{"id":343825,"date":"2025-03-18T14:00:58","date_gmt":"2025-03-18T08:30:58","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=343825"},"modified":"2025-03-26T10:20:32","modified_gmt":"2025-03-26T04:50:32","slug":"karhc-dismisses-plea-challenging-constitutional-validity-of-karnataka-micro-loan-small-loan-ordinance-2025","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2025\/03\/18\/karhc-dismisses-plea-challenging-constitutional-validity-of-karnataka-micro-loan-small-loan-ordinance-2025\/","title":{"rendered":"Karnataka HC dismisses plea challenging constitutional validity of Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025"},"content":{"rendered":"<div style=\"text-align: justify; line-height: 150%;\">\n<p style=\"margin-bottom: 3%;\"><span style=\"font-weight: bold;\">Karnataka High Court:<\/span> The present writ petition was filed by the petitioner under Article <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001574969\" target=\"_blank\">226<\/a> of the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726967\" target=\"_blank\">Constitution<\/a> praying to direct declaring the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 (&#8216;the Ordinance&#8217;) as unconstitutional, arbitrary, and beyond the legislative competence of the State Government and further, direct the respondents to clarify that motor vehicle\/asset financing businesses were outside the purview of the Ordinance.<\/p>\n<p style=\"margin-bottom: 3%;\">A Single Judge Bench of M. Nagaprasanna, J., opined that the Ordinance seeks to rescue vulnerable farmers, women, workers, marginalized groups from usurious money lenders and micro finance entities and it carved out a protective shield for those trapped in unsecured micro loans extended without collateral, targeting an annual income of Rs 3 lakhs or less, which was clearly defined by RBI in its circular issued on 14-3-2022. The Court thus dismissed the petition and held that the Ordinance did not suffer from any manifest arbitrariness to declare it to be unconstitutional.<\/p>\n<h3>Background<\/h3>\n<p style=\"margin-bottom: 3%;\">The petitioner, registered under the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9001917631\" target=\"_blank\">Karnataka Societies Registration Act, 1960<\/a>, was an Association of Motor Vehicle\/Asset Financiers who were engaged in the business through hypothecation, hire purchase, and leasing models in the State of Karnataka. The State promulgated the Ordinance to protect economically vulnerable groups from facing coercive means of recovery by microfinance institutions. The constitutional validity of the Ordinance was challenged on the ground that it takes away the petitioner&#8217;s right under the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726954\" target=\"_blank\">Contract Act, 1872<\/a> and other modes of business that its members were doing.<\/p>\n<p style=\"margin-bottom: 3%;\">Counsel for the petitioner submitted that the definitions in the Ordinance were so ambiguous that they would take away anyone&#8217;s right under different statutes, as all hypothecations or mortgages were to be released from the date of promulgation of the Ordinance and prohibited future collaterization which would imperil the very life blood of their business. Whereas counsel for the respondents stated that the Ordinance was restricted to microfinance rendered to vulnerable groups and the petitioner was doing its business of hypothecation, mortgage, and lease. Microfinance was granted without any security and therefore, the petitioner could not project that it was aggrieved and plead for someone else&#8217;s grievances.<\/p>\n<h3>Analysis, Law, and Decision<\/h3>\n<p style=\"font-weight: bold;\">1. Whether judicial review of an Ordinance was a permissible exercise?