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Phoenix ARC Private Limited vs Vishwa Bharati Vidya Mandir & Ors.

Civil Appeal · 2022 INSC 44Decided 12 Jan 2022
Civil Appeal Nos. 257-259 of 2022
M.R. Shah · B.V. Nagarathna

Background

Two educational trusts had borrowed over Rs.125 crore combined from a cooperative bank, secured by mortgages and personal guarantees; when they defaulted, their loan accounts were classified as non-performing assets and later assigned to Phoenix ARC, an Asset Reconstruction Company, which pursued recovery under the SARFAESI Act. Despite a Letter of Acceptance in which the borrowers admitted the debt, they continued to default, prompting Phoenix ARC to send a letter warning it would take possession of the mortgaged properties. The borrowers challenged this letter in a writ petition before the Karnataka High Court (rather than using the statutory appeal remedy under the SARFAESI Act), and the High Court granted an ex-parte interim stay on possession: conditioned only on a token deposit of Rs.1 crore against dues of about Rs.117 crore, which it then repeatedly extended over several years without deciding Phoenix ARC's application to vacate the stay.

Decision Breakdown

The Supreme Court held that a writ petition under Article 226 is not maintainable against a private Asset Reconstruction Company's proposed action under Section 13(4) of the SARFAESI Act, because such a company is not performing a "public function" of the kind normally expected of State authorities, it is acting as a private secured creditor in a commercial transaction, and because the SARFAESI Act itself provides an efficacious statutory remedy (an appeal under Section 17) that borrowers must use instead. The Court found the High Court's continued, unreasoned ex-parte stay, protecting borrowers on a mere Rs.1-3 crore deposit against dues of Rs.117 crore, to be an abuse of the writ process that seriously prejudiced the secured creditor's rights. It therefore allowed the appeals, dismissed the writ petitions, vacated the interim orders, and awarded costs of Rs.1 lakh in each case against the borrowers.

Lesson Learnt

Borrowers aggrieved by actions of banks or Asset Reconstruction Companies under the SARFAESI Act must pursue the statutory appeal remedy under Section 17 rather than filing a writ petition, since such private financial institutions are not treated as performing "public functions" amenable to writ jurisdiction, and courts should be cautious about granting or indefinitely extending stays that leave large debts effectively unrecoverable.

Official source (sci.gov.in)View Judgment (PDF)

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