Delhi High Court Upholds Constitutional Validity of SARFAESI Chapter II


The Delhi High Court upheld the constitutional validity of Chapter II of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act 2002, noting that it is not manifestly arbitrary and does not violate Article 14 of the Constitution of India.

A dividing bench of Chief Justice Satish Chandra Sharma and Justice Subramoniuam Prasad issued the decision in a plea challenging Chapter II of the Act on the grounds that it provided no legal remedy against Asset Reconstruction Companies (ARCs) that failed in their legal obligations, including for borrowers.

Chapter II of the law provides for the regulation of securitization and the reconstitution of financial assets of banks and financial institutions.

In the alternative, the advocacy also sought to request the Reserve Bank of India and the central government to provide legal remedies to borrowers for the application of the provisions of Chapter II.

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

Furthermore, it has also been argued that the lack of judicial remedy renders Chapter II of the Act manifestly arbitrary on the grounds that each asset reconstruction company follows its own procedure which varies on a case-by-case basis and therefore places borrowers in a separate situation. disadvantage.

Accordingly, the petitioner argued that the absence of any judicial remedy by a borrower in the event of gross violation of the Chapter II guidelines or provisions by an asset reconstruction company renders it ultra vires the Indian Constitution.

In reviewing the relevant statutory provisions and judgments on the subject, the court observed that the remedy provided for in Section 17 of the Act – allows the borrower to challenge the actions of the secured creditor on any grounds which would make the unlawful secured creditor’s action – not limited to Chapter III and that the DRT has the power to verify the secured creditor’s compliance.

The bench added that the borrower cannot approach RBI in its capacity as a regulator to decide whether the actions of a CRA are in compliance with the SARFAESI Act.

“As noted above, the SARFAESI Act under Section 17 provides an effective and efficient remedy to adjudicate a borrower’s grievances and the DRT has the power to determine whether the actions of a CRA are in accordance with SARFAESI law,” the court said. said.

He added that allowing a borrower to approach the RBI to adjudicate such claims under Chapter II would be against the SARFAESI Act regime.

The court observed that the petitioners had not established how the legislator had 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 petitioners’ prayer for a writ to strike down Chapter II of the SARFAESI Act is denied,” the court said.

On the alternative prayers requested in the plea, the court was of the view that it had no authority to direct the legislature or the executive to exercise any legislative function, as such an instruction would conflict with the doctrine of the separation of powers. .


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