SARFAESI Action by NBFC Struck Down: HP High Court Upholds Rs.20 Lakh Monetary Threshold

Overview

The Himachal Pradesh High Court has delivered a significant ruling in Gupta Hardware Store and others Vs Union of India and others, holding that a Non-Banking Financial Company cannot invoke the recovery machinery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) where the outstanding secured debt falls below the prescribed monetary floor of Rs.20,00,000. The judgment clarifies both the jurisdictional limits on NBFC-initiated SARFAESI proceedings and the circumstances under which a High Court may entertain a writ petition despite the existence of an alternative statutory remedy.

Background and Facts of the Case

The petitioners had availed a loan of Rs.25,00,000 from Shriram City Union Finance Limited. After regular repayment of monthly instalments of Rs.72,083, the petitioners eventually defaulted. Following the default, the finance company initiated proceedings under the SARFAESI Act and issued:

  • A demand notice dated 19 March 2024 under Section 13(2) of the SARFAESI Act, raising a total claim of Rs.18,45,198; and
  • A symbolic possession notice dated 27 July 2024 under Rule 8 of the Security Interest (Enforcement) Rules, 2002, directed at a shop property in Mohal Sunni Pratham, Tehsil Sunni, District Shimla, Himachal Pradesh.

The petitioners replied to the demand notice, but the finance company proceeded nonetheless. This prompted the petitioners to approach the Himachal Pradesh High Court by way of a writ petition seeking quashing of both notices and a restraint against any further coercive action against them or their properties.

The principal question before the Court was straightforward yet of considerable legal importance:

Can a Non-Banking Financial Company (NBFC) resort to the provisions of the SARFAESI Act, 2002 to recover an outstanding debt that is admittedly below the monetary threshold of Rs.20,00,000, as prescribed by the Central Government (Ministry of Finance) through its notification dated 12 February 2021?

Arguments Advanced by the Petitioners

The petitioners mounted a two-pronged challenge — one going to the jurisdiction of the finance company and the other addressing the binding character of the Central Government notification:

  • Shriram City Union Finance Limited, being an NBFC, falls squarely within the category of entities covered by Section 2(1)(m)(iv) of the SARFAESI Act, read with Section 45-I(f) of the Reserve Bank of India Act, 1934.
  • Once classified and notified as a financial institution under the SARFAESI Act in the capacity of an NBFC, the finance company is bound by the Gazette Notifications issued by the Central Government, including the notification dated 12 February 2021 (Annexure P-5).
  • The said notification, superseding all prior notifications, expressly mandated that SARFAESI proceedings by an NBFC would be available only in respect of secured debts of Rs.20,00,000 or more.
  • Since the amount sought to be recovered — Rs.18,45,198 — was admittedly below this threshold, the SARFAESI proceedings were without jurisdiction and therefore void ab initio.

Arguments Advanced by the Respondents

The finance company and the other respondents resisted the writ petition on two grounds:

  1. Maintainability: The writ petition was not maintainable because an efficacious alternative remedy existed under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal, which was equally competent to examine whether the SARFAESI provisions were properly invoked.

  2. Substantive Jurisdiction: The finance company claimed to be a "financial institution" under the SARFAESI Act and therefore a "secured creditor" entitled to exercise SARFAESI remedies. It contended that the monetary threshold of Rs.20 lakh applicable to NBFCs should not operate as a bar against it.

The Court's Ruling on Maintainability of the Writ Petition

The General Rule and Its Exceptions

The High Court acknowledged the well-established principle that writ courts are generally reluctant to entertain petitions directly challenging proceedings under the SARFAESI Act, given the availability of the statutory remedy before the Debt Recovery Tribunal. The Court referred to the Supreme Court's decisions in: