Hari Dutta Sharma v. State of U.P. & Ors.
[2026] 10 S.C.R. 132 : 2026 INSC 998
Hari Dutta Sharma
v.
State of U.P. & Ors.
(Civil Appeal No. 12950 of 2026)
16 September 2026
[Pamidighantam Sri Narasimha and
Alok Aradhe,* JJ.]
Issue for Consideration
Whether the action of the financier Company in repossessing the
vehicle of the appellant and selling the same is in contravention
of the RBI Guidelines and the Art.11 of the Loan Agreement and
thus, unauthorised and arbitrary; whether the order passed by
the High Court dismissing the writ petition filed by the appellant
ought to be set aside.
Headnotes†
Directions by Supreme Court – Banking Regulation Act,
1949 – s.35 – Guidelines/Master Circulars/Clarifications
issued by RBI to NBFCs and Scheduled Commercial Banks
on recovery practices – Non-compliance with – Guidelines by
RBI on ‘Fair Practices Code for Lenders’; Guidelines issued
on 21.11.2005 covering a wide area pertaining the rights of
the customers, right to privacy and confidentiality, practice
of debt collections, redressal of grievances and monetary
systems to be implemented by Banks; Guidelines issued
on 28.09.2006 on Fair Practices Code for NBFCs reiterated
that NBFCs should not resort to undue harassment viz.
persistently bothering the borrowers at odd hours and use
of muscle power for the recovery of loans, etc. – Directions
issued to RBI for implementation:
Held: Guidelines/Master Circulars/Clarifications issued by RBI to
NBFCs and Scheduled Commercial Banks have existed only on
paper, and no steps have been taken by the RBI to implement
it – Therefore, the RBI is directed to take effective steps to secure
genuine compliance, by NBFCs and Scheduled Commercial
Banks alike, with the Guidelines/Master Circulars /Clarifications, it
* Author
[2026] 10 S.C.R. 133
Hari Dutta Sharma v. State of U.P. & Ors.
has issued from time to time, so that incidents where a citizen is
dispossessed of his livelihood in the dead of night, without notice
and without recourse, do not recur – Framework set out for the
guidance of financial institutions and of the Courts dealing with
similar controversies in future: (i) Lenders shall not, in the recovery
of loans, resort to undue harassment of borrowers, whether by
persistently bothering them at odd hours or by the deployment
of muscle power – (ii) Seizure of a vehicle can only be effected
through lawful means; banks and financial institutions cannot
employ ‘goondas’ to take possession by force – (iii) Banks must
maintain a due diligence process, conforming to RBI Guidelines
on outsourcing of financial services, for the engagement of
recovery agents – (iv) A repossession clause incorporated in a
loan contract must be legally valid and must conform, in letter
and in spirit, to the provisions of the Indian Contract Act, 1872 –
(v) Recovery agents engaged by banks and financial institutions
must strictly adhere to the applicable Guidelines and instructions,
including the Banking Codes and Standards Board of India
(BCSBI) Code – (vi) Complaints received regarding violation of
the Guidelines, or the adoption of abusive recovery practices,
are to be viewed seriously by the RBI – (vii) The RBI may
impose, and in cases of persistent breach extend, a ban upon
a bank engaging recovery agents within a particular jurisdiction
or function – (viii) A repossession clause may contain: (a) the
notice period before possession is taken; (b) the circumstances
in which such notice may be waived; (c) the procedure for taking
possession; (d) a final opportunity to the borrower to repay before
sale or auction; (e) the procedure for restoring possession to the
borrower; and (f) the procedure for sale or auction – (ix) Banks
are encouraged to maintain a mechanism of credit counsellors
to extend sympathetic consideration to deserving borrowers,
and NBFC-Microfinance Institutions are required to display the
Fair Practices Code, in the vernacular language, at their branch
premises, with a corresponding declaration of accountability for
staff conduct and grievance redressal incorporated into the loan
agreement itself – (x) Recovery is ordinarily to be made at a
central designated place; recourse to the borrower’s residence
or place of work is permissible only where he fails to appear at
the designated place on two or more occasions, and field staff
must possess the minimum qualifications and training prescribed
by the Fair Practices Code. [Para 31]
134 [2026] 10 S.C.R.
Supreme Court Reports
Banking Regulation Act, 1949 – s.35 – Guidelines/Master
Circulars/Clarifications issued by RBI to NBFCs and
Scheduled Commercial Banks on recovery practices – Non-
compliance with – Repossession of vehicle by financier –
When unauthorised and arbitrary – Appellant obtained a
commercial vehicle loan from financier Company which was
secured by hypothecation of the vehicle – Appellant continued
to make defaults in repayment of loan amount under the loan
agreement, eventually, the Company repossessed the vehicle
by breaking open its steering lock at about 1:00 a.m., without
issuing any notice, and sold it – High Court dismissed the
writ petition filed by the appellant holding that the vehicle
had already been sold on and he had approached the Court
belatedly – Interference with:
Held: Impugned order quashed, set aside – A financier’s right to
take possession of the financed vehicle in the first instance, is
a matter of contract, where an agreement confers such a right,
there is no legal impediment to its exercise unless the contract
is unconscionable or opposed to public policy – But precisely
because this right operates as an alternative to recovery through
courts or tribunals, outside the supervision of a court at the first
instance, it must be construed with great circumspection; left
unchecked, it is capable of being read as an unbridled licence
to seize property by stealth, by force or in the dead of night,
converting a facility meant to promote financial inclusion into an
instrument of oppression against the very class it was designed
to serve – Action taken against the appellant is in contravention
both RBI Guidelines, which carry statutory force, and of the very
terms of Art.11 of the loan agreement on which the Company
relies – No seven-day notice, as contemplated by Art.11(a)(i),
was in fact issued to the appellant prior to repossession; the
right of repossession, being conditional upon such notice, never
accrued to the Company in the first place –Appellant’s specific
and unrebutted case is that possession was taken at about 1:00
a.m. by breaking open the steering lock of the vehicle, a mode
of taking possession that is, by no stretch, peaceful, and one
which bears every mark of the very ‘goondaism’ that this Court,
in Prakash Kaur, and the RBI, in its successive Guidelines, have
condemned in unambiguous terms – Possession memorandum
does not even bear the appellant’s signature which reinforces the
conclusion that the vehicle was taken by the Company’s recovery
[2026] 10 S.C.R. 135
Hari Dutta Sharma v. State of U.P. & Ors.
agents without following the due process of law – The vehicle of
the appellant has already been sold therefore, even though the
unauthorised and arbitrary action of the Company in repossessing
the vehicle and in selling the same is not approved of, the sale
is not being set aside – Appellant was deprived of his right to
livelihood in an arbitrary and an unfair manner – Impugned action
of the Company constitutes a violation of Arts.14 and 21 of the
Constitution – Appellant entitled to compensation of Rs.10,00,000/-
in lieu of mental agony caused to him and loss of his livelihood
for a considerable period – Company to refund Rs. 4,50,000/-,
the sale price for which the vehicle of the appellant was sold
with interest @ of 6% p.a from the date of sale till the payment
is made to the appellant – Costs quantified at Rs. 50,000/-.
[Paras 15, 26, 29, 30, 32, 33]
Writ Petition – Dismissal on the ground of delay, when not
justified:
Held: Finding of the High Court that the writ petition was liable
to be dismissed on the ground of delay, was arrived at without
reference to the material on record – Appellant had lodged a First
Information Report on the very day of the incident, 09.04.2023, and
thereafter filed a complaint u/s.156(3), CrPC, 1973 on 08.11.2023,
in the bona fide belief that his vehicle was stolen – He continued,
moreover, to receive traffic challans on 18.01.2024, 18.11.2024
and 18.02.2025 in respect of a vehicle the Company claims to
have sold as far back as 31.08.2023, a circumstance which, at
the very least, called for explanation and ought to have weighed
with the High Court – In these circumstances, the finding that
the writ petition was liable to be thrown out on the ground of
delay alone cannot be sustained, without an examination of its
merits and in the absence of any demonstrated prejudice to the
Company. [Para 27]
Loan Agreement – Art.11 – Was neither in consonance with
the Guidelines issued by the RBI nor the provisions of the
Contract Act, 1872:
Held: Art.11 places the borrower entirely at the mercy of
financier’s unilateral discretion, both as to whether notice will
be given at all and as to the manner and timing of the sale –
On a careful scrutiny of Art.11 of the Loan Agreement read
with Guidelines issued by the RBI, it is found that it is neither
136 [2026] 10 S.C.R.
Supreme Court Reports
in consonance with the Guidelines issued by the RBI nor the
provisions of the Contract Act, 1872 for the following reasons –
Firstly, the stipulation that the borrower’s rights over the asset
stand determined “ipso facto without any notice” upon the
mere occurrence of an Event of Default is directly at variance
with the requirement that a repossession clause must provide
for a notice period before possession is taken – Secondly, the
authorisation to recovery agents to “enter any place or places”
in search of the asset is itself contrary to the RBI’s Guidelines
and offends the requirement of a fair, lawful procedure for taking
possession – Thirdly, the clause nowhere prescribes a procedure
for taking possession or for sale and auction of the asset, leaving
both wholly to the discretion of the Company – And fourthly, the
power reserved to the Company to waive the notice altogether,
at its own discretion, on its own assessment of jeopardy to its
interest, converts what ought to be a floor of minimum protection
into an illusory promise, defeasible at the will of the very party
against whom it is meant to protect the borrower – A contractual
term which permits one party unilaterally to dispense with the
procedural safeguards designed to protect the other cannot be
regarded as being in conformity with either the RBI Guidelines
or the general contractual requirement of fairness; to that extent,
Art.11 does not meet the standard the law requires of a valid
repossession clause. [Paras 24, 25]
Banks/Banking – Financier’s right to take possession of
financed vehicle – Banking Regulation Act, 1949 – s.35 –
Directions issued under, possess a statutory force and are
binding on the banking companies:
Held: A financier’s right to take possession of the financed
vehicle in the first instance, is a matter of contract, where an
agreement confers such a right, there is no legal impediment to
its exercise unless the contract is unconscionable or opposed to
public policy – Such clauses of self-help repossession are not,
in themselves, an evil to be eradicated: they are what make it
commercially feasible for institutions to extend credit, against
the security of the very asset financed, to borrowers of modest
means, truck operators and small transporters among them, who
possess no conventional collateral and would otherwise remain
outside the reach of institutional finance – But precisely because
this right operates as an alternative to recovery through courts or
[2026] 10 S.C.R. 137
Hari Dutta Sharma v. State of U.P. & Ors.
tribunals, outside the supervision of a court at the first instance, it
must be construed with great circumspection; left unchecked, it is
capable of being read as an unbridled licence to seize property by
stealth, by force or in the dead of night, converting a facility meant
to promote financial inclusion into an instrument of oppression
against the very class it was designed to serve – s.35-A of the
Banking Regulation Act, 1949, empowers the Reserve Bank of
India (RBI) to issue directions to the banking companies – The said
power can be exercised in four contingencies, namely: (i) public
interest; (ii) interest of banking policy; (iii) interests of depositors;
and (iv) interests of the banking companies – Directions issued
u/s.35-A possess a statutory force and are binding on the banking
companies. [Paras 15, 16]
Case Law Cited
ICICI Bank Ltd. v. Prakash Kaur and Ors. [2007] 3 SCR 253 :
(2007) 2 SCC 711 – relied on.
Orix Auto Finance (India) Ltd., v. Jagmander Singh and Anr. [2006]
2 SCR 169 : (2006) 2 SCC 598; Sundaram Finance Limited and
Anr. v. T. Thankam [2015] 2 SCR 228 : (2015) 14 SCC 444;
Internet and Mobile Association of India v. Reserve Bank of India
[2020] 2 SCR 297 : (2020) 10 SCC 274 – referred to.
List of Acts
Banking Regulation Act, 1949; Constitution of India; Code of
Criminal Procedure, 1973; Contract Act, 1872.
List of Keywords
Section 35-A of the Banking Regulation Act, 1949; RBI Guidelines;
Guidelines/Master Circulars/Clarifications; Non-Banking Financial
Company (NBFC); Scheduled Commercial Banks; Recovery
practices; Self-help repossession; Vehicle repossessed; Vehicle
sold; Financier Company; Possession of financed vehicle;
Guidelines issued by RBI; Hypothecation of vehicle; Hypothecated
asset; Hypothecation agreement; Commercial vehicle loan; Failure
to repay; Goondaism; Writ petition dismissed on ground of delay;
Right to livelihood deprived; Arbitrary and an unfair manner; Fair
Practices Code for Lenders; 2003 Guidelines by RBI; Possession
memorandum.
138 [2026] 10 S.C.R.
Supreme Court Reports
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 12950
of 2026
From the Judgment and Order dated 04.04.2025 of the High
Court of Judicature at Allahabad in WRITC No. 9635 of 2025
Appearances for Parties
Advs. for the Appellant(s):
Gaurav Agarwal, Ms. Shristi Gupta, Shashank Singh.
Advs. for the Respondent(s):
Ms. Aishwarya Mishra, Anuj Chauhan, S.surender, Shubham
Garg, Ms. Akansha Singh.
Judgment / Order of the Supreme Court
Judgment
Alok Aradhe, J.
1. Delay condoned.
2. Leave granted.
3. A loan may create a debt, and a debt may confer upon the financier
a right to recover what is due; but the manner in which that right
is exercised is not without significance. The present appeal brings
before this Court the contest between the right to recover a secured
debt and the right of the borrower to have that recovery undertaken
within the bounds of law.
4. This appeal is directed against the Order dated 04.04.2025 passed
by the High Court of Judicature at Allahabad by which the writ petition
preferred by the appellant was dismissed.
FACTS
5. Facts giving rise to the filing of this appeal lie in narrow compass.
On 25.03.2019, the appellant obtained a commercial vehicle loan
from Cholamandalam Investment and Finance Company Limited (the
Company) for his truck namely, Tata SFC 407 bearing registration
No. UP-16-GT-0449. Out of the sanctioned amount of loan of
[2026] 10 S.C.R. 139
Hari Dutta Sharma v. State of U.P. & Ors.
Rs.10,40,080.75 (Rupees Ten Lakh Forty Thousand Eighty Rupees
and Seventy-Five Paise only) a sum of Rs.9,36,000/- (Rupees Nine
Lakh Thirty-Six Thousand only) was disbursed. The amount of
loan was to be repaid in 75 monthly instalments, and was secured
by hypothecation of the vehicle. On 12.06.2021, a further sum of
Rs.1,04,080.75 (Rupees One Lakh Four Thousand Eighty and
Seventy-Five Paise only) was extended as a supplementary loan.
6. The appellant failed to honour the repayment commitments and did
not pay the amount of instalments due under the loan agreement.
A recall-cum-demand notice dated 17.01.2022 calling upon the
appellant to discharge his outstanding liability was issued. The
appellant continued to make defaults in repayment of loan amount.
The Company repossessed the vehicle and issued a pre-sale letter
on 13.06.2022 to the appellant. The appellant paid a sum of Rs.
86,726/- (Rupees Eighty-Six Thousand Seven Hundred Twenty-Six
only) and assured to regularise the loan account. Thereupon, the
vehicle was released.
