In the case of financing of a financial assetby more than one secured creditors or jointfinancing of a financial asset by securedcreditors, no secured creditor shall be entitledto exercise any ...
No Acts & Articles mentioned in this case
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CASE NO.:
Transfer Case (civil) 92-95 of 2002
PETITIONER:
Mardia Chemicals Ltd. Etc. Etc.
RESPONDENT:
U.O.I. & Ors. Etc. Etc.
DATE OF JUDGMENT: 08/04/2004
BENCH:
CJI., Brijesh Kumar & Arun Kumar.
JUDGMENT:
JUDGMENT
WITH
WRIT PETITION (CIVIL) NO.140 OF 2003
M/s.Ashok Mfg.Co.Pvt.Ltd. & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.649 OF 2002
Major Mahajan Mandal & Ors.
Versus
U.O.I.
WRIT PETITION (CIVIL) NO.673 OF 2002
Supreme Rubber Industries
Versus
U.O.I. & Anr.
TRANSFER CASE (CIVIL) NO. 10 OF 2003
Modern Terry Towels Ltd. & Ors.
Versus
State of Rajasthan & Ors.
WRIT PETITION (CIVIL) NO.322 OF 2003
Sohanlal Rara
Versus
U.O.I. & Anr.
TRANSFER CASE (CIVIL) NO. 46 OF 2003
J.K.Udaipur Udyog Ltd.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.643 OF 2002
Shree Synthetics Ld. & Anr
Versus
U.O.I. & Ors.
TRANSFER CASE (CIVIL) NO. 12 OF 2003
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Sobhag Textiles Ltd.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.48 OF 2003
M/s.REL Industries .Ltd.
Versus
U.O.I. & Ors.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.5013 of 2003)
M/s.Oriental Motors & Anr.
Versus
Punjab & Sindh Bank & Anr.
WRIT PETITION (CIVIL) NO.176 OF 2003
M/s.Mahendra Commercial Ltd. & Anr.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.190 OF 2003
H.R.Brothers & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.219 OF 2003
M/s.Tirthankar Agro & Ors.
Versus
U.O.I. & Anr.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.9658 of 2003)
Citisteel Corporation & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.147 OF 2003
M/s.Punjab Breeders Ltd..
Versus
U.O.I. & Ors.
TRANSFER PETITION (CIVIL) NO. 326 OF 2003
Bank of Rajasthan Ltd.
Versus
Naresh Kumar Nevatia & Ors.
WRIT PETITION (CIVIL) NO.279 OF 2003
Euro India Biotech Ltd. & Ors.
Versus
U.O.I. & Ors.
WRIT PETITION (CIVIL) NO.231 OF 2003
Pradeep Sohawala
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Versus
U.O.I. & Ors.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.11089 of 2003)
M/s.Rudra Informatics & Ors.
Versus
Prudential Co-op.Bank Ltd.& Anr.
WRIT PETITION (CIVIL) NO.292 OF 2003
Patheja Brothers Forgings & Stampings&Anr.
Versus
U.O.I. & Anr.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.11267 of 2003)
M/s.Haji Abdul Hameed & Ors.
Versus
Central Bank of India & Ors.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.11268 of 2003)
M/s.Etawah Sales Corporation & Ors.
Versus
Central Bank of India & Ors.
TRANSFER PETITION (CIVIL) NO. 403 OF 2003
Bank of Rajasthan
Versus
R.K.Garg & Sons (HUF)
WRIT PETITION (CIVIL) NO.379 OF 2003
M/s.Verma Cards & Posters Pvt.Ltd. & Ors.
Versus
U.O.I. & Anr.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.15566 of 2003)
N.C.Jain
Versus
Bank of Baroda & Ors.
TRANSFER CASE (CIVIL) NO. 11 OF 2003
Soni Tourism Pvt. Ltd. & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.366 OF 2003
G.V.Venkateshiah
Versus
State Bank of India & Ors.
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WRIT PETITION (CIVIL) NO.541 OF 2002
M/s.Amulet International Pvt.Ltd. & Ors.
Versus
U.O.I. & Anr.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.17465 of 2003)
M/s.Deep Chand Sushil Kumar & Ors.
Versus
Central Bank of India & Anr.
WRIT PETITION (CIVIL) NO.477 OF 2003
M/s.Rama Steel Industries & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.496 OF 2003
M/s.Pahadewali Ispat Pvt.Ltd. & Anr.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.499 OF 2003
M/s.KPJ Tradevest Pvt.Ltd. & Anr.
Versus
U.O.I. & Ors.
TRANSFER PETITION (CIVIL) NO. 756 OF 2003
M/s.Vaishno Cold Storage & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.545 OF 2003
M/s.Madhumilan Syntex Ltd. & Anr.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.557 OF 2003
J.K.Jain & Ors.
Versus
U.O.I. & Anr.
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No...... of 2003(CC 10728)
M/s.Suneeta Wool & Readymade Emporium
Versus
Allahabad Bank, Jhansi
CIVIL APPEAL NO. OF 2004
(Arising out of SLP (C) No.6723 of 2003)
Pushpinder Kaur & Anr.
Versus
Punjab & Sindh Bank & Anr.
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WRIT PETITION (CIVIL) NO.590 OF 2003
M/s.Nabe International & Ors.
Versus
U.O.I. & Anr.
WRIT PETITION (CIVIL) NO.13 OF 2004
Kanti Devi & Anr.
Versus
Canara Bank & Ors.
AND
WRIT PETITION (CIVIL) NO.546 OF 2003
M/s.Akal Springs Ltd.
Versus
U.O.I. & Anr.
BRIJESH KUMAR, J.
1. Leave granted in Special Leave Petition (Civil)
Nos.5013/2003, 9658/2003, 11089/2003, 11267/2003,
11268/2003, 15566/2003, 17465/2003 and special leave
petition @ CC 10728 and SLP(C) No.6723/2003.
2. By means of the above noted bunch of cases some
of those having been transferred to this court, the validity of
the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (54 of 2002) (for
short 'the Act') has been challenged. Some writ petitions were
filed in different High Courts on promulgation of Securitization
and Reconstruction of Financial Assets and Enforcement of
Security Interest (Second Ordinance), 2002. However, the Act
54 of 2002 was enacted and enforced, vires of which is in
question, more particularly, the provisions as contained in
Sections 13, 15, 17 and 34 of the Act. Besides others, we
may, for the sake of convenience, refer to the averments made
and documents filed in Transferred Case Nos.92-95 of 2002 -
M/s.Mardia Chemicals Ltd. Etc. Etc. Vs. Union of India & Ors.