<\/p>\n<p style=\"margin-bottom: 3%;\">The Court relied on <span style=\"font-style: italic;\">A.K. Roy<\/span> v. <span style=\"font-style: italic;\">Union of India<\/span>, <a href=\"https:\/\/www.scconline.com\/Members\/SearchResult.aspx\" target=\"_blank\">(1982) 1 SCC 271<\/a>; <span style=\"font-style: italic;\">Krishna Kumar Singh<\/span> v. <span style=\"font-style: italic;\">State of Bihar<\/span>, <a href=\"https:\/\/www.scconline.com\/Members\/SearchResult.aspx\" target=\"_blank\">(2017) 3 SCC 1<\/a>; and <span style=\"font-style: italic;\">Madras Bar Association<\/span> v. <span style=\"font-style: italic;\">Union of India<\/span>, <a href=\"https:\/\/www.scconline.com\/Members\/SearchResult.aspx\" target=\"_blank\">(2022) 12 SCC 455<\/a> (&#8216;Madras Bar Association Case&#8217;), and opined that the constitutional courts could exercise judicial review of an Ordinance, to scrutinize whether satisfaction of the Governor in promulgating an Ordinance constituted fraud or it was actuated by any oblique motive. The Court noted that the Supreme Court in Madras Bar Association Case (supra) held that sans flagrant violation of the constitutional provisions, the laws made by Parliament or the State Legislature could not be struck down if it did not meet the following ingredients, (a) the appropriate legislature did not have the competence to make the law; and (b) that the law takes away or abridges any of the fundamental rights enumerated in Part-III or any other constitutional provisions.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court opined that even manifest arbitrariness as a ground under Article <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001574870\" target=\"_blank\">14<\/a> of the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726967\" target=\"_blank\">Constitution<\/a> could be judicially reviewed, therefore, it was no law that an Ordinance could not become a subject matter of judicial review. The Court stated that the Supreme Court clearly held the parameters of judicial review of an Ordinance or an Act of Parliament or State Legislature, therefore, the Court opined that judicial review of an Ordinance was permissible.<\/p>\n<p style=\"font-weight: bold;\">2. Does the Ordinance suffer from arbitrariness\/manifest arbitrariness and non-application of mind, for it to be held unconstitutional?<\/p>\n<p style=\"margin-bottom: 3%;\">The Court stated that the objects and reasons for promulgation of the Ordinance was to protect the economically vulnerable groups and individuals, especially farmers, woman, and woman&#8217;s self-help groups from the undue hardship of usurious interest rates and coercive means of recovery by Micro Finance Institutions\/Money Lending Agencies\/Organizations operating in the State of Karnataka and for matters incidental thereto.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court opined that the Ordinance aimed at protecting the borrowers from excessive interest and harsh recovery measures employed by Micro Finance Institutions and organizations and the Ordinance had stemmed from suicides attributed to exploitative lending and aggressive loan recovery methods which sparked outrage. The Court stated that precious lives were lost due to coercive actions and recovery measures, therefore, there was nothing manifestly arbitrary in the promulgation of the Ordinance.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court stated that a provision could be struck down on the ground that it was manifestly arbitrary only if the thread of reasonableness did not run through the entire Ordinance or runs counter to the fundamental rights. The Court opined that if the Courts concluded that the Ordinance was manifestly arbitrary or unreasonable, it would be violative of Article <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001574870\" target=\"_blank\">14<\/a> of the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726967\" target=\"_blank\">Constitution<\/a>.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court relied on <span style=\"font-style: italic;\">Nikesh Tarachand Shah<\/span> v. <span style=\"font-style: italic;\">Union of India<\/span>, <a href=\"https:\/\/www.scconline.com\/Members\/SearchResult.aspx\" target=\"_blank\">(2018) 11 SCC 1<\/a> (&#8216;Nikesh Tarachand Shah Case&#8217;) and opined that deployment of the concept of manifest arbitrariness should be on sound principles and the test of manifest arbitrariness would be to apply to invalidate the Ordinance only if the legislature capriciously, irrationally or without adequate determining principle had promulgated the Ordinance. The Court stated that none of the said traits, as held by the Supreme Court in Nikesh Tarachand Shah Case (supra), were found in the present case, to declare the Ordinance to be suffering from manifest arbitrariness.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court noted that the only issue projected by the petitioner was that Micro Finance Institution or borrower, or lending agency was not defined. The Court referred to the circular issued on 14-3-2022 by RBI which defined the term &#8216;Microfinance loan&#8217; to be a collateral free loan given to a household having annual household income up to Rs 3,00,000 or less. The Court stated that RBI was clear that microfinance loans should be collateral-free and collateral security should not be created by marking a lien on the deposit account of the borrower.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court stated that the petitioner did not come within the Ordinance&#8217;s ambit and was still permitted to run its business in other legislations. Further, there was no impediment, in the Ordinance, for the petitioner to make a hue and cry that all securities would stand released in favour of the borrower. Therefore, it was unequivocal that it was applicable only to microfinance lending institutions for protection of borrowers who were from the vulnerable sections of the society.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court opined that the Ordinance seeks to rescue vulnerable farmers, women, workers, marginalized groups from usurious money lenders and micro finance entities who as public knowledge and legislative record bear testament, had wielded unconscionable recovery methods, often driving the debtors from buoyancy of hope to the abyss of despair and death. The Ordinance did not traverse into the realm of secured transactions undertaken by the regulated entities like the petitioner, on the contrary, it carved out a protective shield for those trapped in the labyrinth or unsecured micro loans extended without collateral, targeting an annual income of Rs 3 lakhs or less, which was clearly defined by RBI in its circular.<\/p>\n<p style=\"margin-bottom: 3%;\">The Court dismissed the petition and held that the Ordinance did not suffer from any manifest arbitrariness to declare it to be unconstitutional.<\/p>\n<p style=\"margin-bottom: 3%;\">[<span style=\"font-weight: bold; color: #632423;\">Karnataka Hire Purchase Association v. State of Karnataka, <a href=\"http:\/\/www.scconline.com\/DocumentLink\/IzcwUvvD\" target=\"_blank\" rel=\"noopener\">2025 SCC OnLine Kar 6<\/a>, decided on 17-3-2025<\/span>]<\/p>\n<hr\/>\n<p>Advocates who appeared in this case:<\/p>\n<p style=\"margin-left: 18pt;\"><span style=\"font-weight: bold;\">For the Petitioner:<\/span> Uday Holla, Senior Advocate for Sanjay H. Sethiya, Advocate<\/p>\n<p style=\"margin-left: 18pt;\"><span style=\"font-weight: bold;\">For the Respondents:<\/span> K. Shashikiran Shetty, AG a\/w Anishka Vaishnav, Advocate and Shamanth Naik, HCGP<\/p>\n<h3 style=\"color: #000080;\">Buy Constitution of India &nbsp;<a href=\"https:\/\/www.ebcwebstore.com\/product\/the-constitution-of-india-coat-pocket-edition?products_id=100647\" target=\"_blank\">HERE<\/a><\/h3>\n<p style=\"margin-bottom: 3%;\"><a href=\"https:\/\/www.ebcwebstore.com\/product\/the-constitution-of-india-coat-pocket-edition?products_id=100647\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/s3.amazonaws.com\/ebcwebstore\/images\/the-constitution-of-india-coat-pocket-edition-Gopal-Sankaranarayanan-ebc-front-cover.JPG\" alt=\"Constitution of India\" width=\"300\" height=\"200\" class=\"aligncenter size-large wp-image-294438\" \/><\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p style=\"font-style: italic;\">The Ordinance has taken birth from the womb of social justice, and it nowhere depicts arbitrariness.<\/p>\n","protected":false},"author":1,"featured_media":316069,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[3,10],"tags":[8731,71273,28334,79900],"class_list":["post-343825","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-casebriefs","category-highcourts","tag-constitutional-validity","tag-justice-m-nagaprasanna","tag-karnataka-high-court","tag-karnataka-micro-loan-and-small-loan-prevention-of-coercive-actions-ordinance-2025"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.4 (Yoast SEO v26.4) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Karnataka HC dismisses plea challenging constitutional validity of Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025 | SCC Times<\/title>\n<meta name=\"description\" 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