Hari Dutta Sharma vs State of U.P. & Ors.

(v) Recovery agents engaged by banks and financial institutions must strictly adhere to the applicable Guidelines and instructions, including the Banking Codes and Standards Board of India (BCSBI) Code – (vi) Complaints received regarding violation of the Guidelines, or the adoption of abusive recovery practices, are to be viewed seriously by the RBI – (vii) The RBI may impose, and in cases of persistent breach extend, a ban upon a bank engaging recovery agents within a particular jurisdiction or function – (viii) A repossession clause may contain: (a) the notice period before possession is taken; (b) the circumstances in which such notice may be waived; (c) the procedure for taking possession; (d) a final opportunity to the borrower to repay before sale or auction; (e) the procedure for restoring possession to the borrower; and (f) the procedure for sale or auction – (ix) Banks are encouraged to maintain a mechanism of credit counsellors to extend sympathetic consideration to deserving borrowers, and NBFC-Microfinance Institutions are required to display the Fair Practices Code, in the vernacular language, at their branch premises, with a corresponding declaration of accountability for staff conduct and grievance redressal incorporated into the loan agreement itself – (x) Recovery is ordinarily to be made at a central designated place; recourse to the borrower’s residence or place of work is permissible only where he fails to appear at the designated place on two or more occasions, and field staff must possess the minimum qualifications and training prescribed by the Fair Practices Code. [Para 31]

Banking Regulation Act, 1949 – s.35 – Guidelines/Master Circulars/Clarifications issued by RBI to NBFCs and Scheduled Commercial Banks on recovery practices – Noncompliance with – Repossession of vehicle by financier – When unauthorised and arbitrary – Appellant obtained a commercial vehicle loan from financier Company which was secured by hypothecation of the vehicle – Appellant continued to make defaults in repayment of loan amount under the loan agreement, eventually, the Company repossessed the vehicle by breaking open its steering lock at about 1:00 a.m., without issuing any notice, and sold it – High Court dismissed the writ petition filed by the appellant holding that the vehicle had already been sold on and he had approached the Court belatedly – Interference with:

Held: Impugned order quashed, set aside – A financier’s right to take possession of the financed vehicle in the first instance, is a matter of contract, where an agreement confers such a right, there is no legal impediment to its exercise unless the contract is unconscionable or opposed to public policy – But precisely because this right operates as an alternative to recovery through courts or tribunals, outside the supervision of a court at the first instance, it must be construed with great circumspection; left unchecked, it is capable of being read as an unbridled licence to seize property by stealth, by force or in the dead of night, converting a facility meant to promote financial inclusion into an instrument of oppression against the very class it was designed to serve – Action taken against the appellant is in contravention both RBI Guidelines, which carry statutory force, and of the very terms of Art.11 of the loan agreement on which the Company relies – No seven-day notice, as contemplated by Art.11(a)(i), was in fact issued to the appellant prior to repossession; the right of repossession, being conditional upon such notice, never accrued to the Company in the first place –Appellant’s specific and unrebutted case is that possession was taken at about 1:00 a.m. by breaking open the steering lock of the vehicle, a mode of taking possession that is, by no stretch, peaceful, and one which bears every mark of the very ‘goondaism’ that this Court, in Prakash Kaur, and the RBI, in its successive Guidelines, have condemned in unambiguous terms – Possession memorandum does not even bear the appellant’s signature which reinforces the conclusion that the vehicle was taken by the Company’s recovery agents without following the due process of law – The vehicle of the appellant has already been sold therefore, even though the unauthorised and arbitrary action of the Company in repossessing the vehicle and in selling the same is not approved of, the sale is not being set aside – Appellant was deprived of his right to livelihood in an arbitrary and an unfair manner – Impugned action of the Company constitutes a violation of Arts.14 and 21 of the Constitution – Appellant entitled to compensation of Rs.10,00,000/in lieu of mental agony caused to him and loss of his livelihood for a considerable period – Company to refund Rs. 4,50,000/-, the sale price for which the vehicle of the appellant was sold with interest @ of 6% p.a from the date of sale till the payment is made to the appellant – Costs quantified at Rs. 50,000/-. [Paras 15, 26, 29, 30, 32, 33]

