M/S M. Sons Gems N JJewellery Private Limited & Ors. v. Reserve Bank of India & Ors.

13. It is submitted by Mr. Babu 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.

14. Mr. Babu submits that the constitutional validity of the provisions of the SARFAESI Act has been upheld by the Apex Court in Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311, wherein it was held that borrowers get a reasonably fair deal and opportunity to get their disputes adjudicated before the DRT. The instant petition which seeks to challenge the provisions of the SARFAESI is thus devoid of any merits.

15. Ms. Usha Singh, the learned Counsel for Respondent No. 3 submits that the RARC has proceeded against the Petitioners in accordance with the law laid down under the SARFAESI Act and the RBI 2003 Guidelines and it has not violated any provisions of law. Further, the RARC has complied with the Fair Practice Code by providing a Grievance Redressal Mechanism for borrowers, the details of which are displayed on the website of RARC and an aggrieved borrower can use this mechanism to lodge a complaint.

16. Heard learned counsels for the parties and perused the material on record.

17. The principal contention of the Petitioners is that absence of any judicial remedy by a borrower in case of a flagrant violation of the guidelines/provisions under Chapter II of the SARFAESI Act by an Asset Reconstruction Company renders the entire Chapter ultra vires the Constitution of India. He states that the right to a judicial remedy is a part of the basic structure and any enactment which provides for a duty to be performed by the instrumentalities of the State must also prescribe the remedies in case of a violation/non-performance of such duty. The absence of a judicial remedy under any enactment makes the enactment liable to be struck down. The said contention lacks merit. 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.

18. Before proceeding to discuss the contention of the Petitioners regarding the absence of a judicial remedy, we find it pertinent to discuss the powers and the role of the Reserved Bank of India under the SARFAESI Act. Section 12 of the SARFAESI Act gives power to the Reserve Bank of India to determine policy and issue directions. Section 12 of the SARFAESI Act reads as under: "12.Power of Reserve Bank to determine policy and issue directions. (1) If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to its advantage or to prevent the affairs of any [asset reconstruction company] from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such [asset reconstruction company], it is necessary or expedient so to do, it may determine the policy and give directions to all or any [asset reconstruction company]in matters relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and also relating to deployment of funds by the [asset reconstruction company], as the case may be, and such company shall be bound to follow the policy so determined and the directions so issued. (2) Without prejudice to the generality of the power vested under sub-section (1), the Reserve Bank may give directions to any [asset reconstruction company]generally or to a class of [asset reconstruction companies] or to any [asset reconstruction company]in particular as to— (a) the type of financial asset of a bank or financial institution which can be acquired and procedure for acquisition of such assets and valuation thereof; (b) the aggregate value of financial assets which may be acquired by any [asset reconstruction company].

(c) the fee and other charges which may be charged or incurred for management of financial assets acquired by any asset reconstruction company;

(d) transfer of security receipts issued to qualified buyers.”

19. A reading of the aforesaid highlights that under the SARFAESI Act, powers have been given to the Reserve Bank of India to determine policy and issue directions to the Asset Reconstruction Companies to regulate their affairs. In fact, 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.

20. For the purpose of Asset Reconstruction, which includes recovery of debts, the Reserve Bank of India has issued guidelines and directions in the form of RBI Guidelines, 2003according to which the ARC must formulate a plan for 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 of 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 ARCs are required to formulate the policy for realization of financial assets, under which the period for realization shall not exceed 5 years from the date of acquisition. The Guidelines also provide that the policy shall be duly approved by the Board of Directors laying down the parameters for settlement of the debt acquired. The Board of Directors also have the power to extend the period of 5 years upto a maximum period of 8 years and shall specify the steps to be taken within 5 years and/or extended period of 8 years.

21. The RBI has also issued a “Fair Practices Code for Asset Reconstruction Companies” under Section 9 of the SARFAESI Act to increase fairness and transparency in the manner ARCs conduct their businesses. 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. The Code also calls for ARCs to put in place a Board approved outsourcing policy if they wish to outsource any of their activities, and the ARCs shall ensure that these outsourcing arrangements do not diminish the ARCs ability to fulfil its obligations to customers and the RBI and does not impede upon effective supervision by the RBI. It is also provided that in the matter of recovery of loans, ARCs do not resort to harassment of the debtor and their staff is adequately trained to deal with customers in an appropriate manner.

22. The contention of the Petitioners that that the scope of the remedy available under Section 17 of the SARFAESI Act is restricted only to disputes pertaining to Chapter III of the SARFAESI Act and it does not cover Chapter II of the SARFAESI Act cannot be accepted. 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. At this juncture, it becomes expedient for this Court to discuss the scope of the remedy provided for under Section 17 of the SARFAESI Act. Section 17 of the SARFAESI Act is reproduced as under:

reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub‑section (1) of section 17.]3[Explanation.—For the removal of doubts it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub‑section (1) of section 17.]" 4[(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of this Act and the rules made thereunder. (3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub‑section (4) of section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules made thereunder, and require restoration of the management of the secured assets to the borrower or restoration of possession of the secured assets to the borrower, it may by order, declare the recourse to any one or more measures referred to in subsection (4) of section 13 taken by the secured assets as invalid and restore the possession of the secured assets to the borrower or restore the management of the secured assets to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of section

13. (4) If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub‑section (4) of section 13, is in accordance with the provisions of this Act and the rules made thereunder, then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to one or more of the measures specified under sub‑section (4) of section l[3] to recover his secured debt. (5) Any application made under subsection (1) shall be dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application: Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be recorded in writing, so, however, that the total period of pendency of the application with the Debts Recovery Tribunal, shall not exceed four months from the date of making of such application made under subsection (1). (6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as specified in sub-section (5), any party to the application may make an application, in such form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal. (7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of application in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and the rules made thereunder.]"

