TaxTMI 
TaxTMI 
2026 (9) TMI 1205
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.... of Judicature at Allahabad by which the writ petition preferred by the appellant was dismissed. FACTS 5. Facts giving rise to the filing of this appeal lie in narrow compass. On 25.03.2019, the appellant obtained a commercial vehicle loan from Cholamandalam Investment and Finance Company Limited (the Company) for his truck namely, Tata SFC 407 bearing registration No. UP-16-GT-0449. Out of the sanctioned amount of loan of Rs. 10,40,080.75 (Rupees Ten Lakh Forty Thousand Eighty Rupees and Seventy-Five Paise only) a sum of Rs. 9,36,000/- (Rupees Nine Lakh Thirty-Six Thousand only) was disbursed. The amount of loan was to be repaid in 75 monthly instalments, and was secured by hypothecation of the vehicle. On 12.06.2021, a further sum of Rs. 1,04,080.75 (Rupees One Lakh Four Thousand Eighty and Seventy-Five Paise only) was extended as a supplementary loan. 6. The appellant failed to honour the repayment commitments and did not pay the amount of instalments due under the loan agreement. A recall-cum-demand notice dated 17.01.2022 calling upon the appellant to discharge his outstanding liability was issued. The appellant continued to make defaults in repayment of loan amount. ....
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....ya which was dismissed on 23.09.2024 on the ground that the vehicle had been confiscated for default. 11. The appellant filed a writ petition before the High Court. The Division Bench by an Order dated 04.04.2025, noted that the vehicle had already been sold on 31.08.2023 and held that the appellant had belatedly approached the Court. It was found that the appellant defaulted in the payment of instalments of the loan. Accordingly, the writ petition was dismissed. SUBMISSIONS 12. Learned counsel for the appellant submitted that the High Court fell into error in non-suiting the appellant on the ground of delay. It was further submitted that the High Court ought to have appreciated that the action of the Company in taking possession of the vehicle was in stark violation of Article 11 of the Loan Agreement, which mandated seven-days' prior notice. It was further submitted that a financier's right of self-help repossession under the hypothecation agreement cannot be exercised by force, deceit or in violation of the terms of the Agreement. It was pointed out that, even after the sale of the vehicle, the appellant was continuously visited with traffic challans. 13. On the othe....
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....depositors; and (iv) interests of the banking companies. The directions issued under Section 35-A possess a statutory force and are binding on the banking companies [Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274.]. 17. The RBI, on 05.05.2003, with an object to protect the rights of citizens dealing with the Non-Banking Financial Company (NBFC)/Banks and to curb the arbitrary action on the part of such institution in resorting to alternate modes of recovery without approaching the courts or tribunals, issued Guidelines on 'Fair Practices Code for Lenders'. The said guidelines were issued on the basis of recommendations made by Working Group on Lenders' Liability Laws constituted by the Government of India. The banks/financial institutions were advised to adopt the said Guidelines and frame the Fair Practices Code duly approved by their Board of Directors. Paragraph (v)(c) of the said Guidelines provides that in the matters of recovery of loans, the lenders should not resort to undue harassment viz., persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans etc. 18. Another set of Guidelines we....
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.....07.2013, 01.07.2014 and 01.07.2015, to all NBFCs and the Scheduled Commercial Banks. These instruments taken together address the following aspects: (i) formulation and display of Fair Practices Code duly approved by the Board of Directors, (ii) right of customers and their right to privacy and confidentiality, (iii) practice of collection of debts, (iv) methods of recovery to be followed by recovery agents and their training, (v) provisions to be contained in the repossession clauses, (vi) the need of creating a grievance redressal system in relation to complaints against the banks and its recovery agents; and (vii) utilisation of credit counsellors. 21. A careful reading of the Master Circulars, the Guidelines and the clarifications issued by the RBI, discloses the following position which we consider necessary to set out for the guidance of financial institutions and of the Courts dealing with similar controversies in future: (i) Lenders shall not, in the recovery of loans, resort to undue harassment of borrowers, whether by persistently bothering them at odd hours or by the deployment of muscle power. ....