Etc.Etc.
3. It appears that a notice dated July 24, 2002 was
issued to the petitioner - Mardia Chemicals Ltd. by the
Industrial Development Bank of India (for short 'the IDBI')
under Section 13 of the Ordinance, then in force, requiring it
to pay the amount of arrears indicated in the notice within 60
days, failing which the IDBI as a secured creditor would be
entitled to enforce the security interest without intervention of
the court or Tribunal, taking recourse to all or any of the
measures contained in sub-section (4) of Section 13 namely,
by taking over possession and/or management of the secured
assets. The petitioner was also required not to transfer by way
of sale, lease or otherwise any of the secured assets. Similar
notices were issued by other financial institutions and banks
under the provisions of Section 13 of the Ordinance/Act to
different parties who filed petitions in different High Courts.
4. The main contention challenging the vires of certain
provisions of the Act is that the banks and the financial
institutions have been vested with arbitrary powers, without
any guidelines for its exercise and also without providing any
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appropriate and adequate mechanism to decide the disputes
relating to the correctness of the demand, its validity and the
actual amount of dues, sought to be recovered from the
borrowers. The offending provisions as contained under the
Act, are such that, it all has been made one sided affair while
enforcing drastic measures of sale of the property or taking
over the management or the possession of the secured assets
without affording any opportunity to the borrower. Before
further detailing the grounds of attack, we may peruse some
of the relevant provisions of the Act.
5. The term "borrower" has been defined in clause (f) of
Section 2, which provides as under :
"borrower" means any person who has been
granted financial assistance by any bank or
financial institution or who has given any
guarantee or created any mortgage or pledge
as security for the financial assistance granted
by any bank or financial institution and
includes a person who becomes borrower of a
securitisation company or reconstruction
company consequent upon acquisition by it of
any rights or interest of any bank or financial
institution in relation to such financial
assistance;"
6. "Financial Assistance" has been defined in clause
(k), which reads as under:
"financial assistance" means any loan or
advance granted or any debentures or bonds
subscribed or any guarantees given or letters
of credit established or any other credit facility
extended by any bank or financial institution;"
7. Similarly, the term "default" is defined in clause (j),
as quoted below :
"default" means non-payment of any principal
debt or interest thereon or any other amount
payable by a borrower to any secured creditor
consequent upon which the account of such
borrower is classified as non-performing asset
in the books of account of the secured creditor
in accordance with the directions or guidelines
issued by the Reserve Bank"
8. "Non Performing Asset" has been defined in
clause(o) of Section 2 which means :
"non-performing asset" means an asset or
account of a borrower, which has been
classified by a bank or financial institution as
sub-standard, doubtful or loss asset, in
accordance with the directions or under
guidelines relating to asset classifications
issued by the Reserve Bank".
9. "Reconstruction company" has been defined in
clause(v) of Section 2 which means :
"Reconstruction company" means a company
formed and registered under the Companies
Act, 1956 (1 of 1956) for the purpose of asset
reconstruction;
10. "Secured asset" has been defined in clause(zc) of
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Section 2 which means :
"Secured Asset" means the property on which
security interest is created."
11. "Secured creditor" has been defined in clause(zd) of
Section 2 which means :
"Secured Creditor" means "any bank or
financial institution or any consortium or
group of banks or financial institutions and
includes -
(i) debenture trustee appointed by any bank
or financial institution; or
(ii) securitization company or reconstruction
company; or
(iii) any other trustee holding securities on
behalf of a bank or financial institution,
in whose favour security interest is
created for due repayment by any
borrower of any financial assistance;"
12. "Secured Debt" has been defined in clause(ze) of
Section 2 which means :
"Secured Debt" means a debt which is secured
by any security interest."
13. "Security interest" has been defined in clause(zf) of
Section 2 which means :
"Security Interest" means right, title and
interest of any kind whatsoever upon property,
created in favour of any secured creditor and
includes any mortgage, charge, hypothecation,
assignment other than those specified in
section 31."
14. Section 13, which is relevant for our present
purpose, provides:
"Enforcement of security interest.- (1)
Notwithstanding anything contained in section
69 or section 69A of the Transfer of Property
Act, 1882 (4 of 1882), any security interest
created in favour of any secured creditor may
be enforced, without the intervention of the
court or tribunal, by such creditor in
accordance with the provisions of this Act.
(2) Where any borrower, who is under a
liability to a secured creditor under a security
agreement, makes any default in repayment of
secured debt or any instalment thereof, and
his account in respect of such debt is classified
by the secured creditor as non-performing
asset, then, the secured creditor may require
the borrower by notice in writing to discharge
in full his liabilities to the secured creditor
within sixty days from the date of notice failing
which the secured creditor shall be entitled to
exercise all or any of the rights under sub-
section (4).
(3) The notice referred to in sub-section (2)
shall given details of the amount payable by
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the borrower and the secured assets intended
to be enforced by the secured creditor in the
event of non-payment of secured debts by the
borrower.
(4) In case the borrower fails to discharge his
liability in full within the period specified in
sub-section (2), the secured creditor may take
recourse to one or more of the following
measures to recover his secured debt, namely:-
(a) take possession of the secured assets of the
borrower including the right to transfer by
way of lease, assignment or sale for
realizing the secured asset;
(b) take over the management of the secured
assets of the borrower including the right to
transfer by way of lease, assignment or sale
and realize the secured asset;
(c) appoint any person (hereafter referred to as
the manager) to manage the secured assets
the possession of which has been taken
over by the secured creditor;
(d) require at any time by notice in writing, any
person who has acquired any of the
secured assets from the borrower and from
whom any money is due or may become
due to the borrower, to pay the secured
creditor, so much of the money as is
sufficient to pay the secured debt.
(5) Any payment made by any person referred
to in clause (d) of sub-section (4) to the
secured creditor shall give such person a valid
discharge as if he has made payment to the
borrower.
(6) Any transfer of secured asset after taking
possession thereof or take over of management
under sub-section (4), by the secured creditor
or by the manager on behalf of the secured
creditors shall vest in the transferee all rights
in, or in relation to, the secured asset
transferred as if the transfer had been made by
the owner of such secured asset.
(7) Where any action has been taken against a
borrower under the provisions of sub-section
(4), all costs, charges and expenses which, in
the opinion of the secured creditor, have been
properly incurred by him or any expenses
incidental thereto, shall be recoverable from
the borrower and the money which is received
by the secured creditor shall, in the absence of
any contract to the contrary, be held by him in
trust, to be applied, firstly, in payment of such
costs, charges and expenses and secondly, in
discharge of the dues of the secured creditor
and the residue of the money so received shall
be paid to the person entitled thereto in
accordance with his rights and interests.
(8) If the dues of the secured creditor together
with all costs, charges and expenses incurred
by him are tendered to the secured creditor at
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any time before the date fixed for sale or
transfer, the secured asset shall not be sold or
transferred by the secured creditor, and no
further step shall be taken by him for transfer
or sale of that secured asset.
(9) In the case of financing of a financial asset
by more than one secured creditors or joint
financing of a financial asset by secured
creditors, no secured creditor shall be entitled
to exercise any or all of the rights conferred on
him under or pursuant to sub-section (4)
unless exercise of such right is agreed upon by
the secured creditors representing not less
than three-fourth in value of the amount
outstanding as on a record date and such
action shall be binding on all the secured
creditors:
Provided that in the case of a company in
liquidation, the amount realized from the sale
of secured assets shall be distributed in
accordance with the provisions of section 529
A of the Companies Act, 1956 (1 of 1956).
Xxx xxx xxx
(10) Where dues of the secured creditor are
not fully satisfied with the sale proceeds of the
secured assets, the secured creditor may file
an application in the form and manner as may
be prescribed to the Debts Recovery Tribunal
having jurisdiction or a competent court, as
the case may be, for recovery of the balance
amount from the borrower.
(11) Without prejudice to the rights conferred
on the secured creditor under or by this
section, secured creditor shall be entitled to
proceed against the guarantors or sell the
pledged assets without first taking any of the
measures specified in clauses (a) to (d) of sub-
section (4) in relation to the secured assets
under this Act.
Xxx xxx xxx
(13) No borrower shall, after receipt of notice
referred to in sub-section (2), transfer by way
of sale, lease or otherwise (other than in the
ordinary course of his business) any of his
secured assets referred to in the notice,
without prior written consent of the secured
creditor."
15. Mr.Kapil Sibal, learned senior counsel appearing for
the petitioners in the Transferred Case - M/s.Mardia
Chemicals Ltd. submits that there was no occasion to enact
such a draconian legislation to find a short-cut to realize the
dues without their ascertainment but which the secured
creditor considered to be the dues and declare the same as
non-performing assets (NPAs). Out of the total NPAs which are
considered to be about one lac crores, about half of it is due
against priority sector like agriculture etc. The dues between
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10 lacs to one crore constitute only 13.90% of the total dues.
By providing statistics on the point it is sought to be
demonstrated that most of the dues are against those
borrowers whose borrowing ranges between Rs.25000 to Rs.10
lacs. Besides the above, it is submitted, that there is already a
special enactment providing for recovery of dues of banks and
financial institutions. Therefore, it was not necessary to enact
yet another legislation containing drastic steps and procedure
depriving the debtors of any fair opportunity to defend
themselves from the onslaught of the harsh steps as provided
under the Act.
16. It is further submitted that no provision has been
made to take into account the lenders liability, though at one
time it was considered necessary to have an enactment
relating to lenders liability and a bill was also intended to be
introduced, as it was considered that it is necessary for the
lenders as well to conduct themselves responsibly towards the
borrowers. It is submitted that despite such a statement, as
indicated above, on the floor of the House, neither any such
law has been enacted so far nor any care has been taken to
introduce such safeguards in the Act to protect the borrowers
against their vulnerability to arbitrary or irresponsible action
on the part of the lenders. On a comparative basis, in relation
to other countries, it is submitted that the percentage of NPA
of as against the GDP is only 6% in India which is much less
as compared to China, Malasia, Thailand, Japan, South Korea
and other countries. Therefore, it is evident that the resort
has been taken to a drastic legislation, under mis-
apprehension that other ways and means have failed to
recover the dues from the borrowers.
17. Referring to Section 13 of the Act it is submitted on
behalf of the petitioners that a security interest can be
enforced by the secured creditor straightaway without
intervention of the court just on default in repayment of an
instalment and non-compliance of a notice of 60 days in that
regard, declaring the loan as non-performing asset. Under
sub-section 4 of Section 13 the secured creditor is entitled to
take possession of the secured assets and may transfer the
same by way of lease, assignment or sale as provided under
clause (a) or under clause (b) to take over the management of
the secured assets including the right to transfer any secured
assets or to appoint any person as provided in clause (c) to
manage the secured assets taken over by the creditor. Under
clause (d) by means of a notice any person who has acquired
any of the secured assets from the borrower or who has to pay
to the borrower any amount which may cover the secured
debt, can be asked to pay it to the secured creditor. All that
is provided is that if all the dues with costs and charges and
expenses incurred by the creditor is tendered before the date
fixed for sale of the assets no further steps shall be taken for
sale of the property.
18. It is submitted that the mechanism provided for
recovery of the debt under Section 13 indicated above does not
provide for any adjudicatory forum to resolve any dispute
which may arise in relation to the liability of the borrower to
be treated as a defaulter or to see as to whether there has
been any violation or lapse on the part of the creditor or in
regard to the correctness of the amount sought to be recovered
and the interest levied thereupon. On the other hand, Section
34 bars the jurisdiction of the civil court to entertain any suit
in respect of any matter which a Debt Recovery Tribunal or the
appellate Tribunal is empowered to determine. It also provides
that no injunction shall be granted by any court or other
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authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under Act or under
the Recovery of Debts due to Banks and Financial Institutions
Act, 1993. Section 35 gives an overriding effect to the
provisions of the Act over the provisions contained under any
other law. The submission, therefore, is that before any action
is taken under Section 13, there is no forum or adjudicatory
mechanism to resolve any dispute which may arise in respect
of the alleged dues or the NPA.
19. It is further submitted that the provision of appeal
as contained in Section 17 of the Act is also illusory since an
appeal may be preferred within the specified time from the
date on which measures under sub-section 4 of Section 13
have been taken, is to say that the appeal would be
maintainable after the possession of the property or the
management of the secured assets has been taken over or the
property has been sold. Further, an appeal is not
entertainable unless 75% of the amount claimed in the notice
is deposited by the borrower with the Debt Recovery Tribunal.
