SARFAESI • RBI Policy • Wilful Defaulter Restrictions
The Orissa High Court held that SARFAESI cannot be used as an independent source of enforcement power once the underlying debt has been extinguished under an approved resolution plan.
The Court observed that the SARFAESI Act is premised on the existence of a subsisting and legally recoverable debt. Once the debt has been assigned, resolved, and satisfied under an IBC resolution plan, the foundation for enforcement of security interest ceases to exist.
The Court further held that retaining lien over fixed deposits without any enforceable debt amounts to deprivation of property without authority of law and may violate Article 300A of the Constitution. The Bank was directed to release the fixed deposit along with accrued interest.
The Bombay High Court upheld RBI's June 07, 2019 Prudential Framework for Resolution of Stressed Assets, observing that it is an economic policy decision taken by an expert regulator in public interest.
The Court held that writ courts should not interfere with such policy decisions unless they suffer from mala fides, arbitrariness, manifest unreasonableness, or violation of law. The framework was designed to ensure early recognition, reporting, and time-bound resolution of stressed assets.
The Court also accepted RBI's position that the framework was intended to prevent evergreening of loans and promote transparent reporting of stress.
The Bombay High Court held that the five-year embargo under the RBI Master Circular on wilful defaulters cannot be mechanically continued after the borrower's name is removed from the wilful defaulters list pursuant to a compromise settlement and full payment.
The Court distinguished between borrowers who continue in default and borrowers who settle their dues. It observed that once the compromise amount is fully paid and the borrower's name is deleted, continuation of severe restrictions must be justified.
However, the Court clarified that restrictions may continue where the case involves siphoning of funds, diversion, misrepresentation, falsification of accounts, or fraudulent transactions.