'Not Manifestly Arbitrary': Delhi High Court Upholds Constitutional Validity Of Chapter II Of SARFAESI Act

The Delhi High Court has upheld the constitutional validity of Chapter II of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 observing that it is not manifestly arbitrary and is not in violation of Article 14 of the Constitution of India.

A division bench of Chief Justice Satish Chandra Sharma and Justice Subramoniuam Prasad passed the ruling in a plea challenging Chapter II of the Act on the ground that it did not provide an avenue of judicial redress against Asset Reconstruction Companies (ARCs) who have defaulted in their statutory obligations including for the borrowers.

Chapter II of the Act provides for the regulation of securitization and reconstruction of financial assets of banks and financial institutions.

In the alternative, the plea also sought directions asking the Reserve Bank of India and Central Government to provide legal remedies to the borrowers for enforcement of provisions of Chapter II.

It was argued on behalf of the petitioners that Chapter II and RBI Guidelines of 2003 do not provide for any judicial remedy, unlike the one provided under Chapter III of the Act, adding that the same be struck down for lack of judicial remedy.

Furthermore, it was also submitted that the absence of a judicial remedy makes chapter II of the Act manifestly arbitrary for the reason that each Asset Reconstruction Company follows its own procedure which varies on a case-to-case basis and therefore puts borrowers at a distinct disadvantage.

Accordingly, it was the petitioner's case that absence of any judicial remedy by a borrower in case of a flagrant violation of the guidelines or provisions under Chapter II by an Asset Reconstruction Company renders it ultra vires the Constitution of India.

Perusing the statutory provisions and relevant judgments on the subject, the court observed that the remedy under Section 17 of the 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 - is not restricted to Chapter III and that the DRT has power to look into the compliance of the secured creditor.

The bench added that the borrower cannot approach RBI in its capacity as a regulatory body to adjudicate whether the actions of an ARC are in compliance with the SARFAESI Act.

"As stated above, the SARFAESI Act under Section 17 provides for an efficacious and efficient remedy to adjudicate the grievances of a borrower and the DRT has the power to determine whether the actions of an ARC are in compliance with the SARFAESI Act," the court said.

It added that permitting a borrower to approach the RBI to adjudicate such claims under Chapter II would be against the scheme of the SARFAESI Act.

The court observed that the petitioners failed to establish as to how the legislature has acted in a "capricious or irrational manner" or how the impugned provisions were excessive or disproportionate.

"In light of the foregoing, it is 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 is rejected," the court held.

On the alternative prayers as sought in the plea, the court was of the view that it 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.

Title: M/S M. SONS GEMS N JJEWELLERY PRIVATE LIMITED & ORS v. RESERVE BANK OF INDIA & ORS

Citation: 2022 LiveLaw (Del) 976

Click Here To Read Order