23. The Hon‟ble Supreme Court in the case of Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311,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. The relevant extracts from the decision are reproduced as under:

24. The Apex Court in its decision in Indian Overseas Bank v. Ashok Saw Mill, (2009) 8 SCC 366, discussed the jurisdiction of DRT under Section 17 of the SARFAESI Act. The Court noted that certain checks and balances have been introduced through Section 17 of the SARFAESI Act in order to prevent misuse of the wide powers conferred upon banks and financial institutions under the SARFAESI Act. The Apex Court held that Section 17 of the SARFAESI Act permits the borrower, who is aggrieved by measures taken against him under Section 13(4) to approach the DRT and the DRT has been vested with the power to declare any such action as invalid. It notes that Section 17(3) of the SARFAESI Act vests with the DRT, the authority to question the action taken by a secured creditor. The relevant paragraphs of the judgment delineating the same are reproduced as under:

25. In United Bank of India v. Satyawati Tondon, (2010) 8 SCC 110, the Apex Court noted that the SARFAESI Act is a code in itself and the remedy provided under Section 17 is an expeditious and effective remedy available to an aggrieved person. In this regard, the Court stated as follows:

26. 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. The DRT while exercising its powers under Section 17 of the SARFAESI Act is not restricted to the compliance of provisions of the Act alone and can get into violations of other provisions such as mandatory guidelines of RBI and other incidental questions.

27. The aforestated decisions of the Hon‟ble Supreme Court make it clear that a borrower aggrieved by the actions of the secured creditor can approach the DRT under Section 17 of the SARFAESI Act. The SARFAESI Act is a code in itself and the remedy provided for under Section 17 of the SARFAESI Act is an expeditious and effective remedy available to borrowers and the same provides reasonable protection to the interest of the borrowers. 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.

28. Chapter II of the SARFAESI Guidelines provides for a mechanism through which the RBI regulates the functioning of securitisation by banks, financial institutions and the securitisation companies. In pursuance of these statutory functions the RBI has framed the RBI Guidelines, 2003 and Fair Practice Code which have been discussed above. These Guidelines and Code regulate the functioning of the banks, financial institutions, securitisation companies and reconstruction companies involved in the process of securitisation of financial assets and the enforcement of security interests. These functions of regulation are within the exclusive domain of the RBI and a borrower cannot claim that his grievance with the actions of a secured creditor be adjudicated by the RBI under Chapter II of the SARFAESI Act. 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. 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. Permitting a borrower to approach the RBI to adjudicate such claims under Chapter II would be against the scheme of the SARFAESI Act.

29. The learned Counsel for the Petitioners has argued that Chapter II of the SARFAESI Act is manifestly arbitrary and has relied upon the decision of the Hon‟ble Supreme Court in Shayara Bano (supra) to buttress this argument. The Court in the said decision has explained the test of manifest arbitrariness as follows:

30. The aforesaid decision defines the test of manifest arbitrariness as something done by the legislature capriciously, irrationally and/or without determining principle or something which is excessive and disproportionate. As has been discussed above, the SARFAESI Act provides for an efficacious and expeditious remedy to borrowers under Section 17. 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. Further, the bar on jurisdiction of civil courts under Section 34 has been upheld by the Hon‟ble Supreme Court in Mardia Chemicals Ltd. (supra) and the reason for providing “protection of actions taken under good faith” under Section 32 has been explained in Priyanka Srivastava v. State of U.P., (2015) 6 SCC 287 wherein the Hon‟ble Supreme Court has discussed the intention of the legislature to provide for the same under the SARFAESI Act. The Court in the aforesaid decision was dealing with a case where the secured creditor had initiated action against the borrowers under Section 13(4) of the SARFAESI Act and in response the borrowers decided to initiate criminal action against the officials. The Court at the outset in the aforesaid decision noted how borrowers abuse the process of the Court to harass statutory authorities and create pressure on officials in order to settle disputes. The Court in its decision noted that the Parliament has made such a provision in its wisdom to protect the secured creditors and its officers so that such situations can be avoided.

31. 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 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.

32. 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.

33. 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 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.

34. It has been brought to the notice of this 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. This Court is not going into those issues at this juncture. It is left to the Petitioners and Respondent No.3 to raise all the contentions available to them before the DRT. It is also stated by learned counsel for the Petitioners that representations are pending before the RBI. It is 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.

35. The petition is disposed of with the above observations. Pending applications, if any, stand disposed of.

SATISH CHANDRA SHARMA, CJ SUBRAMONIUM PRASAD, J OCTOBER 14, 2022 hsk.