7. The appellant again did not pay the instalments due under the loan
agreement. Thereupon, notices dated 07.07.2022 and 22.12.2022
were issued granting an opportunity to the appellant to clear the
outstanding dues or to surrender the hypothecated asset. The
appellant was further informed that upon such surrender of the
vehicle the same shall be sold “on as is where is” basis and the
sale proceeds will be appropriated towards the amount under the
loan agreement. According to the Company, the appellant even
after issuance of said notices, did not repay the amount of the loan,
thereupon, a pre-seizure notice dated 09.04.2023 was sent to the
SHO Police Station, Ayodhya Cantt.
8. According to the appellant, on 09.04.2023, while the vehicle stood
parked after making delivery of goods at a consignor’s godown
under CCTV surveillance at Ayodhya, four unidentified persons
broke the vehicle’s steering lock at about 1:00 a.m. and drove it
away. The vehicle was repossessed without issuing any notice to
the appellant. The appellant lodged a lost article Report and an
e-FIR on the same day. No action was taken on the complaint of
the appellant for tracking the said vehicle. The appellant thereupon
submitted a complaint on 08.09.2023 to the Superintendent of
Police, Ayodhya.
140 [2026] 10 S.C.R.
Supreme Court Reports
9. On 30.09.2023, the appellant received a legal notice from the
Company disclosing that since the appellant had failed to make
repayment of the amount of loan due, the possession of the vehicle
has been taken and the same has been sold on 31.08.2023. It was
further stated in the notice that amount payable by the appellant as
on 31.08.2023 was Rs.5,71,914/- (Rupees Five Lakh Seventy One
Thousand Nine Hundred Fourteen only) and a sum of Rs.4,50,000/-
(Rupees Four Lakh Fifty Thousand only) was recovered as sale
proceeds. The appellant was informed that he was required to pay
a further sum of Rs.1,25,571/- (Rupees One Lakh Twenty Five
Thousand Five Hundred Seventy One only).
10. The appellant, thereupon, filed a complaint under Section 156(3) of
the Code of Criminal Procedure before the Chief Judicial Magistrate,
Ayodhya which was dismissed on 23.09.2024 on the ground that
the vehicle had been confiscated for default.
11. The appellant filed a writ petition before the High Court. The Division
Bench by an Order dated 04.04.2025, noted that the vehicle had
already been sold on 31.08.2023 and held that the appellant had
belatedly approached the Court. It was found that the appellant
defaulted in the payment of instalments of the loan. Accordingly,
the writ petition was dismissed.
SUBMISSIONS
12. Learned counsel for the appellant submitted that the High Court fell
into error in non-suiting the appellant on the ground of delay. It was
further submitted that the High Court ought to have appreciated that
the action of the Company in taking possession of the vehicle was in
stark violation of Article 11 of the Loan Agreement, which mandated
seven-days’ prior notice. It was further submitted that a financier’s
right of self-help repossession under the hypothecation agreement
cannot be exercised by force, deceit or in violation of the terms of
the Agreement. It was pointed out that, even after the sale of the
vehicle, the appellant was continuously visited with traffic challans.
13. On the other hand, learned counsel for the Company submitted
that the appellant was a chronic defaulter, as is reflected in the
consolidated statement of account. It was further submitted that
on an earlier occasion, on an identical default, repossession of the
vehicle was forestalled only upon making part- payment of the loan
[2026] 10 S.C.R. 141
Hari Dutta Sharma v. State of U.P. & Ors.
amount. It was also submitted that pre-seizure intimation, inventory
list, post-seizure intimation and pre-sale notice were duly furnished to
the police and the appellant. It was contended that the vehicle was
sold for Rs.4,50,000/- (Rupees Four Lakh Fifty Thousand only) which
was fair and in accordance with the terms of the loan agreement.
ANALYSIS
14. We have considered the rival submissions and have perused the
record.
15. It is well-settled in law that a financier’s right to take possession of the
financed vehicle in the first instance, is a matter of contract, where
an agreement confers such a right, there is no legal impediment
to its exercise unless the contract is unconscionable or opposed
to public policy 1. Such clauses of self-help repossession are not,
in themselves, an evil to be eradicated: they are what make it
commercially feasible for institutions to extend credit, against the
security of the very asset financed, to borrowers of modest means,
truck operators and small transporters among them, who possess
no conventional collateral and would otherwise remain outside
the reach of institutional finance. But precisely because this right
operates as an alternative to recovery through courts or tribunals,
outside the supervision of a court at the first instance, it must be
construed with great circumspection; left unchecked, it is capable of
being read as an unbridled licence to seize property by stealth, by
force or in the dead of night, converting a facility meant to promote
financial inclusion into an instrument of oppression against the very
class it was designed to serve.
16. Section 35-A of the Banking Regulation Act, 1949, empowers the
Reserve Bank of India (RBI) to issue directions to the banking
companies. The said power can be exercised in four contingencies,
namely: (i) public interest; (ii) interest of banking policy; (iii) interests
of depositors; and (iv) interests of the banking companies. The
directions issued under Section 35-A possess a statutory force and
are binding on the banking companies 2.
1 Orix Auto Finance (India) Ltd., v. Jagmander Singh and Anr., (2006) 2 SCC 598 and Sundaram Finance
Limited and Anr. v. T. Thankam, (2015) 14 SCC 444.
2 Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274.
142 [2026] 10 S.C.R.
Supreme Court Reports
17. The RBI, on 05.05.2003, with an object to protect the rights of citizens
dealing with the Non-Banking Financial Company (NBFC)/Banks and
to curb the arbitrary action on the part of such institution in resorting
to alternate modes of recovery without approaching the courts or
tribunals, issued Guidelines on ‘Fair Practices Code for Lenders’.
The said guidelines were issued on the basis of recommendations
made by Working Group on Lenders’ Liability Laws constituted
by the Government of India. The banks/financial institutions were
advised to adopt the said Guidelines and frame the Fair Practices
Code duly approved by their Board of Directors. Paragraph (v)(c)
of the said Guidelines provides that in the matters of recovery of
loans, the lenders should not resort to undue harassment viz.,
persistently bothering the borrowers at odd hours, use of muscle
power for recovery of loans etc.
18. Another set of Guidelines were issued on 21.11.2005, by the RBI
which covered a wide area pertaining the rights of the customers,
right to privacy and confidentiality, practice of debt collections,
redressal of grievances and monetary systems to be implemented by
Banks. Thereafter, on 28.09.2006, the Guidelines on Fair Practices
Code for NBFCs were issued, wherein, it was reiterated that NBFCs
should not resort to undue harassment viz. persistently bothering the
borrowers at odd hours and use of muscle power for the recovery
of loans, etc.
19. A two-Judge Bench of this Court had occasion to consider the 2003
Guidelines in ICICI Bank Ltd. v. Prakash Kaur and Ors. 3 where
registration of First Information Report against the recovery agents
of ICICI Bank Ltd. for forcibly taking possession of a vehicle fell for
consideration. This Court emphasised that the rights of financial
institutions in employing alternate means of recovery other than
the due process of law either through courts or tribunals has to be
viewed from the angle of common man no less than that of financial
institutions. It was observed that once a loan is taken and there is a
default, the witch-hunt begins and the bank is an aggressor whereas
the public is the victim. It was also noted that financial institutions
employ recovery agents to trace the defaulter and recover the
amounts of loans and a person’s self-respect and stature in the
society is immaterial to such an agent. This Court held in terms
3 (2007) 2 SCC 711
[2026] 10 S.C.R. 143
Hari Dutta Sharma v. State of U.P. & Ors.
which bear reiteration that ours is a country governed by rule of law
and recovery of loans or seizures of vehicles could only be made
through the legal means and the banks cannot employ ‘goondas’
to take possession of the vehicles by force. The court enumerated
the suggestions to be followed by the financial institutions/banks
for recovery of the amount and seizure of the vehicle and noted
that even though the RBI had issued the Guidelines on 21.11.2005
which remains only on paper and is not being followed.
20. Following Prakash Kaur (supra), and having regard to the rising
volume of disputes and litigations arising from conduct of recovery
agents and to the reputational risk such conduct visits upon the
banking sector as a whole, the RBI, issued successive Master
Circulars, Guidelines and Clarifications, on 24.04.2008, 24.04.2009,
01.07.2009, 01.07.2010, 01.07.2011, 26.03.2012, 02.07.2012,
18.02.2013, 01.07.2013, 01.07.2014 and 01.07.2015, to all NBFCs
and the Scheduled Commercial Banks. These instruments taken
together address the following aspects: (i) formulation and display
of Fair Practices Code duly approved by the Board of Directors, (ii)
right of customers and their right to privacy and confidentiality, (iii)
practice of collection of debts, (iv) methods of recovery to be followed
by recovery agents and their training, (v) provisions to be contained
in the repossession clauses, (vi) the need of creating a grievance
redressal system in relation to complaints against the banks and its
recovery agents; and (vii) utilisation of credit counsellors.
21. A careful reading of the Master Circulars, the Guidelines and the
clarifications issued by the RBI, discloses the following position
which we consider necessary to set out for the guidance of financial
institutions and of the Courts dealing with similar controversies in
future:
(i) Lenders shall not, in the recovery of loans, resort to undue
harassment of borrowers, whether by persistently bothering
them at odd hours or by the deployment of muscle power.
(ii) Seizure of a vehicle can only be effected through lawful means;
banks and financial institutions cannot employ ‘goondas’ to
take possession by force.
(iii) Banks must maintain a due diligence process, conforming to
RBI Guidelines on outsourcing of financial services, for the
engagement of recovery agents.
144 [2026] 10 S.C.R.
Supreme Court Reports
(iv) A repossession clause incorporated in a loan contract must
be legally valid and must conform, in letter and in spirit, to the
provisions of the Indian Contract Act, 1872.
(v) Recovery agents engaged by banks and financial institutions
must strictly adhere to the applicable Guidelines and
instructions, including the Banking Codes and Standards
Board of India (BCSBI) Code.
(vi) Complaints received regarding violation of the Guidelines, or
the adoption of abusive recovery practices, are to be viewed
seriously by the RBI.
(vii) The RBI may impose, and in cases of persistent breach
extend, a ban upon a bank engaging recovery agents within
a particular jurisdiction or function.
(viii) A repossession clause may contain: (a) the notice period before
possession is taken; (b) the circumstances in which such
notice may be waived; (c) the procedure for taking possession;
(d) a final opportunity to the borrower to repay before sale
or auction; (e) the procedure for restoring possession to the
borrower; and (f) the procedure for sale or auction.
(ix) Banks are encouraged to maintain a mechanism of credit
counsellors to extend sympathetic consideration to deserving
borrowers, and NBFC-Microfinance Institutions are required to
display the Fair Practices Code, in the vernacular language,
at their branch premises, with a corresponding declaration
of accountability for staff conduct and grievance redressal
incorporated into the loan agreement itself.
(x) Recovery is ordinarily to be made at a central designated
place; recourse to the borrower’s residence or place of work
is permissible only where he fails to appear at the designated
place on two or more occasions, and field staff must possess
the minimum qualifications and training prescribed by the Fair
Practices Code.
22. It is against this regulatory framework; relevant part of Article 11 of
the Agreement needs to be examined which is extracted below for
the facility of reference:
[2026] 10 S.C.R. 145
Hari Dutta Sharma v. State of U.P. & Ors.
“11. REPOSSESSION, TERMINATION AND
COMPANY’S OTHER RIGHTS:
a) On the occurrence of any of the aforesaid Events Of
Default contained in Article 10, the rights of the Borrower
over the Asset shall stand determined void ipso facto
without any notice and the Borrower shall be bound to
deliver forthwith the Asset to the Company in the same
condition in which it was originally received by him with all
accessories/modifications done by Borrower whatsoever,
ordinary wear and tear accepted and if the Asset is a
vehicle, original Certificate of Registration with applicable
Forms as prescribed in the statutes and/or rules made
thereunder shall also be delivered to the Company
along with the Asset. Failure or refusal of the Borrower
to surrender the Asset shall constitute unlawful retention
for which the Company shall be entitled to initiate legal
action, without prejudice in other rights/legal remedies
available to the Company.
i) Notice: In case of any default in repayment
including an occurrence of any of the aforesaid
Events of Default and/or failure to surrender the
Asset as mentioned herein above, the Company
shall cause a 7-day notice to be issued to the
Borrower at his address as registered with the
Company. The notice shall be deemed me to be
served on the Borrower within 24 hours of posting,
the notice by the Company even if the notice so
served returns unserved for whatever reason
and the confirmation from any authorized offer of
the Company for having posted the notice to the
Borrower shall be final and binding in this regard.
ii) Repossession: In case the Borrower fails to
make payment of the dues or surrender the
asset to the Company and/or rectify the breach
of the terms of the contract in compliance with
the notice mentioned above, to the satisfaction of
the Company, without prejudice to its other rights
available under the Agreement, the Company may
146 [2026] 10 S.C.R.
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be entitled to take possession of the Asset (referred
to as “repossession”) and for the said purpose, enter
any place or places where the Asset may than be
or is likely to be, remove or take possession of
the same. The Borrower agrees and undertakes
not to prevent or obstruct the Company from
exercising its right of repossession of the Asset
in the event of default by the Borrower. It shall be
the sole responsibility of the Borrower to remove
any goods (perishable, non-perishable) available
in the Asset at the time of its repossession by the
Company and the Borrower shall make his/their own
arrangements to transfer such goods from the said
Asset to and transport it back at his own cost and
expenses and the Company shall not be liable to
the Borrower for any damage, depreciation value,
lose in transit etc. or for any damages arising on
account of non-delivery of the same to anyone
during or after such repossession.
iii) Post Repossession: Upon taking possession of
the Asset, as a final chance to rectify the default,
a 7 days notice that be caused by the Company to
the Borrower to repay the termination price (which
includes the charges and expenses incurred for
taking possession of the Asset including the legal
expenses). The notice shall be deemed to be
served on the Borrower within 24 hours of posting
the notice by the Company even if the notice
is served returns unserved for whatever reason
and the confirmation of any authorised officer of
the Company for having posted the notice to the
Borrower shall be final and binding in this regard.
iv) Waiver of Notice: The said notice (before and
after taking possession of the Asset) mentioned
here in above can be waived at the discretion of
the Company, in case the Company is of opinion
that such action is likely to jeopardize the Asset or
the interest of the Company.
[2026] 10 S.C.R. 147
Hari Dutta Sharma v. State of U.P. & Ors.
v) On payment of the termination price within
the time and manner stipulated in the notice
mentioned above, the Company shall return the
repossessed Asset to the Borrower or his authorized
representative to be specified in writing by the
Borrower. In case of failure on the part of the
Borrower to make payment of the termination price
within the time and manner stipulated in the notice
mentioned above, the Company shall sell, dispose
of the asset in the manner it may deem fit without
any further notice to the Borrower notwithstanding
exercising any other legal remedy or right against
the Borrower available to it.
vi) The Borrower hereby irrevocably authorizes
the Company to sell/transfer/assign the Asset
without the Intervention of Court either by
private treaty of public auction in such other manner
as the Company may deem fit. The Borrower shall
not be entitled to raise any objection regarding
the regulatory of the sale and/or actions taken by
the Company nor shall the Company be liable/
responsible for any loss that may occasion by the
exercise of such power and/or may arise from any
act or default on the part of any broker or auctioneer
or other person or body engaged by the Company
for the said purpose.
vii) The Borrower shall forthwith deliver to the Company
all original certificates and policies of insurance
including Certificate of Registration (where the
Asset is a vehicle), keys and all other documents
relating to the Asset in the event of the failure of
the Borrower to do so, the Company be entitled
immediately apply to the concerned authorities and
obtain the documents afresh, expenses for which
shall be charged to the account of the Borrower
and shall form part of the amount payable on the
determination of this Agreement. The Borrower
agrees and undertakes that he shall not raise any
objection for such application by the Company.
148 [2026] 10 S.C.R.
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viii) Upon sale of the Asset and adjustment of the said
proceeds towards the Loan dues (which includes
the expenses/charges incurred for parking, sale of
Asset, in addition to the termination price), if there
is any shortfall amount due and payable, the same
shall be made good by the Borrower and/or the
Guarantor. If there is any surplus amount available
after such adjustment, the Company shall, subject
to the right of lien and Set-off against the Borrower
and Guarantor, refund the balance, if any to the
Borrower.
b) Termination:
On the surrender of the Asset by the Borrower or
repossession thereof by the Company, notwithstanding
the Term of Loan specified in the Schedule, the
Agreement shall stand terminated without any notice.
Without prejudice la the foregoing and/or any of the
terms contained in this Agreement on termination, this
Agreement may also stand terminated:
i) by efflux of time an expiry of the Term of Loan
specified in Agreement; or
ii) earlier by a notice in writing from the Company to
the Borrower and Guarantor, of is decision to do so.
On such termination, the Company shall have like
powers of repossession of the Asset as in a case
where any Event of Default had occurred. On
termination in any manner as above:
iii) The Borrower and Guarantor shall not thereafter be
entitled to the benefit: of payment by instalments
of the amounts remaining payable which shall fall
due immediately together with amount already in
arrears, whether by way of instalments, additional
interest or on any other account whatsoever.
iv) The Borrower shall be liable to pay Additional
Interest or the termination price at the rate
mentioned in the Schedule, calculated from data of
termination until realisation of the payment in full.
[2026] 10 S.C.R. 149
Hari Dutta Sharma v. State of U.P. & Ors.
23. Thus, Article 11 in substance provides as follows:
(i) On occurrence of an event of default as prescribed in Article 10,
the rights of borrowers over the asset shall stand determined
and the borrowers shall be bound to deliver forthwith the asset
to the Company.
(ii) Failure or refusal of borrowers to surrender the asset shall
constitute unlawful retention for which the Company shall be
entitled to initiate legal action.
(iii) In case of default in repayment including an occurrence of
the event of the defaults or failure to surrender the asset, the
Company shall cause a seven-day notice to be issued to the
borrower at his address registered with the Company.
(iv) In case, borrower fails to make payment of dues or surrender
asset to the Company or to rectify the breach of terms of
contract in compliance with the notice mentioned above, the
Company may be entitled to take possession of the asset and
for the said purpose may enter any place or places where
the asset may then be or is likely to be, removed or take
possession of the same.
(v) Upon taking possession of the asset, as a final chance to rectify
the default, a seven-day notice shall be sent by the Company
to the borrower to repay the termination price, which includes
charges and expenses incurred for taking possession of the
asset including legal expenses.
(vi) On payment of termination price within the time and manner
indicated in the notice the Company shall return the repossessed
asset to the borrower or his authorized representative to be
specified in the writing by the borrower.
(vii) In case of failure on the part of the borrower to make the
termination price within the time and manner stipulated in the
notice, the Company shall sell, dispose of the asset in the manner
it may deem fit, without any further notice to the borrower.
(viii) The borrower irrevocably authorises the Company to sell/
transfer/assign the asset without the intervention of the Court
either by private treaty or public auction in such manner as
the Company may deem fit.
150 [2026] 10 S.C.R.
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(ix) The borrower shall forthwith deliver to the Company, all original
certificates and policy of insurance including certificates of
registration where asset is a vehicle.
(x) Upon sale of the asset and adjustment of the sale proceeds
toward the dues, if there is any shortfall in the amount due
and payable, the same shall be made good by the borrower
and/or the guarantor.
24. Thus, Article 11 places the borrower entirely at the mercy of financier’s
unilateral discretion, both as to whether notice will be given at all
and as to the manner and timing of the sale. On a careful scrutiny
of Article 11 of the Loan Agreement read with Guidelines issued by
the RBI, we are of the view that Article 11 is neither in consonance
with the Guidelines issued by the RBI nor the provisions of the
Indian Contract Act, 1872 for the reasons which follow.
25. Firstly, the stipulation that the borrower’s rights over the asset
stand determined “ipso facto without any notice” upon the mere
occurrence of an Event of Default is directly at variance with the
requirement that a repossession clause must provide for a notice
period before possession is taken. Secondly, the authorisation to
recovery agents to “enter any place or places” in search of the asset
is itself contrary to the RBI’s Guidelines and offends the requirement
of a fair, lawful procedure for taking possession. Thirdly, the clause
nowhere prescribes a procedure for taking possession or for sale
and auction of the asset, leaving both wholly to the discretion of
the Company. And fourthly, the power reserved to the Company
to waive the notice altogether, at its own discretion, on its own
assessment of jeopardy to its interest, converts what ought to be
a floor of minimum protection into an illusory promise, defeasible
at the will of the very party against whom it is meant to protect the
borrower. A contractual term which permits one party unilaterally to
dispense with the procedural safeguards designed to protect the
other cannot be regarded as being in conformity with either the RBI
Guidelines or the general contractual requirement of fairness; to that
extent, Article 11 does not meet the standard the law requires of a
valid repossession clause.
26. Turning to the facts, the action taken against the appellant is shown
to be in contravention both RBI Guidelines, which carry statutory
force, and of the very terms of Article 11 on which the Company
[2026] 10 S.C.R. 151
Hari Dutta Sharma v. State of U.P. & Ors.
relies. No seven-day notice, as contemplated by Article 11(a)(i),
was in fact issued to the appellant prior to repossession; the right of
repossession, being conditional upon such notice, never accrued to
the Company in the first place. The appellant’s specific and unrebutted
case is that possession was taken at about 1:00 a.m. on 09.04.2023
by breaking open the steering lock of the vehicle, a mode of taking
possession that is, by no stretch, peaceful, and one which bears
every mark of the very ‘goonda-ism’ that this Court, in Prakash Kaur
(supra), and the RBI, in its successive Guidelines, have condemned
in unambiguous terms. The possession memorandum does not even
bear the appellant’s signature which reinforces the conclusion that
the vehicle was taken by the Company’s recovery agents without
following the due process of law. The High Court failed to advert to
this aspect of the matter, which had a direct and material bearing
on the controversy before it.
27. As regards the finding of the High Court that the writ petition was
liable to be dismissed on the ground of delay, we find that this
finding was arrived at without reference to the material on record.
The appellant had lodged a First Information Report on the very
day of the incident, 09.04.2023, and thereafter filed a complaint
under Section 156(3) of the Code of Criminal Procedure, 1973 on
08.11.2023, in the bona fide belief that his vehicle had been stolen.
He continued, moreover, to receive traffic challans on 18.01.2024,
18.11.2024 and 18.02.2025 in respect of a vehicle the Company
claims to have sold as far back as 31.08.2023, a circumstance
which, at the very least, called for explanation and ought to have
weighed with the High Court. In these circumstances, we are unable
to sustain the finding that the writ petition was liable to be thrown out
on the ground of delay alone, without an examination of its merits
and in the absence of any demonstrated prejudice to the Company.
28. Financial institutions, particularly those operating under the regulatory
umbrella of the RBI, hold their repossession clauses on the implicit
condition that they will be exercised within the four corners of the
procedural safeguards, the RBI has, over two decades, painstakingly,
built, notice, an opportunity to cure, a fair mode of taking possession,
and a transparent mode of sale. Where a financier steps outside that
framework, breaks open a lock in the dead of night, takes possession
without notice and without a signed memorandum, and thereafter
treats the borrower merely as a source of residual liability, it forfeits
152 [2026] 10 S.C.R.
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the protection that the contract and the law would otherwise have
afforded it, and exposes itself to the consequences in law of an
unauthorised and arbitrary seizure. It is the balance discussed earlier
in this judgment, between the legitimate need of the financier for an
efficient recovery mechanism and the equally legitimate entitlement of
the borrower to be treated fairly, with notice and due process, before
he is deprived of the very asset by which he earns his bread, that
the Company failed to observe on the facts before us.
29. For the foregoing reasons, impugned order dated 04.04.2025
passed by the High Court is quashed and set aside. The vehicle
of the appellant has already been sold on 31.08.2023. Therefore,
even though we do not approve of the unauthorised and arbitrary
action of the Company in repossessing the vehicle and in selling the
same, at this point of time, we are not inclined to set aside the sale.
30. The appellant is a man of modest means and was solely dependent
on the vehicle for his livelihood by engaging it in the business of
transportation. The appellant has been deprived of his right to
livelihood in an arbitrary and an unfair manner. The impugned action
of the Company constitutes a violation of Articles 14 and 21 of the
Constitution. Therefore, the appellant is entitled to compensation.
31. The Guidelines/Master Circulars/Clarifications issued by RBI to
NBFCs and Scheduled Commercial Banks have existed only on
paper, and no steps have been taken by the RBI to implement it. We,
therefore, direct the RBI to take effective steps to secure genuine
compliance, by NBFCs and Scheduled Commercial Banks alike,
with the Guidelines/Master Circulars /Clarifications, it has issued
from time to time, so that incidents of the present kind, where a
citizen is dispossessed of his livelihood in the dead of night, without
notice and without recourse, do not recur. The Registry is directed
to send a copy of this judgment to RBI.
CONCLUSION
32. We, therefore, issue following directions:
(i) The company shall close both the loan accounts of the
appellant.
(ii) The Company shall refund the sum of Rs. 4,50,000/- (Rupees
Four Lakh Fifty Thousand only) that is the sale price for which
[2026] 10 S.C.R. 153
Hari Dutta Sharma v. State of U.P. & Ors.
the vehicle of the appellant was sold. The said amount shall
carry interest at the rate of 6% per annum from the date of
sale till the payment is made to the appellant.
(iii) The appellant is held entitled to a sum of Rs.10,00,000/-
(Rupees Ten Lakhs only) as compensation in lieu of mental
agony caused to him and loss of his livelihood for a considerable
period.
33. In the result, the appeal is allowed with costs which are quantified
at Rs. 50,000/- (Rupees Fifty Thousand only).
34. Pending applications, if any, shall stand disposed of.
Result of the case: Appeal allowed.
†Headnotes prepared by: Divya Pandey