HC slams use of recovery agents to seize vehicles

The Allahabad High Court has ruled that finance companies cannot forcibly take possession of vehicles from borrowers by employing recovery agents and must approach a judicial or arbitral forum to enforce their rights. The court observed that allowing private lenders to seize vehicles through force would amount to giving them powers that exclusively belong to the State.

A Division Bench comprising Justices JJ Munir and Indrajeet Shukla delivered the ruling while allowing petitions filed by Sadab Ahmad against HDB Financial Services Limited and others. The judgment was pronounced on October 26 in the case of Sadab Ahmad v. State of UP and Others.

The dispute arose after a goods carrier purchased by Ahmad in 2023 with financial assistance from HDB Financial Services

was allegedly seized by the company's recovery agents on August 9. Ahmad told the court that he was driving the vehicle when he was intercepted by persons acting on behalf of the finance company. 

He submitted that he had regularly paid the loan instalments and had already cleared 31 of the 45 instalments. According to him, the company subsequently informed him that the vehicle had been seized not merely in connection with his loan account, but because he had stood as guarantor for another person's vehicle loan.

HDB Financial Services informed the court that Ahmad's account was linked to that of his brother, who had committed serious defaults in paying equated monthly instalments. The company stated that arbitration proceedings had been initiated against his brother and a final  award had been passed, but he failed to produce the vehicle.

The finance company also alleged that Ahmad had defaulted on his own loan repayments and that 30 post-dated cheques issued by him had bounced, resulting in termination of his loan account.

Examining the circumstances, the Bench found that the company had initiated arbitration proceedings against Ahmad's brother but had not followed the same procedure in Ahmad's case. It noted that the arbitrator had permitted the company to seize the brother's vehicle with police assistance. However, no such authority had been granted to employ private recovery agents to take possession of Ahmad's vehicle.

 The judges observed that although hire-purchase agreements provide finance companies with enforceable rights over vehicles, such rights cannot be exercised through force. Contractual provisions cannot be treated as legislative authority allowing private parties to decide disputes and execute their own decisions as judicial or quasi-judicial bodies.

The Bench further pointed out that the Supreme Court's protection against criminal prosecution in certain vehicle repossession cases did not authorise lenders to use force merely because their agreements contained repossession clauses.

It observed that an order from a court or arbitral tribunal, followed by the involvement of an impartial State authority to maintain law and order, distinguishes lawful enforcement from private acts of taking the law into one's own hands.

Questioning the decision to seize Ahmad's vehicle at gunpoint instead of obtaining appropriate interim orders through arbitration, the court noted that he had regularly paid instalments and cleared the charges arising from bounced cheques.

Allowing the petitions, the High Court imposed costs of Rs.10,000 on the finance company and directed it to release the vehicle to Ahmad unconditionally. It also ordered restructuring of the loan, allowing him to repay fresh instalments with normal interest but without penal or extraordinary interest. The court clarified that in the event of any future default, the company could pursue recovery only through lawful proceedings before a civil court or arbitrator.