Supreme Court Thwarts Challenge To Recovery Action By ARC

Borrowers cannot approach high courts for relief against recovery efforts by Asset Reconstruction Companies, the Supreme Court held this week.

The ruling comes after Phoenix ARC Pvt. challenged an adverse ruling by the Karnataka High Court which prevented it from recovering dues worth Rs 117 crore. The high court, without specifying the reasons, had passed a status quo order, which meant that Phoenix ARC couldn't move for possession of the mortgaged properties of two borrowers—Vishwa Bharati Vidya Mandir and St. Ann’s Education Society.

Challenging this order, Phoenix ARC argued that the only remedy available to the borrowers would be under section 17 of the SARFAESI Act. The provision allows an aggrieved borrower to approach the Debt Recovery Tribunal for seeking relief against the enforcement action by the lenders. The recovery action cannot be challenged through a writ petition in the high court, the ARC said.

The apex court agreed, saying while exercising its writ jurisdiction, the high court is duty bound to consider if the borrower had any alternative remedy. In this case, the relief should be sought under the SARFAESI Act, it pointed out.

Further, the apex court also dismissed the borrowers' argument that the ARC was performing a public function and is required to act fairly while dealing with the security. "There was no public function that was being exercised by the ARC which could justify the exercise of the writ jurisdiction," the court said.

The bench of Justices MR Shah and BV Nagarathna noted that the proceedings before the high court deserved to be dismissed and imposed a cost of Rs 1 lakh each on the two borrowers who had approached the high court with the writ petitions.