Writ Petition – Dismissal on the ground of delay, when not justified:

Held: Finding of the High Court that the writ petition was liable to be dismissed on the ground of delay, was arrived at without reference to the material on record – Appellant had lodged a First Information Report on the very day of the incident, 09.04.2023, and thereafter filed a complaint u/s.156(3), CrPC, 1973 on 08.11.2023, in the bona fide belief that his vehicle was stolen – He continued, moreover, to receive traffic challans on 18.01.2024, 18.11.2024 and 18.02.2025 in respect of a vehicle the Company claims to have sold as far back as 31.08.2023, a circumstance which, at the very least, called for explanation and ought to have weighed with the High Court – In these circumstances, the finding that the writ petition was liable to be thrown out on the ground of delay alone cannot be sustained, without an examination of its merits and in the absence of any demonstrated prejudice to the Company. [Para 27]

Loan Agreement – Art.11 – Was neither in consonance with the Guidelines issued by the RBI nor the provisions of the Contract Act, 1872:

Held: Art.11 places the borrower entirely at the mercy of financier’s unilateral discretion, both as to whether notice will be given at all and as to the manner and timing of the sale – On a careful scrutiny of Art.11 of the Loan Agreement read with Guidelines issued by the RBI, it is found that it is neither in consonance with the Guidelines issued by the RBI nor the provisions of the Contract Act, 1872 for the following reasons – Firstly, the stipulation that the borrower’s rights over the asset stand determined “ipso facto without any notice” upon the mere occurrence of an Event of Default is directly at variance with the requirement that a repossession clause must provide for a notice period before possession is taken – Secondly, the authorisation to recovery agents to “enter any place or places” in search of the asset is itself contrary to the RBI’s Guidelines and offends the requirement of a fair, lawful procedure for taking possession – Thirdly, the clause nowhere prescribes a procedure for taking possession or for sale and auction of the asset, leaving both wholly to the discretion of the Company – And fourthly, the power reserved to the Company to waive the notice altogether, at its own discretion, on its own assessment of jeopardy to its interest, converts what ought to be a floor of minimum protection into an illusory promise, defeasible at the will of the very party against whom it is meant to protect the borrower – A contractual term which permits one party unilaterally to dispense with the procedural safeguards designed to protect the other cannot be regarded as being in conformity with either the RBI Guidelines or the general contractual requirement of fairness; to that extent, Art.11 does not meet the standard the law requires of a valid repossession clause. [Paras 24, 25]

Banks/Banking – Financier’s right to take possession of financed vehicle – Banking Regulation Act, 1949 – s.35 – Directions issued under, possess a statutory force and are binding on the banking companies:

Held: A financier’s right to take possession of the financed vehicle in the first instance, is a matter of contract, where an agreement confers such a right, there is no legal impediment to its exercise unless the contract is unconscionable or opposed to public policy – Such clauses of self-help repossession are not, in themselves, an evil to be eradicated: they are what make it commercially feasible for institutions to extend credit, against the security of the very asset financed, to borrowers of modest means, truck operators and small transporters among them, who possess no conventional collateral and would otherwise remain outside the reach of institutional finance – But precisely because this right operates as an alternative to recovery through courts or tribunals, outside the supervision of a court at the first instance, it must be construed with great circumspection; left unchecked, it is capable of being read as an unbridled licence to seize property by stealth, by force or in the dead of night, converting a facility meant to promote financial inclusion into an instrument of oppression against the very class it was designed to serve – s.35-A of the Banking Regulation Act, 1949, empowers the Reserve Bank of India (RBI) to issue directions to the banking companies – The said power can be exercised in four contingencies, namely: (i) public interest; (ii) interest of banking policy; (iii) interests of depositors; and (iv) interests of the banking companies – Directions issued u/s.35-A possess a statutory force and are binding on the banking companies. [Paras 15, 16]