The Allahabad High Court recently held that finance companies seeking to repossess vehicles over loan defaults must do so only through a legal forum, either judicial or arbitral [Sadab Ahmad v State of UP and others]

A Division Bench of Justices JJ Munir and Indrajeet Shukla observed that if a finance company is permitted to exercise its right to seize the vehicle by force, it would be virtually arming a private party with the coercive authority of the State.

"No doubt, it is true, as often said, that in a contract, parties legislate for themselves, but that principle cannot imaginably be carried to the extent, where the terms of the contract are actually imbued with legislative force empowering parties to enforce terms, deciding for themselves and executing it too, as if they were judicial or quasi-judicial fora, deciding a lis and then executing the decision," the Court said.

In the judgment passed on October 26, the Bench added that while the Supreme Court has protected the finance companies from criminal prosecutions for taking away vehicles in such cases, they are not allowed to use force merely because a clause in the agreement authorizes them to seize the vehicle from the borrower.

"The right of the finance company engrafted into a hire-purchase agreement to seize the chattel, the vehicle here, purchased on hire-purchase, gives an enforceable right no doubt to the finance company, but that enforcement has to be done through a process known to law. It cannot be done by force employing goons, styled as agents," the Court emphasised.

The vehicle could not be taken into possession by employment of recovery agents, who would waylay the hirer or his driver and seize it at gunpoint, the Bench further said.

The Court was dealing with the petition moved by one Sadab Ahmad who said a goods carrier vehicle purchased by him in 2023 with finance of the HDB Financial Services Limited was seized by the company's recovery agents on August 9.

Ahmad was driving the vehicle when he was intercepted by the men acting on behalf of HDB Financial Services, the Court was told.

He submitted that he had regularly paid his dues and had already cleared 31 out of the total 45 instalments.

Ahmad was later told by the financial company that the vehicle was not seized in connection with his own loan account, but on the ground that he had stood guarantor in regard to the vehicle loan of another person.

The finance company told the court that Ahmad's loan account was linked to his brother's account who had committed severe default in the payment of his EMIs. It added that arbitration proceedings were initiated against Ahmad's brother and despite the passing of a final award against him, he failed to produce the vehicle.

However, HDB Financial Services also told the Court that Ahmad himself had defaulted in payment of regular EMIs and his 30 post-dated cheques bounced, leading to termination of his loan account.

The Court found that the finance 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 allowed the company to seize the vehicle of Ahmad's brother with police aid. However, the company was not given a free hand to hire private goons to seize the vehicle, it added.

"It is in the first place, the order of a Court or an Arbitral Tribunal, enforcing a party's claim in a particular manner, that makes it legitimate, and then the presence of an impartial State Authority to maintain peace, law and order, which makes all the difference between the private act of a party to do justice for itself and the process of law being invoked by a party to gain its lawful right, may be under a contract," the Bench observed.

It also found that Ahmed regularly paid the instalments and when the cheques bounced, he paid the requisite charges for it. Thus, it questioned the financial company for getting the vehicle seized at gunpoint instead of instituting arbitration proceedings and securing appropriate interim orders from the arbitrator, as was done in his brother's case

Considering the findings, the Court allowed Ahmad's petitions with costs of ₹10,000. It directed the financial company to release the vehicle to him without any pre-condition.

Further, it directed the finance company to re-structure the loan to enable Ahmed to pay fresh instalments with usual interest, but no penal or extraordinary interest.

In the event of default, the Court said the finance compan may take steps strictly in accordance with the law by moving the civil court or the arbitrator.

The Court also questioned the police for their lack of action in the matter. It observed that the police seemed to have been confounded by the subtleties of judicial pronouncements which say that the finance company has a right to repossess in terms of the contract.

The Court noted that after Ahmed's vehicle was seized on gunpoint, he contacted the finance company and also approached the government authorities including the police and District Magistrate. It said that the District Magistrate could have hardly done anything in the matter.

"The petitioner then went and made a representation dated 27.08.2026 to that mysterious and omnipotent authority, who dwells in the mind of every citizen of free India, called the District Magistrate. The legacy of the District Magistrate, as the all powerful man in the district comes from the days of the Britishraj and is a colonial legacy, which no effort seems to be made by citizens of free India to shed," it observed.

The Court further observed that though Ahmad's case disclosed a purely civil cause of action, it has the complexion of a public law element also to it because an offence was committed by seizing the vehicle at gunpoint through an organised agency of recovery agents.

It added that the petitioner should have approached a civil judge instead though judges of the civil judicature are regarded as possessors of weak or no authority by litigants.

Advocates Gulshad Ali and Syed Ahmed Faizan represented the petitioner.

Standing Counsel Awadhesh Chandra Srivastava represented the State.

Advocate Amit Shukla represented HDB Financial Services.

[Read Judgment]