M/S M. SONS GEMS N JJEWELLERY PRIVATE LIMITED vs. RESERVE BANK OF INDIA & ORS
W.P.(C)-1122/2021
Facts:
1.State Bank of Bikaner and Jaipur (hereinafter referred to as ‘SBBJ’) granted cash credit (hypothecation) to the Petitioners with a limit to the sum of Rs. 10 crores and a sub-limit of Rs.4 crores on 24.11.2009. The Petitioners were also granted Bank Guarantee loan of Rs.5crores. Two properties were mortgaged by the petitioner.
2.Laxmi Villas Bank also give cash credit to the tune of Rs.5 crore and sub-limit of Rs.2 Crore. The Bank Guarantee for the sum of Rs.10 crore was also given to the Petitioners and the abovementioned two properties. cash credit (hypothecation) was enhanced by SBBJ to Rs.10 crores with sub-limit of Rs.4 crores and Bank Guarantee was enhanced to Rs.10 crore. 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 LVB were removed by MMTC Ltd. and the accounts of the Petitioners were categorised as Non-Performing Assets (NPA) by SBBJ.
3.Notice under section 13(2) of the SARFAESI act was issued by SBBJ and the LVB demanding outstanding amount of Rs.19.90 crores and Rs.14.94 crores respectively. One of the property was sold to Rs.11 Crore and OTS of Rs.10 crore was reached. of which 6.35 crore was paid and 4 crore was unpaid. LVB filed application before DRT for recovery of amount. LVB assigned the loan granted to the Petitioners to Reliance Asset Reconstruction Company. Petitioner approached RARC for OTS which was rejected and filed application for recovery of Rs.39 crore under section 13(2) of the SARFEASI.
4.Petitioners sent a letter dated 12.10.2020 to the Reserve Bank of India i.e., Respondent No.1 herein, for cancellation of 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 (hereinafter referred to as ‘RBI Guidelines, 2003’) have been violated. Stating that no action has been taken by the Reserve Bank of India, the Petitioners approached this Court by filing the instant writ petition.
Issue: Whether Chapter II of the SARFAESI Act is manifestly arbitrary and is in violation of Article 14 of the Constitution of India?
Arguments:
For Petitioner:
1.Counsel submitted that Chapter II of the SARFAESI Act contained provisions for regulation of securitisation and reconstruction of financial assets of banks and financial institutions and there are no guidelines which have been formulated in order to ensure proper regulation by the Asset Reconstruction Companies (hereinafter referred to as „ARCs‟).
2.He stated that majority of the Asset Reconstruction Companies do not follow the guidelines framed for realisation of the assets and the RBI does practically nothing to ensure that the maximum value of assets is obtained. He further submitted that in the absence of a judicial remedy by the borrower complaining about the malpractices committed by the Asset Reconstruction Companies, Chapter II as a whole would become manifestly arbitrary for the reason that each Asset Reconstruction Company follows its own procedure which varies on a case-to-case basis and thereby puts borrowers at a distinct disadvantage
3.It was contended that the appeal under Section 4(2) of the SARFAESI Act lies with the Central Government. He submits that the Central Government has a deep and penetrative influence over the working of the RBI by virtue of the Reserve Bank of India Act, 1934. The Central Government thus exercises great influence on the working of the RBI and the appeal under Section 4(2) of the SARFAESI Act should not be heard by the Central Government.
4.It was submitted that a lender‟s liability has to be adjudicated by an independent agency for determining the rights of the parties, particularly so when the consequences of an Act defeat the civil rights of the parties and the only remedy available to the borrowers, is to approach the Debt Recovery Tribunal (hereinafter referred to as „DRT‟) under Section 17 and 18 of the SARFAESI Act which only deals with the circumstances enumerated under Chapter III of the SARFAESI Act. He further states that Section 34 of the SARFAESI Act expressly ousts the jurisdiction of the Civil Court, and, therefore, there is a complete absence of any right to approach Courts in case of a flagrant violation of the procedure under Chapter 2 of the SARFAESI Act by the Asset Reconstruction Companies.
For Respondents:
1.It was submitted that a borrower can raise objections under Section 17 of the SARFAESI Act against a creditor or ARC before the DRT. The remedy under Section 17 of the SARFAESI Act is the appropriate and proper remedy to agitate any
disputes with respect to proceedings initiated by a creditor or ARC and therefore the Petitioners have an alternative effective remedy available to them under the SARFAESI Act and the present writ petition is not maintainable.
2.Petitioners cannot call upon the High Court to direct the RBI to frame guidelines as the same is done in exercise of the Banking Regulation Act, 1949 and is a matter of policy. It is submitted that RBI is empowered to determine policy and issue guidelines and directions to all or individual ARCs under Sections 3, 9, 10 and 12 of the SARFAESI Act and in exercise of these powers, the RBI issued the updated RBI Guidelines, 2003vide notification dated 01.07.2015.
3.He further submitted that in order to ensure transparency and fairness in the operation of businesses of an ARC, the RBI has devised and put in place the Fair Practice Code for Asset Reconstruction Companies (Fair Practice Code) by way of circular dated 16.07.2020.The Fair Practice Code must be mandatorily and strictly adhered to by ARCs and as per the same, all ARCs are required to constitute a Grievance Redressal Machinery within the organisation to ensure all genuine grievances are redressed promptly.
4.He submitted that the representation dated 09.10.2020 submitted by the Petitioner was closed by the RBI taking into consideration the proceedings under SARFEASI Act and the Recovery of Debts Due to Bank and Financial Institution Act, 1993 (RDDBFI Act) that are pending adjudication between the parties and to prevent derailing of the proceedings before the DRT, New Delhi
Decision: Chapter II of the SARFAESI Act is not manifestly arbitrary and is not in violation of Article 14 of the Constitution of India
Rationale:
1.HC noted that any action by an instrumentality of State is subject to judicial scrutiny under Article 226 of the Constitution of India. It is always open for any borrower to approach the High Court under Article 226 of the Constitution of India contending that the Reserve Bank of India is not exercising due and adequate control over any Asset Reconstruction Company and that the provisions of Chapter II of the SARFAESI Act is being violated.
2.If the Asset Reconstruction Companies do not follow the guidelines, the Reserve Bank of India has been given power to revoke the certificate of registration granted to them under Section 4 of the SARFAESI Act. It noted that the Fair Practice Code calls for measures to enhance transparency in the process of sale of secured assets by publicly soliciting the invitation for participation in auction to enable maximum participation. It also states that the spirit of Section 29A of the Insolvency and Bankruptcy Code be followed in dealing with prospective buyers
3.The borrower is entitled to file an application under Section 17of the SARFAESI Act challenging the actions of the Asset Reconstruction Company/Bank on the ground that it is not in accordance with the SARFAESI Act. It is well settled that the remedy u/s 17(1) of the SARFAESI Act allows the borrower to challenge the actions of the secured creditor on all such grounds which would render the action of the secured creditor illegal.
4.The DRT under Section 17(3) of the SARFAESI Act has the power to examine whether the actions of the secured creditor are in accordance with the provisions of the SARFAESI Act and the rules made thereunder. The remedy under Section 17 of the SARFAESI Act is not restricted to Chapter III of the SARFAESI Act and the DRT has power to look into the compliance of the secured creditor with other provisions of law, and not just provisions of the SARFAESI Act and rules framed thereunder.
5.The borrower cannot approach the RBI, in its capacity as a regulatory body to adjudicate whether the actions of an ARC are in compliance with the SARFAESI Act. The powers conferred upon the DRT under Section 17 are not restricted to Chapter II of the SARFAESI Act and the DRT has the power to assess whether the actions of the SARFAESI are in compliance with other provisions of the law as well.
6.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.
Order Copy:
