NEW DELHI: High courts should not throw a spanner in the works of the recovery proceedings initiated by financial institutions against the borrowers, who abuse the process of the courts by filing writ petitions, the Supreme Court has said.

“Filing of the writ petitions by the borrowers before the high court under Article 226 of the Constitution of India (writ petition) is an abuse of process of the court,” said a bench of justices MR Shah and BV Nagarathna, underscoring the significance of relevant laws under which recovery proceedings are initiated.

The bench pointed out that there are specific laws such as the SARFAESI (Securitisation and Reconstruction for Enforcement of Security Interest) Act, which provide for debt recovery mechanisms involving banks and other financial institutions. The SARFAESI Act, said the top court, also laid down the process of challenging various notices issued to a borrower, and therefore, high courts should not entertain writ petitions against such orders or notices.

“The secured creditor and/or its assignor have a right to recover the amount due and payable to it from the borrowers. The stay granted by the high court would have a serious adverse impact on the financial health of the secured creditor/assignor,” the top court in a judgment on Wednesday.

Advocate Abhishek A Rastogi, a partner at Khaitan & Co, said a writ petition under Article 226 cannot be entertained when sufficient alternate and effective remedy is available. “The availability of alternate remedy will certainly depend on facts of each case but the findings of the Supreme Court are relevant in debt recovery cases and must be kept in mind by all judicial authorities.”

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The top court’s judgment came as it set aside a 2018 order of the Karnataka high court, directing a status quo with regard to possession of mortgaged properties subject to the borrowers making a payment of 1 crore with the assets reconstruction company (ARC) concerned.

Phoenix ARC Private Limited challenged the high court order in favour of its borrowers, Vishwa Bharati Vidya Mandir and St Ann’s Education Society, which had defaulted in repayment of loans to the tune of 117 Crore. After the borrowers committed defaults repeatedly between 2013 and 2015 even after issuance of notices under the SARFAESI Act, Phoenix sent a communication to the borrowers intimating them about taking possession of the mortgaged properties.

Against this letter, the borrowers moved the high court, which ordered a status quo with regard to possession of the mortgaged properties subject to the borrowers making a payment of One crore Phoenix in August 2015. The high court extended this interim order on two other occasions in 2017 and 2018, prompting Phoenix to approach the Supreme Court.

Allowing the appeal, the Supreme Court said that writ petitions against the private financial institution under Article 226 may not be maintainable when they seek to challenge SARFAESI proceedings, particularly because such institutions do not perform any public function by lending money.

“The secured creditor and/or its assignor have a right to recover the amount due and payable to it from the borrowers. The High Court ought to have appreciated that by passing such an interim order, the rights of the secured creditor to recover the amount due and payable have been seriously prejudiced,” said the bench.

It proceeded to dismiss the writ petitions before the high court, adding the borrowers to pay One lakh each to Phoenix as the cost of litigation.


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