2025 (2) TMI 616 - SC - Indian Laws

Finance company not subject to writ jurisdiction despite RBI compliance as regulatory oversight doesn't create public functions under Article 12

The SC dismissed writ petitions against a finance company, ruling that mere regulatory compliance with RBI rules does not constitute performing public ... Maintainability of writ petition under Article 226 of the Constitution of India - Muthoot Finance Ltd. to be considered as State or not - alleged breached statutory rules and regulations framed by the Reserve Bank of India (RBI) - whether the company could be considered a 'State' or an entity performing public functions under Article 12 of the Constitution? - HELD THAT:- In the case of LIC of India v. Escorts Ltd. [1985 (12) TMI 289 - SUPREME COURT], it was contended before this Court that the Life Insurance Corporation was an instrumentality of the State and was debarred by Article 14 from acting arbitrarily. It was also contended that it was obligatory upon the Corporation to disclose the reasons for its action complained of, namely, its requisition to call an extra-ordinary general meeting of the company for the purpose of moving a Resolution to remove some Directors and appoint others in their place. Such argument was opposed by the State, contending that the actions of the State or an instrumentality of the State, which do not properly belong to the field of public law but belong to the field of private law, were not subject to judicial review. A body, public or private, should not be categorized as “amenable” or “not amenable” to writ jurisdiction. The most important and vital consideration should be the “function” test as regards the maintainability of a writ application. If a public duty or public function is involved, any body, public or private, concerned or connection with that duty or function, and limited to that, would be subject to judicial scrutiny under the extraordinary writ jurisdiction of Article 226 of the Constitution of India. Conclusion - i) A writ petition under Article 226 is maintainable against entities performing public functions or duties, not merely due to regulatory compliance. ii) The distinction between public law and private law is crucial in determining the maintainability of writ applications. iii) The function test is essential in assessing whether an entity is performing a public duty. The petitions are dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered was whether a writ petition under Article 226 of the Constitution of India is maintainable against Muthoot Finance Ltd., a private company, on the grounds that it allegedly breached statutory rules and regulations framed by the Reserve Bank of India (RBI). Specifically, the question was whether the company could be considered a 'State' or an entity performing public functions under Article 12 of the Constitution.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework centers around Article 12 and Article 226 of the Constitution of India. Article 12 defines the term 'State' for the purposes of Part III of the Constitution, while Article 226 empowers High Courts to issue certain writs. The Court referred to the precedent set in LIC of India v. Escorts Ltd., which discussed the distinction between public law and private law and the circumstances under which a private entity could be subjected to writ jurisdiction.Court's Interpretation and ReasoningThe Court held that Muthoot Finance Ltd. does not qualify as a 'State' under Article 12 because it is a private company engaged in financial activities and not performing any public function or duty. The Court emphasized the distinction between public and private law, noting that judicial review under Article 226 is typically reserved for actions with a public law character. The Court also clarified that compliance with RBI guidelines does not convert a private company's actions into public functions.Key Evidence and FindingsThe Court noted that the loan agreement between the petitioner and Muthoot Finance Ltd. contained an arbitration clause, indicating a private contractual relationship. The High Court's previous observation that the company did not have the status of a 'State' was upheld.Application of Law to FactsThe Court applied the principles from LIC of India v. Escorts Ltd. and other relevant cases to determine that Muthoot Finance Ltd.'s actions did not have a public law character. The company's duties were towards its account holders and borrowers, not the public at large, and it did not exercise any governmental functions.Treatment of Competing ArgumentsThe petitioner's counsel argued that the company's adherence to RBI regulations made it amenable to writ jurisdiction. However, the Court rejected this argument, stating that regulatory compliance does not equate to performing public duties. The Court reiterated that the function test is crucial in determining the maintainability of a writ application.ConclusionsThe Court concluded that Muthoot Finance Ltd. is not amenable to writ jurisdiction under Article 226 of the Constitution, as it does not perform any public function or duty. The appropriate remedy for the petitioner lies in civil court or arbitration, as per the loan agreement's arbitration clause.SIGNIFICANT HOLDINGSThe Court reiterated the principle that for a writ to be issued against a legal entity, the entity must be an instrumentality or agency of the State or entrusted with governmental functions. The Court emphasized that a private company's compliance with statutory regulations does not make it a public authority.Core Principles EstablishedA writ petition under Article 226 is maintainable against entities performing public functions or duties, not merely due to regulatory compliance.The distinction between public law and private law is crucial in determining the maintainability of writ applications.The function test is essential in assessing whether an entity is performing a public duty.Final Determinations on Each IssueThe Court dismissed the writ petitions, affirming that Muthoot Finance Ltd. is not a 'State' under Article 12 and is not performing any public function. The Court advised the petitioner to seek remedies through civil suits, arbitration, or other appropriate legal forums.