New Delhi, Sep 16 (PTI) Highlighting RBI's directive that a financed vehicle can be seized only through "lawful means", the Supreme Court on Wednesday directed the federal bank to enforce its guidelines on non-banking financial companies and scheduled commercial banks to ensure that borrowers are not dispossessed of their hypothecated vehicles without due process of law.

The top court's direction came in a judgement in which it ordered Cholamandalam Investment and Finance Company Ltd to close the loan accounts of a truck owner, and refund Rs 4.5 lakh realised from the sale of his vehicle with six per cent annual interest.

It also asked the finance firm to pay Rs 10 lakh compensation for mental agony and loss of livelihood caused by the unauthorised repossession of his vehicle.

A bench of justices PS Narasimha and Alok Aradhe held that financial institutions cannot use force, stealth or arbitrary methods to recover loans, even when borrowers have defaulted on repayment.

Justice Narasimha, writing the judgement, said, "It is well-settled in law that 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," the verdict said.

But, 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, it said, adding if such terms are left unchecked, they are 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".

The bench referred to the RBI's master circulars, guidelines, and clarifications and said that banks and financial institutions must recover loans lawfully and fairly, without harassing or using force against borrowers.

"The Guidelines/Master Circulars/Clarifications issued by RBI to NBFCs and Scheduled Commercial Banks have existed only on paper, and no steps have been taken by the RBI to implement it.

"We, therefore, direct the RBI to take effective steps to secure genuine compliance, by NBFCs and Scheduled Commercial Banks alike, with the Guidelines/Master Circulars /Clarifications, it has issued from time to time, so that incidents of the present kind, where a citizen is dispossessed of his livelihood in the dead of night, without notice and without recourse, do not recur. The Registry is directed to send a copy of this judgment to RBI," it said.

The RBI directives said that lenders and recovery agents must not threaten, intimidate, or harass borrowers, including at odd hours or through muscle power.

They also said vehicle seizure must follow legal procedures and banks cannot use goondas or forcibly take possession.

Banks must conduct due diligence when appointing recovery agents and ensure they follow RBI guidelines, the RBI had said, adding that loan agreements must contain legally valid repossession provisions consistent with the Indian Contract Act, 1872.

Repossession terms should specify notice periods, lawful possession procedures, a final repayment opportunity, and sale or auction processes, they said.

The top court said such safeguards are only on papers and asked the RBI to enforce them.

The judgement, delivered in the case of Hari Dutta Sharma, quashed the Allahabad High Court's order dismissing the borrower's petition. The top court also awarded Rs 50,000 in litigation costs.

The case concerned a Tata SFC 407 truck financed through a commercial vehicle loan obtained from Cholamandalam Investment and Finance Company.

The borrower had taken a loan of Rs 10.40 lakh, of which Rs 9.36 lakh was disbursed, and later received a supplementary loan of Rs 1.04 lakh.

The loan was secured by hypothecation of the vehicle.

Following defaults, the finance company repossessed the truck in April 2023.

The borrower alleged that four unidentified persons broke open the vehicle's steering lock and drove it away at around 1 am on April 9, 2023, without serving the contractually required notice.

He lodged a lost article report and an e-FIR the same day.

The company subsequently informed the borrower that the vehicle had been sold on August 31, 2023, for Rs 4.5 lakh.

It claimed that Rs 5.71 lakh was outstanding and sought payment of the remaining dues.

The top court examined the repossession clause in the loan agreement, which required a seven-day notice before taking possession of the vehicle.

The verdict held that the clause was inconsistent with Reserve Bank of India guidelines and the Indian Contract Act as it allowed the financier to dispense with notice, enter places to seize the vehicle, and determine the procedure for repossession and sale at its own discretion. PTI SJK ZMN