Delhi High Court upholds constitutional validity of Chapter II of SARFAESI Act

Delhi High Court upholds constitutional validity of Chapter II of SARFAESI Act

Refuses to direct the legislature, as it was against the powers of the judiciary

The Delhi High Court has upheld the constitutional validity of Chapter II of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. It observed that it was not manifestly arbitrary and not violative of Article 14 of the Constitution of India.

The division bench of Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad passed the order on a plea challenging Chapter II of the Act.

The petitioner maintained it did not provide an avenue of judicial redress against Asset Reconstruction Companies (ARCs) who defaulted in their statutory obligations including for the borrowers. He said the Act provided for the regulation of securitization and reconstruction of financial assets of banks and financial institutions.

The petitioner sought directions from the court asking the Reserve Bank of India (RBI) and the Central government to provide legal remedies to the borrowers for enforcement of the Chapter II provisions.

He argued that Chapter II and the 2003 RBI Guidelines did not provide any judicial remedy, unlike under Chapter III of the Act, and should be struck down. It was submitted that each ARC followed its own procedure varying on a case-to-case basis. This was disadvantageous for the borrowers and violated their rights under the Indian Constitution.

However, the court observed that Section 17 of the Act allowed the borrower to challenge the action of the secured creditor on grounds that rendered the action of the secured creditor illegal. It was not restricted to Chapter III and the DRT had the power to investigate the compliance of the secured creditor.

The bench added that the borrower could not approach the RBI in its capacity as a regulatory body to adjudicate whether the action of an ARC complied with the SARFAESI Act, as it was against the Act. The court held that the petitioner failed to establish how the legislature acted in a 'capricious or irrational manner' or how the impugned provisions were excessive or disproportionate.

The judges ruled, "Chapter II of the SARFAESI Act is not manifestly arbitrary and is not in violation of Article 14 of the Constitution of India. Accordingly, the prayer of the petitioner seeking a writ to strike it down is rejected."

The bench held that it did not have the power to direct the legislature or the executive to perform a legislative function. Such a direction would be against the doctrine of the separation of powers.