Defining SARFAESI Boundaries: Supreme Court’s Directives on High Court’s Intervention under Writ Jurisdiction

Introduction

In the judgement, PHR Invent Educational Society v. UCO Bank & Ors[i], delivered by the Hon'ble Supreme Court (‘SC’), the SC reiterated the importance of exhausting alternative remedies before approaching the High Court under a. 226 of the Constitution of India, 1949 (‘Constitution’). This ruling pertains to a case challenging the order dated 04.02.2022 (‘Impugned Order’), passed by the Division Bench of the High Court for the State of Telangana at Hyderabad (‘HC’), which was passed without noting non-adherence to the process laid down in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’).

Brief Facts

• This case involved a borrower, a bank, and an auction purchaser (‘Appellant’). The borrower had availed a loan from the bank and mortgaged four properties as collateral security. The borrower defaulted in the repayment of the loan amount, leading the bank to initiate proceedings under the SARFAESI Act.

• Subsequently, the bank issued an auction sale notice (‘Notice’) for auctioning off the mortgaged properties. In response, the borrower filed a securitization application before the Debt Recovery Tribunal (‘DRT’) under s. 17 of the SARFAESI Act, seeking to set aside the Notice, which was later withdrawn.

• Meanwhile, the auction took place, and the Appellant emerged as the highest bidder. However, the borrower failed to deposit the amount as directed by the DRT, resulting in the confirmation of the sale in favour of the Appellant.

• The borrower then filed a miscellaneous application before the DRT, seeking the restoration of the securitization application, which was dismissed by the DRT. Thereafter, the borrower approached the HC under a. 226 of the Constitution for the restoration of his application under s. 17 of the SARFAESI Act.

• The HC, vide the Impugned Order, ordered the restoration of the borrower’s application under s. 17 of the SARFAESI Act and directed the DRT to proceed with the same. Aggrieved by this decision, the Appellant filed an appeal before the SC.

Held

• The SC allowed the appeal filed by the Appellant, quashing, and setting aside the Impugned Order passed by the HC. Additionally, the SC imposed costs quantified at Rs. 1,00,000/- upon the borrower.

• It was held that the HC should ordinarily not entertain a petition under a. 226 of the Constitution if an effective remedy is available to the aggrieved person. It further held that this rule applies with greater rigour in matters involving the recovery of taxes, cess, fees, public money, and the dues of banks and other financial institutions.

• Further, while relying upon various previous judgements[ii], the SC held that the HC should not entertain a petition under a. 226 of the Constitution if the statute under which the action complained of has been taken, itself contains a mechanism for redressal of grievances.

• It was noted that the HC failed to consider various factors such as the conduct of the borrower, confirmation of sale, and registration thereof, and that the situation had reached an irreversible stage.

• Additionally, the SC held that interference with the confirmed auction sale could only occur in cases of fraud or collusion. Since no fraud or collusion was evident in the present case, the right of redemption was extinguished upon the execution of the registered sale deed.

• Lastly, the SC carved out certain exceptions when a petition under a. 226 of the Constitution could be entertained despite the availability of an alternative remedy, which included instances where the statutory authority has not acted in accordance with the provisions of the enactment in question, has acted in defiance of the fundamental principles of judicial procedure, has invoked repealed provisions, or has passed an order in total violation of the principles of natural justice.

Analysis

The SC’s ruling underscores the importance of exhausting alternative remedies before approaching the HC under a. 226 of the Constitution. This principle, while not absolute, is generally adhered to, especially in matters involving the recovery of public dues, taxes, cess, fees, and the dues of banks and other financial institutions. The SC’s decision reinforces the idea that legislation enacted for the recovery of such dues is a code unto itself, containing comprehensive procedures for recovery and quasi-judicial bodies for the redressal of grievances.

The impact of this decision is far-reaching. It serves as a reminder to borrowers and financial institutions about the sanctity of the process laid down in the SARFAESI Act. It also highlights the need for borrowers to comply with the directives of the DRT and the consequences of non-compliance thereof. Moreover, it emphasizes the principle of finality in legal proceedings and the conditions under which interference with a confirmed auction sale is permissible.

This ruling also has significant implications for the functioning of the High Courts. It serves as a reminder to the High Courts to exercise discretion with greater caution, care, and circumspection, especially when statutory remedies are available. The ruling reinforces the SC’s stance on the need for High Courts to refrain from entertaining petitions arising from the SARFAESI Act, thereby stressing the importance of adhering to established legal procedures and mechanisms for the redressal of grievances.

End Notes

[i] 2024 SCC OnLine SC 528

[ii] Agarwal Tracom Private Limited v. Punjab National Bank & Ors., (2018) 1 SCC 626; Authorized Officer, State Bank of Travancore & Anr. v. Mathew K.C., (2018) 3 SCC 85; Phoenix ARC Private Limited v. Vishwa Bharati Vidya Mandir & Ors., (2022) 5 SCC 345; Varimadugu OBI Reddy v. B. Sreenivasulu & Ors., (2023) 2 SCC 168.

Authored by Prashant Singh, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.