.