Writ Petition By Borrowers Challenging SARFAESI Proceedings Initiated By Private Banks/ARCs Not Maintainable: Supreme Court

The Supreme Court observed that a writ petition challenging proceedings under SARFAESI Act initiated by private banks/Asset Reconstruction Companies is not maintainable.

"If proceedings are initiated under the SARFAESI Act and/or any proposed action is to be taken and the borrower is aggrieved by any of the actions of the private bank/bank/ARC, borrower has to avail the remedy under the SARFAESI Act and no writ petition would lie and/or is maintainable and/or entertainable.", the bench comprising Justices MR Shah and BV Nagarathna said.

The court said that the activity of the bank/ARC (of lending the money to the borrowers) cannot be said to be as performing a public function which is normally expected to be performed by the State authorities.

In this case, the High Court of Karnataka entertained the writ petitions under Article 226 of the Constitution of India filed by borrowers against an Assets Reconstructing Company and passed an interim order directing for maintaining status quo with regard to SARFAESI action (possession of the secured assets). Challenging this, the Assets Reconstructing Company (ARC) preferred appeals before the Apex Court.

The ARCs contended that the writ petitions against the private party – ARC and that too against the communication proposing to take action under the SARFAESI Act would not be maintainable at all, and, therefore, the High Court ought not to have entertained such writ petitions and ought not to have granted the interim protection to the borrower. On the other hand, the borrowers contended that the ARC to act fairly while dealing with the security so as to secure the interest of the borrower as well as public at large (depositors). As the ARC has not performed the statutory duty cast upon it and there is a contravention of the statutory duty imposed under the Security Interest (Enforcement) Rules, 2002, a writ would lie against ARC against such an illegal action, it was contended.

 Agreeing with the contention raised by the ARC, the Apex Court bench observed thus:

12....It is required to be noted that a writ petition against the private financial institution – ARC – appellant herein under Article 226 of the Constitution of India against the proposed action/actions under Section 13(4) of the SARFAESI Act can be said to be not maintainable. In the present case, the ARC proposed to take action/actions under the SARFAESI Act to recover the borrowed amount as a secured creditor. The ARC as such cannot be said to be performing public functions which are normally expected to be performed by the State authorities. During the course of a commercial transaction and under the contract, the bank/ARC lent the money to the borrowers herein and therefore the said activity of the bank/ARC cannot be said to be as performing a public function which is normally expected to be performed 21 by the State authorities. If proceedings are initiated under the SARFAESI Act and/or any proposed action is to be taken and the borrower is aggrieved by any of the actions of the private bank/bank/ARC, borrower has to avail the remedy under the SARFAESI Act and no writ petition would lie and/or is maintainable and/or entertainable. 

Addressing the contention of the borrowers that the Supreme Court ought not to interfere with the interim / interlocutory orders passed by the High Court, the bench said that the writ petitions by the borrowers before the High Court under Article 226 of the Constitution of India is an abuse of process of the Court. While allowing the appeals, the court observed thus:

13.2... The writ petitions have been filed against the proposed action to be taken under Section 13(4). As observed hereinabove, even assuming that the communication dated 13.08.2015 was a notice under Section 13(4), in that case also, in view of the statutory, efficacious remedy available by way of appeal under Section 17 of the SARFAESI Act, the High Court ought not to have entertained the writ petitions. Even the impugned orders passed by the High Court directing to maintain the status quo with respect to the possession of the secured properties on payment of Rs.1 crore only (in all Rs.3 crores) is absolutely unjustifiable. The dues are to the extent of approximately Rs.117 crores. The ad-interim relief has been continued since 2015 and the secured creditor is deprived of proceeding further with the action under the SARFAESI Act. Filing of the writ petition by the borrowers before the High Court is nothing but an abuse of process of Court. It appears that the High Court has initially granted an ex-parte ad-interim order mechanically and without assigning any reasons. The High Court ought to have appreciated that by passing such an interim order, the rights of the secured creditor to recover the amount due and payable have been seriously prejudiced. The secured creditor and/or its assignor have a right to recover the amount due and payable to it from the borrowers. The stay granted by the High Court would have serious adverse impact on the financial health of the secured 24 creditor/assignor. Therefore, the High Court should have been extremely careful and circumspect in exercising its discretion while granting stay in such matters. In these circumstances, the proceedings before the High Court deserve to be dismissed."

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