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....e: "11. REPOSSESSION, TERMINATION AND COMPANY'S OTHER RIGHTS: a) On the occurrence of any of the aforesaid Events Of Default contained in Article 10, the rights of the Borrower over the Asset shall stand determined void ipso facto without any notice and the Borrower shall be bound to deliver forthwith the Asset to the Company in the same condition in which it was originally received by him with all accessories/modifications done by Borrower whatsoever, ordinary wear and tear accepted and if the Asset is a vehicle, original Certificate of Registration with applicable Forms as prescribed in the statutes and/or rules made thereunder shall also be delivered to the Company along with the Asset. Failure or refusal of the Borrower to surrender the Asset shall constitute unlawful retention for which the Company shall be entitled to initiate legal action, without prejudice in other rights/legal remedies available to the Company. i) Notice: In case of any default in repayment including an occurrence of any of the aforesaid Events of Default and/or failure to surrender the Asset as mentioned herein above, the Company shall cause a 7-day notice to be issued to th....
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.... mentioned here in above can be waived at the discretion of the Company, in case the Company is of opinion that such action is likely to jeopardize the Asset or the interest of the Company. v) On payment of the termination price within the time and manner stipulated in the notice mentioned above, the Company shall return the repossessed Asset to the Borrower or his authorized representative to be specified in writing by the Borrower. In case of failure on the part of the Borrower to make payment of the termination price within the time and manner stipulated in the notice mentioned above, the Company shall sell, dispose of the asset in the manner it may deem fit without any further notice to the Borrower notwithstanding exercising any other legal remedy or right against the Borrower available to it. vi) The Borrower hereby irrevocably authorizes the Company to sell/transfer/assign the Asset without the Intervention of Court either by private treaty of public auction in such other manner as the Company may deem fit. The Borrower shall not be entitled to raise any objection regarding the regulatory of the sale and/or actions taken by the Company nor shall the Company....
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....ears, whether by way of instalments, additional interest or on any other account whatsoever. iv) The Borrower shall be liable to pay Additional Interest or the termination price at the rate mentioned in the Schedule, calculated from data of termination until realisation of the payment in full. 23. Thus, Article 11 in substance provides as follows: (i) On occurrence of an event of default as prescribed in Article 10, the rights of borrowers over the asset shall stand determined and the borrowers shall be bound to deliver forthwith the asset to the Company. (ii) Failure or refusal of borrowers to surrender the asset shall constitute unlawful retention for which the Company shall be entitled to initiate legal action. (iii) In case of default in repayment including an occurrence of the event of the defaults or failure to surrender the asset, the Company shall cause a seven-day notice to be issued to the borrower at his address registered with the Company. (iv) In case, borrower fails to make payment of dues or surrender asset to the Company or to rectify the breach of terms of contract in compliance with the notice mentioned above, the Co....
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...., 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, Article 11 does not meet the standard the law requires of a valid repossession clause. 26. Turning to the facts, the action taken against the appellant is shown to be in contravention both RBI Guidelines, which carry sta....
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....ssion, and a transparent mode of sale. Where a financier steps outside that framework, breaks open a lock in the dead of night, takes possession without notice and without a signed memorandum, and thereafter treats the borrower merely as a source of residual liability, it forfeits the protection that the contract and the law would otherwise have afforded it, and exposes itself to the consequences in law of an unauthorised and arbitrary seizure. It is the balance discussed earlier in this judgment, between the legitimate need of the financier for an efficient recovery mechanism and the equally legitimate entitlement of the borrower to be treated fairly, with notice and due process, before he is deprived of the very asset by which he earns his bread, that the Company failed to observe on the facts before us. 29. For the foregoing reasons, impugned order dated 04.04.2025 passed by the High Court is quashed and set aside. The vehicle of the appellant has already been sold on 31.08.2023. Therefore, even though we do not approve of the unauthorised and arbitrary action of the Company in repossessing the vehicle and in selling the same, at this point of time, we are not inclined to set....