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Chapter II of the SARFAESI Act, 2002 is neither manifestly arbitrary nor in violation of Article 14


Delhi High Court, Division Bench comprising Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad was hearing a Petition where the Petitioners prayed for striking down Chapter II of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for not providing an avenue of judicial redress against ARCs who have defaulted in their statutory obligations including for borrowers. The Division Bench of the High Court held that the Chapter II of the SARFAESI Act, 2002 is neither arbitrary nor in violation of Article 14.


In the present case, The State Bank of Bikaner and Jaipur granted cash credit to the Petitioners with a limit to the sum of Rs. 10 crores and a sub-limit of Rs. 4 crores. The Petitioners were also granted a Bank Guarantee loan of Rs. 5 crores.


The Petitioners in order to secure the cash credit and the Bank Guarantee granted by SBBJ gave an equity mortgage of two properties.


Laxmi Vilas Bank (Respondent No. 5) gave cash credit to the Petitioners within a limit for the sum Rs. 5 crores and a sub-limit of Rs. 2 crores. On account of a survey conducted by the Income Tax Department, the bank accounts of the Petitioners were frozen. The loan accounts of the Petitioners were also frozen by the Income Tax Department.


The Bank Guarantees issued by Laxmi Vilas Bank were removed by MMTC Ltd. and the accounts of the Petitioners were categorized as Non-Performing Assets (NPA) by SBBJ.


Laxmi Vilas Bank filed an application before the Debt Recovery Tribunal for recovery of Rs, 13.31 crores. Laxmi Vilas Bank assigned the loan granted to the Petitioners to Reliance Asset Reconstruction Company. (RARC) (Respondent No. 3).


Petitioner sent a letter to RBI (Respondent No.1) for cancellation of the certificate of registration of RARC under Section 4 of the SARFAESI Act alleging that the provisions of the SARFAESI Act read with Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 have been violated.


Whether the petition striking down Chapter II of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for not providing an avenue of judicial redress against ARCs who have defaulted in their statutory obligations including for borrowers could be accepted?


High Court observed that for the purpose of Asset Reconstruction, which includes recovery of debts, the RBI has issued guidelines and directions in the form of RBI Guidelines, 2003 according to which the ARC must formulate a plan for the realisation of assets within the planning period i.e. within a period not exceeding 6 months from the date of acquisition of debt. The said formulation includes one or more asset reconstruction measures i.e. rescheduling of payment of settlement of dues or enforcement of security interest or charge or take-over of management etc.


The bench relied upon the case of Mardia Chemicals Ltd. v. Union of India, 2004 (1) Bank CLR 641 (SC), where the Supreme Court while dealing with a constitutional challenge to the validity of Section 17 of the SARFAESI ACT recognised that the borrowers cannot be left remediless in case they have been wronged by a secured creditor, bank or financial institutions and that borrowers have a right to approach the DRT after measures are taken against the borrower under Section 13(4) of the SARFAESI Act and the same provides reasonable protection to the borrower.


High Court noted that “the petitioners cannot claim a remedy under Section 4 of the SARFAESI Act as the borrowers have an appropriate remedy available to them under Section 17 of the Act. The petitioners have failed to establish how the legislature has acted in a capricious or irrational manner or how any of these provisions are excessive or disproportionate. The provisions of the SARFAESI Act as a whole have been made to give effect to its purpose and object and the legislature has enacted the legislation on rational and determined principles.”


The purpose of Chapter II of the SARFAESI Guidelines is to establish a mechanism through which the RBI shall regulate securitisation process by Banks, Financial Institutions and Securitisation Companies. It is in the performance of this statutory function that the RBI 2003 Guidelines and the Fair Practice Code have been published by the RBI. Further, as has been discussed hereinabove, the Petitioners cannot claim a remedy under Section 4 of the SARFAESI Act as the borrowers have an appropriate remedy available to them under Section 17 of the Act. The Petitioners was failed to establish how the legislature has acted in a capricious or irrational manner or how any of these provisions are excessive or disproportionate. The provisions of the SARFAESI Act as a whole have been made to give effect to its purpose and object and the legislature has enacted the legislation on rational and determined principles.


In light of the foregoing, Division Bench of High Court held that Chapter II of the SARFAESI Act is not manifestly arbitrary and is not in violation of Article 14 of the Constitution of India. Accordingly, the prayer of the Petitioners seeking a writ to strike down Chapter II of the SARFAESI Act was rejected.


The Petitioners herein have made an alternative prayer seeking a writ of mandamus to the RBI to exercise its powers under Section 12 of the SARFAESI Act to provide legal remedies to the borrowers for enforcement of provisions of Chapter II.


The Petitioners have further alternatively prayed for a writ of mandamus to the Union of India to exercise its powers under Section 38(1) of the SARFEASI Act to provide legal remedies to the borrowers for enforcement of provisions of Chapter II.


Additionally, the Petitioners have prayed for a writ of mandamus to the RBI to amend the RBI 2003 Guidelines to make provisions in it to the effect that defaulting ARCs shall not be entitled to proceed as per the provisions of SARFAESI Act and lose their right to enforce security interest under the SARFAESI Act. With regards to these alternate prayers made by the Petitioners, it is suffice to say that the High Court does not have any power to direct the Legislature or the Executive to perform a legislative function as such a direction would be in conflict with the doctrine of separation of powers.


It has been brought to the notice of the High Court that Petitioners have already approached the DRT by raising objections regarding the modus adopted by Respondent No.3/RARC for sale of the property. The High Court denied to entertain those issues at this juncture. It was left to the Petitioners and Respondent No.3 to raise all the contentions available to them before the DRT. It was also stated by learned counsel for the Petitioners that representations were pending before the RBI. It was always open for the RBI to consider and decide the representation and pass appropriate orders in accordance with law even when the Petitioners have already approached the DRT.


It was also filed praying to direct the Reserve Bank of India to amend Securitization Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 to make provisions in it to the effect that defaulting ARC companies including RARC respondent, shall not be entitled to proceed as per provisions of SARFAESI Act and shall lose their rights to enforce security under provisions of SARFAESI Act.


In view of the above, the bench stated that this Court does not have any power to direct the Legislature or the Executive to perform a legislative function as such a direction would be in conflict with the doctrine of separation of powers and directed the petitioners and respondent no. 3 to raise all the contentions before the DRT.


The Petition was accordingly dismissed.


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