The Rajasthan High Court on Thursday held that police assistance given to banks to take possession of secured assets under the SARFAESI Act must be provided without charging the banks. A division bench of Justice Vinit Kumar Mathur and Justice Chandra Shekhar Sharma said enforcement of orders passed by a magistrate under Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 cannot be treated as a private service billed to banks, and set aside a single-judge order that had upheld the levy of such charges.

Source: LiveLaw

The court was hearing a batch of appeals filed by AU Small Finance Bank. The bank had initiated recovery proceedings against borrowers who defaulted on loan repayments and, after its own efforts to take possession of the secured assets proved unsuccessful, approached the competent authority under Section 14 of the Act, which directed the deployment of police personnel to assist in taking physical possession of the properties. The police authorities subsequently demanded charges for providing that assistance.

A single judge had, in an August 12 order, upheld the demand for police protection charges from banks seeking such assistance and directed that the charges be levied under Rule 10 of the Rajasthan Police Rules, 2008. Challenging that decision, the bank contended that police assistance under Section 14 was integral to the statutory enforcement mechanism, was not a private commercial service, and that Section 46 of the Rajasthan Police Act, 2007 did not authorise the levy in these circumstances. The police authorities opposed the appeals, arguing that the assistance facilitated the bank's commercial recovery and was an additional service for which charges could be levied.

Source: Times of India

"Therefore, for effectively implementing the orders passed under Section 14 of the Act of 2002, the police aid is required. Thus, the State Government is under an obligation to provide the same without any charges," the bench held. It said police assistance requisitioned to discharge this statutory obligation partakes of the character of a sovereign function of the state, and its cost cannot be imposed on the secured creditor merely because the proceedings arise out of a commercial loan transaction. "The mere fact that the underlying loan transaction is commercial in nature does not alter the character of the statutory process through which possession of the secured assets is sought to be taken," the court said.

The bench further held that Section 46 of the Rajasthan Police Act, 2007 cannot be construed as authorising such charges where police are deployed to implement statutory orders of the competent authority, and relied on a similar ruling of the Allahabad High Court in PNB Housing Finance Ltd. v. State of Uttar Pradesh, which recognised that execution of orders under Section 14 is a statutory responsibility of the competent authorities. Allowing the appeals, the court directed the state government to provide the requisite police force for implementing orders under Section 14 of the SARFAESI Act without levying any charges.

Advocate Vijay Purohit appeared for the appellant bank, while advocates B.L. Bhati, Deepak Chandak and Sukhdev Sharma appeared for the respondents. The ruling is expected to affect recovery proceedings by banks and financial institutions against defaulting borrowers across Rajasthan, reducing the additional costs of enforcing security interests and recovering bad loans.