Forceful Seizure Of Vehicles By Recovery Agents Unconstitutional & Illegal, Compliance Of SARFAESI Act, RBI Guidelines Must: Patna High Court

In a significant ruling, the Patna High Court has said that banks and finance companies cannot use recovery agents to forcefully seize vehicles of customers who have defaulted on car loans, without following the proper procedure under law. 

The judgment was delivered by Justice Rajeev Ranjan Prasad while disposing of a batch of pleas filed by aggrieved petitioners against the action of the contesting respondents, namely, Tata Motor Finance Limited, IndusInd Bank Limited, Shri Ram Finance Company, ICICI Bank, and the State Bank of India.

What the court said:

"The Banks and the Finance Companies who are contesting these matters are under a constitutional obligation not to act in violation of law. They cannot act in conflict with the fundamental principles and policy of India which means that no person may be deprived of his livelihood and the right to live with dignity without following the established procedure of law. The right to recovery of these Banks and Financial Institutions if pitted against the constitutional right of ‘life’ of a person/petitioner to live with dignity and not to be deprived of without following the established procedure of law, the constitutional rights of the person/petitioners shall prevail. In this connection, this Court is tempted to reiterate that these are the rights conferred by Part III of the Constitution of India to ‘a person’ which are to be honoured by and also enforceable against, non-State actors. The private rights of the contesting respondents must be exercised within the constitutional limitations and in accordance with law."

The common grievance of all the petitioners was that their respective vehicles, which they had purchased with the financial assistance from these institutions, had been forcibly seized by the respondents without taking recourse to the process of law and by using goons and musclemen during odd hours.

The petitioners in all these writ applications sought a direction to the respondents to hand over their respective vehicles with all papers. They further sought compensation for the loss of their reputation suffered in the process.

Justice Prasad said that the actions of the contesting respondents were in clear contravention of the law and basic notions of justice. The court emphasized that the banks and finance companies must exercise their rights to recover loans within the limits of the Constitution.

The question before the Court was whether the provision regarding seizure of a vehicle in case of default, under the loan agreement in these cases, may be enforced in the manner it has been sought to be done by the respondents.

The court said that the contesting respondents, while seeking their private power to recover the loan by repossessing the vehicle, can exercise their rights only within constitutional limitations.

It further observed that even the RBI guidelines have emphasised that repossessions clause in the contract should be legally valid, should comply with the provisions of the Indian Contract Act in letter and spirit and banks should ensure that such repossession clause is clearly brought to the notice of the borrower at the time of execution of the contract.

The court observed that the loan agreements which were available on the record were at best only creating a security interest in the vehicles which would be covered within the meaning of the words “Secured Asset” under the SARFAESI Act, 2002.

It noted that the covenants of the loan agreement providing for re-possessing the vehicle do not provide a procedure in accordance with the provisions of the Act of 2002 and the Rules framed thereunder.

“In the garb of a power acquired by the financier under the loan agreement to repossess the vehicle, they cannot be allowed to take the law into their hands and enforce the loan agreement by violating the legislative mandate and the regulatory law such as the Act of 2002,” the Court observed.

The court asserted that the Banks and the Finance Companies have a constitutional obligation to not act in violation of law. It added that the action of the contesting respondents in seizure/repossessing the vehicles without following the RBI guidelines and the law was wholly illegal and further deprives the petitioners of their fundamental rights of livelihood and the right to live with dignity which are embedded in Article 21 of the Constitution.

The court left it open for the Investigating Agency to look into the complaints of the petitioners and investigate them independently in accordance with law.

It also allowed the petitioners to lodge their respective complaint with the jurisdictional police station within whose jurisdiction the vehicle in question has been seized and repossessed allegedly by use of force.

The court directed the respondents to exercise their power to seize and repossess the vehicle only in accordance with the provisions of the Act of 2002, and the Rules framed thereunder and the RBI guidelines. It further directed all Superintendent of Police in Bihar to ensure that no recovery agent takes the law into their hands within their jurisdiction.

It observed that repossession of any vehicle should be carried out only after the orders of the competent court and in accordance with the procedure established by law.

The court also directed that in all such cases where the vehicles have not been sold, the petitioners and the respondents through their authorized representative shall sit together and reconcile the account to determine the amount due in the loan account. However, the respondents shall not charge any interest for the period during which the vehicle remained in seizure and they will treat the Covid-19 period in accordance with lockdown notification, it said.

In the cases where the vehicle has been sold to a third party and the respondents are not in a position to restore the vehicle, the bench said that they would be liable to pay the petitioners to the extent of the value of the vehicles as per their insurance value on the date of the seizure, and the said amount shall be adjusted against the outstanding vehicle loan and thereafter if any surplus comes out the same will be made available to the petitioner.

While disposing of the writ applications, the court said,

“Since the action of the Banks/Finance Companies are found illegal, the petitioners who have been made to contest this case shall be entitled for cost of litigation. Accordingly, this Court directs that each of the contesting respondents i.e.Banks/Financial Institutions would be liable to pay a sum of Rs.50,000/- (fifty thousand) as cost of litigation to the respective writ petitions within a period of 30 days from the date of receipt/production of a copy of this judgment.”

Case Title: Dhananjay Seth vs. The Union of India Civil Writ Jurisdiction Case No.3456 of 2021

Click Here To Read/Download Judgment