Mardia Chemicals Ltd. Etc. Etc vs U.O.I
Citation: (2004) 4 SCC 311
Bench: Supreme Court of India: CJI Brijesh Kumar,
Arun Kumar
Introduction:
The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 was passed with an object of giving additional powers to the borrowers in realizing
the NPAs. The said legislation was challenged before many Courts as the same is
unconstitutional, arbitrary and against natural justice. Also it was stated as
leaning more towards the lenders.
The Supreme Court
in Mardia Chemicals Ltd. Etc. Etc vs U.O.I. & Ors, upheld the
constitutional validity of the said Act and elaborated the provisions of the
enactment in detail which cleared ambiguity arose out of this enactment
before.
Why
SARFAESI Act was challenged?
In the said case, the
SARFAESI Act was challenged as unconstitutional and arbitrary. In this regard,
the following questions were raised before the court:
- Whether
Sections 13 and 17 of the Act provide adequate and efficacious mechanism
to consider and decide the objections/disputes raised by a borrower
against the recovery,
- Whether
the remedy available under Section 17 of the Act is illusory for the
reason it is available only after the action is taken under Section 13(4)
of the Act and the appeal would be entertained only on deposit of 75%
of the claim raised in the notice of demand?
- Whether
the terms or existing rights under the contract entered into by two
private parties could be amended by the provisions of law providing
certain powers in one sided manner in favour of one of the parties to the
contract?
- Whether
provision for sale of the properties without intervention of the court
under Section 13 of the Act is akin to the English mortgage and its effect
on the scope of the bar of the jurisdiction of the civil court?
- Whether
the provisions under Sections 13 and 17(2) of the Act are unconstitutional
on the basis of the parameters laid down in different decisions of this
Court?
- Whether
the principle of lender's liability has been absolutely ignored while
enacting the Act and its effect?
Points
of Law discussed:
The Supreme Court
upheld the validity of the Act and the points of law discussed in the said case
are hereunder:
- A specific enactment for
recovery of NPAs is much needed:
- When the need for
a specific enactment (When there is already Recovery of Debts due to Banks
and Financial Institutions Act 1993) for recovery of NPAs is questioned,
the Supreme Court answered it in affirmative.
- Pointing out the
recommendations of the Narashimman Committee, the Supreme Court emphasized
the need for faster recovery process to recover the NPAs to ensure healthy
and growth oriented economy.
- Also the Supreme Court
highlighted that SARFAESI Act is much needed even in the existence of DRT
Act 1993 and pointed out the failure on the part of Debt recovery
Tribunals in bringing desired results in this regard.
2.
Safeguards available to the borrowers:
- Section
13 (2) mandates that a notice shall be served upon the borrower in this
regard and a reply may be submitted by the borrower explaining the
reasons as to why measures may or may not be taken under Section 13 (4) in
case of non- compliance of notice within 60 days.
- The
intention of this provision is that the creditor must apply its mind
to the objections raised in reply to such notice and an internal mechanism
must be particularly evolved to consider such objections
raised in the reply to the notice.
- Once
the same is done this is sufficient for ensuring principles of fairness on
the part of the banks and financial institutions in dealing with their
borrowers.
- Communication
of reasons not to accept the objections of the borrower, would certainly
be for the purpose of his knowledge which would be a step forward towards
his right to know as to why his objections have not been accepted by the
secured creditor who intends to resort to harsh steps of taking over the
management/business of viz.
- The
next safeguard available to a secured borrower within the framework of the
Act is to approach the Debt Recovery Tribunal under Section 17 of the Act.
Such a right accrues only after measures are taken under sub-section (1)
of Section 13 of the Act.
3. on
precondition to deposit 75% of the claim on appeal:
Such condition to deposit
was not only declared as onerous and oppressive but also held unreasonable and
arbitrary. Therefore provisions of 17 (2) of the Act relating
to predeposit of claim money was declared as violative of Article 14 of the
Constitution and the same was struck down.