Supreme Court of India· 16 September 2026

Does a repossession clause dispensing with notice and leaving possession to the financier's discretion conform to the RBI's Guidelines?

HARI DUTTA SHARMA v. STATE OF U.P. & ORS

2026 INSC 998
Coram: Justice Pamidighantam Sri Narasimha · Justice Alok Aradhe

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Answer

A repossession clause dispensing with notice and leaving possession to the financier's discretion does not conform to the RBI's Guidelines.

No. A repossession clause dispensing with notice and leaving possession to the financier's discretion does not conform to the RBI's Guidelines. Article 11 of the loan agreement here provided that the borrower's rights stood determined 'ipso facto without any notice', authorised agents to enter any place in search of the asset, prescribed no procedure for taking possession or sale, and let the Company waive notice altogether at its own discretion; such a clause converts a floor of minimum protection into an illusory promise and does not meet the standard the law requires of a valid repossession clause. (¶24, 25)

Headnote

Banking Regulation Act, 1949 — s.35-A — RBI Fair Practices Code — Self-help repossession — Article 14 — Article 21 — Repossession clause — Banking Regulation Act, 1949 — s.35-A — RBI Fair Practices Code — Repossession clause validity — Held: A repossession clause dispensing with notice and leaving possession to the financier's discretion does not conform to the RBI's Guidelines. Such a clause converts a floor of minimum protection into an illusory promise defeasible at the financier's will. (¶24, 25) Self-help repossession — No force, no 'goondas' — Held further: Banks and financial institutions cannot employ 'goondas' to take possession of a hypothecated vehicle by force; seizure can only be effected through lawful means. Breaking open a steering lock at night to seize a vehicle bears every mark of the 'goonda-ism' this Court has condemned. (¶19, 21, 26) Article 14 — Article 21 — Livelihood — Held further: An unauthorised and arbitrary repossession that deprives a person of modest means of his livelihood violates Articles 14 and 21 of the Constitution. Such a borrower is entitled to compensation for the resulting mental agony and loss of livelihood. (¶30) Writ jurisdiction — Delay — Held further: A writ petition cannot be dismissed on the ground of delay alone without examining its merits and any demonstrated prejudice. Appeal allowed with costs; impugned order quashed, sale proceeds ordered refunded with interest and compensation awarded. (¶27, 29, 32, 33)

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In the Court's own words

Paragraph 24Thus, 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.

Paragraph 25Firstly, 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.

Acts & Sections

Section 35-A of the Banking Regulation Act, 1949Article 14 of the Constitution of IndiaArticle 21 of the Constitution of IndiaSection 156(3) of the Code of Criminal Procedure, 1973Indian Contract Act, 1872

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Also decided in this judgment

Can banks and financial institutions employ 'goondas' to take possession of a hypothecated vehicle by force?Does an unauthorised and arbitrary repossession that deprives a person of modest means of his livelihood amount to a violation of Articles 14 and 21?Can a writ petition be dismissed on the ground of delay alone without examining its merits and any demonstrated prejudice?

Plain-language answer prepared by the LexStreak Editorial Desk — verify against the judgment. Source: Supreme Court of India. Corrections