It would be a matter in the discretion of the Debt Recovery
Tribunal to waive the condition of pre deposit or to reduce the
amount, for reasons to be recorded therefor. It is submitted
that a remedy which is available, after the damage is done and
on fulfillment of such an onerous condition as deposit of 75%
of the demand, is illusory and a mere farce. It is no real
remedy available to a borrower before he is subjected to harsh
steps as provided under sub-section (4) of Section 13. It is
further submitted that after the possession of the secured
assets or its management has been taken over by the secured
creditor or the property is leased out or sold to any other
person, it would not be possible to raise and deposit 75% of
the amount claimed by the secured creditor. It is also
submitted that once the secured assets are taken over there is
hardly any occasion for deposit of 75% of the claim since it is
already secured and the management and the possession of
the secured assets moves into the hands of the creditor. The
position thus is that the borrower is gagged into a helpless
position where he cannot ventilate his grievance against the
drastic steps taken against him. The doors of the civil court
are closed for him and no adjudicatory mechanism is provided
before steps are taken under sub-section (4) of Section 13.
Such a law, it is submitted, is arbitrary and suffers from the
vice of unreasonableness.
20. In so far it relates to Section 19 of the Act which
provides, in case it is found that possession of the secured
assets was wrongfully taken by the secured creditor he may be
directed to return the secured assets to the borrower who may
also be entitled to such compensation as may be determined
by the debt recovery Tribunal or the appellate Tribunal, it is
submitted that it is hardly a consolation after harsh steps as
provided under sub-section 4 of section 13 have been taken.
21. Shri Ashok Desai, learned counsel appearing in one
of the matters namely, the case of M/s.Modern Terry Towel
Ltd. leaving aside the questions of fact, submits that for
exercise of power under Section 13, certain enquiries would be
necessary as to whether a person to whom notice is given is
under a liability to pay as also the question of extent of the
liability etc. Further the questions pertaining to law of
limitation and bar under consortium agreements, claim of set
off/counter claim, creditors defaults as bailee or its failure to
disburse the credit in time, the chargeability of penal interest
or compound interest or non-appropriation of amount already
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paid and so on and so forth, all these questions need to be
decided. Bar of Section 22 of the Sick Industrial Companies
Act (for short 'SICA) may have to be considered. But there is
no adjudicatory body provided for dealing with such disputes.
Relying on a decision of this Court reported in 2002(5) SCC
p.685, Indian National Congress (I) Vs. Institute of Social
Welfare and others, observations made by one of us (Chief
Justice V.N.Khare) have been relied upon as quoted below:-
"Thus, where there is a lis or two contesting
parties making rival claims and the statutory
authority under the statutory provision is
required to decide such a dispute, in the
absence of any other attributes of a quasi-
judicial authority, such a statutory authority is
quasi-judicial authority.
But there are cases where there is no lis or two
contending parties before a statutory authority
yet such a statutory authority has been held to
be quasi-judicial and decision rendered by it
as a quasi-judicial decision when such a
statutory authority is required to act judicially.
In R v. Dublic Corpn. It was held thus :
"In this connection the term judicial does not
necessarily mean acts of a Judge or legal
tribunal sitting for the determination of
matters of law, but for purpose of this
question, a judicial act seems to be an act
done by competent authority upon
consideration of facts and circumstances and
imposing liability or affecting the rights. And if
there be a body empowered by law to enquire
into facts, making estimates to impose a rate
on a district, it would seem to me that the acts
of such a body involving such consequences
would be judicial acts."
"Applying the aforesaid principle, we are of the
view that the presence of a lis or contest
between the contending parties before a
statutory authority, in the absence of any
other attributes of a quasi-judicial authority is
sufficient to hold that such a statutory
authority is quasi-judicial authority. However,
in the absence of a lis before a statutory
authority, the authority would be quasi-
judicial authority if it is required to act
judicially."
It is submitted that power to decide a lis is a judicial or quasi-
judicial power and not purely an administrative power.
Therefore a suitable forum has to be provided to decide all
such disputes at an appropriate stage. In that connection
reliance has also been placed on a case reported in 1992
Suppl.(2) SCC p.651, Kihoto Hollohan v. Zachillhu & Ors.
and Associated Cement Companies Ltd. v. P.N.Sharma
(1965(2) SCR p.366 at pages 386-87). It is submitted any
power which is exercised by a party to enforce security by way
of sale etc. without any determination of disputed questions,
as in the existing law, under Section 13 of the Act, is
unconstitutional. It is further submitted that legislature has
vested the beneficiary to exercise the power without any
determination of disputed questions excluding the judicial
remedies till the power stands exercised. It renders the Act
procedurally and substantively unfair, unreasonable and
arbitrary. Power of judicial determination, it is submitted, is
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manifestation of sovereign power to determine the legal rights
which cannot be vested in private bodies as foreign banks,
cooperative banks or non-banking financial institutions etc.
Stress has also been given upon the condition of deposit of
75% of claim before entertainment of the appeal.
22. It is next submitted that power under Section 69 of
the Transfer of Property Act is hedged with various restrictions
to prevent abuse of power including mortgagor's right to have
recourse to court both before and after the sale. In this
connection, he has referred to decisions of the Madras High
Court reported in AIR 1955 Madras P. 135,
V.Narasimhachariar vs. Egmore Benefit Society, and also
AIR 1955 Madras 343, V.P.Padmavati vs. P.S.Swaminathan
Iyer. It is submitted that English mortgage is in the nature of
conveyance or absolute transfer of mortgage property with
provision of retransfer upon discharge of mortgage and
referred to AIR 1969 Mysore p.280, Bank of Maharashtra
Ltd., Puna Vs. Official Liquidator, High Court Buildings. It
is submitted that the scope of Section 13 of the Act is
fundamentally different from the scope of power under Section
69 of the Transfer of Property Act.
23. Shri Dholakia, learned senior counsel appearing on
behalf of the guarantors of the principal borrower, refers to
Section 2(f) of the Act to indicate that the definition of the word
'borrower' covers even the guarantor. He then refers to
Section 135 of the Contract Act to show that in certain
circumstances a guarantor is discharged of his obligation. The
petitioner received a notice under Section 13(2) of the Act. The
submission is in view of the bar of Section 34 to file a suit in
the Civil Court, it is not possible for him to approach the Court
to show and establish that he is a discharged guarantor,
hence notice under Section 13(2) is bad and refers to 1997(5)
SCC p.536 at page 735 Mafatlal Industries Ltd. and Ors. Vs.
Union of India and Ors. He next referred to Section 31 of the
Act. It is submitted that the word 'security' has not been
defined under Section 2 of the Act. Then refers to Section 2(t)
of the Act which defines the word 'property' which means a
movable, immovable, or any right to receive payment,
receivable intangible assets etc. It is submitted that the Act
not to apply to the legal liens. Further refers to Laws of
Halsbury's, 4th Edition, Vol.28, pages 510-511 and Section 48
of the Transfer of Property Act. It is submitted that if property
is subject to several charge as first charge, second charge and
third charge and so on property in relation to only one of them
would be NPA and not in relation to other creditors having
charge over the property. It is submitted that it is not clear in
such a situation how the Act will be workable.
24. He also refers to Section 44 of the Transfer of
Property Act which deals with the case of transfer by one co-
owner and the difficulty to work out the provisions of the Act
in such cases.
25. As against the above submissions, the case of the
respondents is that financial institutions are badly effected by
non-recovery of dues and despite the existing laws like, the
Recovery of Debts due to Banks and Financial Institutions Act,
much could not be achieved, hence it was necessary to take
further legislative steps to accelerate recovery of the heavy
amount of dues. It is submitted that after availing the facility
of financial assistance quite often the borrowers hardly show
interest in repayment of loan which keep on accumulating as
a result of which it becomes difficult for the financial
institutions to continue the financial assistance to deserving
parties due to heavy blockade of money stuck up with the
erring borrowers. It is not good for a financial institution to
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have heavy NPA. It has also been indicated that since after
enforcement of the Act there has been marked improvement
in the recovery and quite substantial amount has since been
recovered.
26. Shri Soli J.Sorabjee, learned Attorney General,
appearing for the Union of India submitted that the Act was
enacted to curb the menace of growing non-performing assets
(NPAs). It affects the banks and financial institutions which is
ultimately against the public interest. Due to non-recovery of
the dues the banks also run out of the financial resources to
further carry on the financial activity and to meet the need
and requirement of its other depositors and clients. The
figures of NPA which have been given border around one lac
crores. After coming into force of the Recovery of Debts due to
Banks and Financial Institutions Act and establishment of
Debt Recovery Tribunals the success in recovery has not been
very encouraging. Therefore, need was felt for a faster
procedure empowering the secured creditors to recover their
dues and for securitisation of financial assets so as to generate
maximum monetary liquidity. It has been felt that after coming
into force of the Act there is a marked difference in realization
of dues and more borrowers are coming forward to pay up the
defaulted amount and clear the dues. It is submitted that in
case a defaulter wants to raise any objection it may be raised
in reply to the notice which would obviously be considered by
the secured creditor before it would further proceed to take
recourse to sub-section 4 of Section 13 of the Act. It is further
submitted that there will be ample time for a borrower to
approach the Debt Recovery Tribunal to seek relief before sale
of the secured assets. The remedy as provided under Section
17 of the Act it is adequate and the condition of deposit of 75%
of the claim before the appeal could be entertained is not an
unusual condition and it is to be found in other statutes also.
It is then submitted that proviso to Section 17 very clearly
provides that on an application moved in that behalf the
condition of deposit of the amount can be waived or the
amount can be reduced. Therefore, it would not be correct to
say that condition of pre-deposit is harsh as it can be relaxed
in deserving cases. The bar of jurisdiction of the Civil Court
was thought to be necessary to avoid lengthy legal process in
realizing the amount due. It is then submitted that normally
there should be a presumption in favour of validity of a
legislation more so in regard to the laws relating to economic
and financial matters and a few instances here and there of
any harsh results would not be a valid consideration to
invalidate the law.
27. Shri Harish N.Salve, learned senior counsel
appearing for the ICICI submits that the purpose of enacting
the Act would be self-evident from the statement of objects
and reasons for the enactment which reads as under:
"The financial sector has been one of the key
drivers in India's efforts to achieve success in
rapidly developing its economy. While banking
industry in India is progressively complying
with the international prudential norms and
accounting practices, there are certain areas in
which the banking and financial sector do not
have a level playing field as compared to other
participants in the financial markets in the
world. There is no legal provision for
facilitating securitisation of financial assets of
banks and financial institutions. Further,
unlike international banks, the banks and
financial institutions in India do not have
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power to take possession of securities and sell
them. Our existing legal framework relating to
commercial transactions has not kept pace
with the changing commercial practices and
financial sector reforms. This has resulted in
slow pace of recovery of defaulting loans and
mounting levels of non-performing assets of
banks and financial institutions. Narasimham
Committee I and II and Andhyarujina
Committee constituted by the Central
Government for the purpose of examining
banking sector reforms have considered the
need for changes in the legal system in respect
of these areas."
28. It is submitted that the question of enactment of
the Act was under consideration for long and first
Narasimham Committee and then Andhyarujina Committee
were constituted by the central government for introducing
reforms in the banking sector necessary for recovery of the
outstanding dues of the financial institutions. The practice of
securitisation of debts is in vogue all over the world. That is to
say a measure of replenishing the funds by recourse to the
secondary market. There are organizations who undertake
exercise of securitisation. Such organizations take over the
financial assets and in turn issue securities.
29. It is submitted that the funding of the debts is
feasible only where there exists an efficacious and expeditious
machinery for realization of debts for investors in such
securities. It is submitted that in England a mortgagee under
a legal mortgage has a right to take possession, to sell, and
even appoint a receiver in relation to mortgaged properties
without recourse to a court of law. It is also submitted that
provisions as contained under Section 9 of the Act are also
valid. The securitisation is done in accordance with the
guidelines framed by the Reserve Bank of India. In so far the
provisions contained under Section 15 of the Act and the
challenge made to it, it is submitted that it is referable to
Section 9 and not to Section 13(4) (a) of the Act.
30. Shri Andhyarujina, learned senior counsel
appearing for the Life Insurance Corporation of India stressed
upon the background in which the impugned legislation was
enacted pressed by circumstances, namely, over growing non-
performing assets crippling the viability of financing by
banking sector and financial institutions. It ultimately effects
the process of industrialization and growth of national
economy. It was difficult to get quick relief from the normal
procedure of laws. The recovery through Debt Recovery
Tribunals was also insignificant. Based on the
recommendations of the Narasimham Committee, an expert
committee recommended the legal framework concerning
banking system. It is submitted that the provisions as
contained in Chapter III of the Act are in keeping with
provisions as contained under Section 69 of the Transfer of
Property Act regarding sale of security interest without
intervention of the court like Section 29 of the State Financial
Corporation Act, 1951 and Section 176 of the Contract Act. It
is submitted that the relationship between secured creditor
and the borrower is a contractual relationship and no question
of adjudication arises at the stage of Section 13(2) of the Act.
31. Shri A.M. Singhvi has also made similar
submissions in support of validity of the Act.
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32. As indicated earlier, arguments on the same lines
were advanced by some of the counsels and others adopted
the same.
33. Taking an overall view of the rival contentions of the
parties, we feel the main questions which broadly fall for
consideration by us are :
i) Whether it is open to challenge the statute on
the ground that it was not necessary to enact
it in the prevailing background particularly
when another statute was already in
operation?
ii) Whether provisions as contained under
Section 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, particularly in
view of bar to approach the civil court under
Section 34 of the Act?
iii) 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 entertainable only on deposit of 75% of the
claim raised in the notice of demand?
iv) 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?
v) 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?
vi) 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?
vii) Whether the principle of lender's liability has
been absolutely ignored while enacting the Act
and its effect?
34. Some facts which need be taken note of are that the
banks and the financial institutions have heavily financed the
petitioners and other industries. It is also a fact that a large
sum of amount remains unrecovered. Normal process of
recovery of debts through courts is lengthy and time taken is
not suited for recovery of such dues. For financial assistance
rendered to the industries by the financial institutions,
financial liquidity is essential failing which there is a blockade
of large sums of amounts creating circumstances which retard
the economic progress followed by a large number of other
consequential ill effects. Considering all these circumstances,
the Recovery of Debts Due to Banks and Financial Institutions
Act was enacted in 1993 but as the figures show it also did not
bring the desired results. Though it is submitted on behalf of
the petitioners that it so happened due to inaction on the part
of the governments in creating Debt Recovery Tribunals and
appointing Presiding Officers, for a long time. Even after
leaving that margin, it is to be noted that things in the
concerned spheres are desired to move faster. In the present
day global economy it may be difficult to stick to old and
conventional methods of financing and recovery of dues.
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Hence, in our view, it cannot be said that a step taken towards
securitisation of the debts and to evolve means for faster
recovery of the NPAs was not called for or that it was
superimposition of undesired law since one legislation was
already operating in the field namely the Recovery of Debts
due to Banks and Financial Institutions Act. It is also to be
noted that the idea has not erupted abruptly to resort to such
a legislation. It appears that a thought was given to the
problems and Narasimham Committee was constituted which
recommended for such a legislation keeping in view the
changing times and economic situation whereafter yet another
expert committee was constituted then alone the impugned
law was enacted. Liquidity of finances and flow of money is
essential for any healthy and growth oriented economy. But
certainly, what must be kept in mind is that the law should
not be in derogation of the rights which are guaranteed to the
people under the Constitution. The procedure should also be
fair, reasonable and valid, though it may vary looking to the
different situations needed to be tackled and object sought to
be achieved.
35. As referred to above, the Narasimham Committee
was constituted in 1991 relating to the Financial System
prevailing in the country. It considered wide ranging issues
relevant to the economy, banking and financing etc. Under
Chapter V of the Report under the heading 'Capital Adequacy,
Accounting Policies and other Related Matters' it was opined
that a proper system of income recognition and provisioning is
fundamental to the preservation of the strength and stability
of banking system. It was also observed that the assets are
required to be classified, it also takes note of the fact that the
Reserve Bank of India had classified the advances of a bank,
one category of which was bad debts/doubtful debts. It then
mentions that according to the international practice, an asset
is treated as non-performing when the interest is overdue for
at least two quarters. Income of interest is considered as
such, only when it is received and not on the accrual basis.
The Committee suggested that the same should be followed by
the banks and financial institutions in India and an advance
is to be shown as non-performing assets where the interest
remains due for more than 180 days. It was further suggested
that the Reserve Bank of India should prescribe clear and
objective definitions in respect of advances which may have to
be treated as doubtful, standard or sub-standard, depending
upon different situations. Apart from recommending to set up
of special Tribunals to deal with the recovery of dues of the
advances made by the banks the committee observed that
impact of such steps would be felt by the banks only over a
period of time, in the meanwhile, the Committee also
suggested for reconstruction of assets saying "the Committee
has looked at the mechanism employed under similar
circumstances in certain other countries and recommends the
setting up of, if necessary by special legislation, a separate
institution by the Government of India to be known as 'Assets
Reconstruction Fund (ARF) with the express purpose of taking
over such assets from banks and financial institutions and
subsequently following up on the recovery of dues owed to
them from the primary borrowers." While recommending for
setting up of special Tribunals, the Committee observed :
"Banks and financial institutions at
present face considerable difficulties in
recovery of dues from the clients and
enforcement of security charged to them
due to the delay in the legal processes. A
significant portion of the funds of banks
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and financial institutions is thus blocked
in unproductive assets, the values of
which keep deteriorating with the
passage of time. Banks also incur
substantial amounts of expenditure by
way of legal charges which add to their
overheads. The question of speeding up
the process of recovery was examined in
great detail by a committee set up by the
Government under the Chairmanship of
the late Shri Tiwari. The Tiwari
Committee recommended, inter alia, the
setting up of Special Tribunals which
could expedite the recovery of process...."
The Committee also suggested some legislative measures to
meet the situation.
36. In its Second Report, the Narasimham Committee
observed that the NPAs in 1992 were uncomfortably high for
most of the public sector banks. In Chapter VIII of the Second
Report the Narasimham Committee deals about legal and
legislative framework and observed :
"8.1 A legal framework that clearly defines the
rights and liabilities of parties to contracts and
provides for speedy resolution of disputes is a
sine qua non for efficient trade and commerce,
especially for financial intermediation. In our
system, the evolution of the legal framework
has not kept pace with changing commercial
practice and with the financial sector reforms.
As a result, the economy has not been able to
reap the full benefits of the reforms process.
As an illustration, we could look at the scheme
of mortgage in the Transfer of Property Act,
which is critical to the work of financial
intermediaries.........."
One of the measures recommended in the circumstances was
to vest the financial institutions through special statutes, the
power of sale of the asset without intervention of the court and
for reconstruction of the assets. It is thus to be seen that the
question of non-recoverable or delayed recovery of debts
advanced by the banks or financial institutions has been
attracting the attention and the matter was considered in
depth by the committees specially constituted consisting of the
experts in the field. In the prevalent situation where the
amount of dues are huge and hope of early recovery is less, it
cannot be said that a more effective legislation for the purpose
was uncalled for or that it could not be resorted to. It is again
to be noted that after the report of the Narasimham
Committee, yet another committee was constituted headed by
Mr.Andhyarujina for bringing about the needed steps within
the legal framework. We are therefore, unable to find much
substance in the submission made on behalf of the petitioners
that while the Recovery of debts due to Banks and Financial
Institutions Act was in operation it was uncalled for to have
yet another legislation for the recovery of the mounting dues.
Considering the totality of circumstances the financial climate
world over, if it was thought as a matter of policy, to have yet
speedier legal method to recover the dues, such a policy
decision cannot be faulted with nor it is a matter to be gone
into by the courts to test the legitimacy of such a measure
relating to financial policy.
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37. Next we come to the question as to whether it is on
whims and fancies of the financial institutions to classify the
assets as non-performing assets, as canvassed before us. We
find it not to be so. As a matter of fact a policy has been laid
down by the Reserve Bank of India providing guidelines in the
matter for declaring an asset to be a non-performing asset
known as "RBI's prudential norms on income recognition,
asset classification and provisioning - pertaining to advances"
through a Circular dated August 30, 2001. It is mentioned in
the said Circular as follows :
"1.1 In line with the international practices
and as per the recommendations made by the
Committee on the Financial System (Chairman
Shri M.Narasimham), the Reserve Bank of
India has introduced, in a phased manner,
prudential norms for income recognition, asset
classification and provisioning for the
advances portfolio of the banks so as to move
towards greater consistency and transparency
in the published accounts."
2.1 Non-performing Assets:
"2.1.1 An asset, including a leased asset,
becomes non-performing when it ceases to
generate income for the bank. A 'non-
performing asset' (NPA) was defined as a credit
facility in respect of which the interest and/or
instalment of principal has remained 'past due'
for a specified period of time. The specified
period was reduced in a phased manner as
under:
Year ending March 31 Specified period
1993 four quarters
1994 three quarters
1995 onwards two quarters
2.1.2 An amount due under any credit facility
is treated as "past due" when it has not been
paid within 30 days from the due date. Due to
the improvements in the payment and
settlement systems, recovery climate,
upgradation of technology in the banking
system, etc., it was decided to dispense with
'past due' concept, with effect from March 31,
2001. Accordingly, as from that date, a Non-
performing Asset (NPA) shall be an advance
where
(i) interest and/or installment of principal
remain overdue for a period of more than
180 days in respect of a Term Loan,
(ii) the account remains 'out of order' for a
period of more than 180 days, in respect
of an Overdraft/Cash Credit (OD/CC),
(iii) the bill remains overdue for a period of
more than 180 days in the case of bills
purchased and discounted,
(iv) interest and/or installment of principal
remains overdue for two harvest seasons
but for a period not exceeding two half
years in the case of an advance granted
for agricultural purposes, and
(v) any amount to be received remains
overdue for a period of more than 180
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days in respect of other accounts.
4.2.2 Banks should establish appropriate
internal systems to eliminate the tendency to
delay or postpone the identification of NPAs,
especially in respect of high value accounts.
The banks may fix a minimum cut off point to
decide what would constitute a high value
account depending upon their respective
business levels. The cut off point should be
valid for the entire accounting year.
Responsibility and validation levels for
ensuring proper asset classification may be
fixed by the banks. The system should ensure
that doubts in asset classification due to any
reason are settled through specified internal
channels within one month from the date on
which the account would have been classified
as NPA as per extant guidelines."
From what is quoted above, it is quite evident that guidelines
as laid down by the Reserve Bank of India which are in more
details but not necessary to be reproduced here, laying down
the terms and conditions and circumstances in which the debt
is to be classified as non-performing asset as early as
possible. Therefore, we find no substance in the submission
made on behalf of the petitioners that there are no guidelines
for treating the debt as a non-performing asset.
38. We may now consider the main enforcing provision
which is pivotal to the whole controversy namely, Section 13 in
Chapter III of the Act. It provides that a secured creditor may
enforce any security interest without intervention of the court
or Tribunal irrespective of Section 69 or Section 69A of the
Transfer of Property Act where according to sub-section (2) of
Section 13, the borrower is a defaulter in repayment of the
secured debt or any installment of repayment and further the
debt standing against him has been classified as a non-
performing asset by the secured creditor. Sub-section (2) of
Section 13 further provides that before taking any steps in
direction of realizing the dues, the secured creditor must
serve a notice in writing to the borrower requiring him to
discharge the liabilities within a period of 60 days failing
which the secured creditor would be entitled to take any of
the measures as provided in sub-section (4) of Section 13. It
may also be noted that as per sub-section (3) of Section 13 a
notice given to the borrower must contain the details of the
amounts payable and the secured assets against which the
secured creditor proposes to proceed in the event of non-
compliance with the notice given under sub-section (2) of
Section 13.
39. Sub-section (4) provides for four measures which
can be taken by the secured creditor in case of non-
compliance with the notice served upon the borrower. Under
clause (a) of sub-section (4) the secured creditor may take
possession of the secured assets including the right to transfer
the secured assets by way of lease, assignment or sale; may
take over the management of the secured assets under clause
(b) including right to transfer; under clause (c) of sub-section
(4) a manager may be appointed to manage the secured assets
which have been taken possession of by the secured creditor
and may require any person who has acquired any secured
assets from the borrower or from whom any money is due to
the borrower to pay the same to him as it may be sufficient to
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pay the secured debtor as provided under Clause (d) of Section
3(4) of the Act. Sub-section (8) of Section 13 however,
provides that if all the dues of the secured creditor including
all costs, charges and expenses etc. as may be incurred are
tendered to the secured creditor before sale or transfer no
further steps be taken in that direction.
40. Now coming to Section 17, it provides for filing of
an appeal to the Debt Recovery Tribunal within 45 days of
any action taken against the borrower under sub-section (4) of
Section 13 of the Act. It reads as under :
"17. Right to appeal .- (1) Any person
(including borrower), aggrieved by any of the
measures referred to in sub-section (4) of
section 13 taken by the secured creditor or his
authorized officer under this Chapter, may
prefer an appeal to the Debts Recovery
Tribunal having jurisdiction in the matter
within forty-five days from the date on which
such measures had been taken.
(2) Where an appeal is preferred by a borrower,
such appeal shall not be entertained by the
Debts Recovery Tribunal unless the borrower
has deposited with the Debts Recovery
Tribunal seventy-five per cent of the amount
claimed in the notice referred to in sub-section
(2) of section 13 :
Provided that the Debts Recovery
Tribunal may, for reasons to be recorded in
writing, waive or reduce the amount to be
deposited under this section.
(3) Save as otherwise provided in this Act, the
Debts Recovery Tribunal shall, as far as may
be, dispose of the appeal in accordance with
the provisions of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (51
of 1993) and rules made thereunder."
It is thus clear that an appeal under sub-section (1) of Section
17 would lie only after some measure has been taken under
sub-section (4) of Section 13 and not before the stage of taking
of any such measure. According to sub-section (2), the
borrower has to deposit 75% of the amount claimed by the
secured creditor before his appeal can be entertained.
41. So far jurisdiction of Civil Court is concerned we
find that there is a bar to it as provided under Section 34 of
the Act quoted below:-
"34. Civil Court not to have jurisdiction - No Civil
Court shall have jurisdiction to entertain any suit or
proceeding in respect of any matter which a Debts
Recovery Tribunal or the Appellate Tribunal is
empowered by or under this Act to determine and
no injunction shall be granted by any court or other
authority in respect of any action taken or to be
taken in pursuance of any power conferred by or
under this Act or under the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 (51
of 1993)."
42. Mainly it is to be considered as to whether there is
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absolute bar of any remedy to the borrower, before an action
is taken under sub-section (4) of Section 13 of the Act in view
of non-obstante clause under sub-section (1) of Section 13 and
the bar of the jurisdiction of the civil court under Section 34 of
the Act. Sub-section (1) of Section 13 begins with
"Notwithstanding anything contained" under Section 69 of the
Transfer of Property Act any secured interest can be enforced
without intervention of the court or Tribunal. Section 69 of
the Transfer of Property Act provides as follows :
"69. Power of sale when valid.-(1) A
mortgagee, or any person acting on his behalf,
shall, subject to the provisions of this section,
have power to sell or concur in selling the
mortgaged property, or any part thereof, in
default of the payment of mortgage-money,
without the intervention of the Court, in the
following cases and in no others, namely -
(a) where the mortgage is an English mortgage,
and neither the mortgagor nor the
mortgagee is a Hindu, Mohammadan or
Buddhist or a member of any other race,
sect, tribe or class from time to time
specified in this behalf by the State
Government, in the Official Gazette;
(b) where a power of sale without the
intervention of the Court is expressly
conferred on the mortgagee by the
mortgage-deed, and the mortgagee is the
Government;
(c) where a power of sale without the
intervention of the Court is expressly
conferred on the mortgagee by mortgage-
deed, and the mortgaged property or any
part thereof was, on the date of the
execution of the mortgage-deed, situate
within the towns of Calcutta, Madras,
Bombay, or in any other town or area which
the State Government may, by notification
in the Official Gazette, specify in this
behalf.
(2) No such power shall be exercised unless
and until -
(a) notice in writing requiring payment of the
principal money has been served on the
mortgagor, or on one of several mortgagors,
and default has been made in payment of
the principal money, or of part thereof, for
three months after such service; or
(b) some interest under the mortgage
amounting at least to five hundred rupees
is in arrear and unpaid for three months
after becoming due.
(3) When a sale has been made in professed
exercise of such a power, the title of the
purchaser shall not be impeachable on the
ground that no case had arisen to authorize
the sale, or that due notice was not given, or
that the power was otherwise improperly or
irregularly exercised; but any person
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damnified by an unauthorized, or improper, or
irregular exercise of the power shall have his
remedy in damages against the person
exercising the power.
(4) . . . . . . .
(5) . . . . . . .
Xxx xxx xxx"
It is clear that mortgaged property cannot be sold without
intervention of the court except in three conditions as
enumerated in clauses (a), (b) and (c) of sub-section (1) of
Section 69. Clause (a) relates to English mortgage in which a
mortgaged property is permitted to be sold without
intervention of the court but in the stricto senso clause (a)
would not be applicable to the present case as it contains
many conditions which obviously are not fulfilled in case in
hand. It is however, submitted that the provision for
enforcing secured debt was made on the lines of the principle
governing English mortgage. It is perhaps sought to be
canvassed that if that kind of step namely enforcing the
secured debt without intervention of the court is permissible
in a case of English mortgage such a provision may
legitimately be enacted in respect of mortgages like English
mortgages. We find much has been argued on the point as to
whether the transactions involved in the cases before us
amount to English mortgage or not though none of agreements
have been placed before us. Distinction between the two have
also been tried to be shown and it has been submitted that
English mortgage is in fact transfer of the property absolutely
to the mortgagee with a term of retransfer. Section 58(e)
pertaining to English mortgage is quoted below :
"58. 'Mortgage', 'mortgagor', 'mortgagee',
'mortgage-money' and 'mortgage-deed'
defined.-
xxx xxx xxx
(d) English mortgage - Where the mortgagor
binds himself to repay the mortgage-money
on a certain date, and transfers the
mortgaged property absolutely to the
mortgagee, but subject to a proviso that he
will retransfer it to the mortgagor upon
payment of the mortgage-money as agreed,
the transaction is called an English
mortgage.
Xxx xxx xxx"
It is thus pointed out that in English mortgage, absolute
transfer of the property already takes place. Hence the
question of intervention of the court may not arise. It has a
condition of retransfer. It is submitted that by no means it
can be said that the transactions in question are like those
as English mortgage. On the basis of the above provision it is
further submitted that if the condition of retransfer is not
invoked the mortgagee is possessed of all rights absolutely in
the property. There are different kinds of mortgages as
enumerated in section 58 of the Transfer of Property Act. We
feel that it would not be necessary to further go into the
matter as to whether the agreements in the cases before us
amount to English mortgage or not since the non-obstante
clause under Section 13(1) of the Act provides that
notwithstanding anything contained in Section 69 a secured
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interest can be enforced without intervention of the court.
That is to say it overrides the provision as contained under
Section 69 where it is said that in no cases, other than those
as enumerated in clauses (a), (b) and (c), a mortgage shall be
enforced without intervention of the court. Once the said
condition, as noted above, in section 69 of the Transfer of
Property Act, the general law on the subject, has been
overridden by the special enactment namely the Securitisation
Act, it would not make much of a difference as to whether the
transactions in question are akin to or amount to English
mortgage or not, since irrespective of the kind of the
mortgage the secured interest is liable to be enforced without
intervention of the court as per the provision contained under
Section 13 of the Act. Needless to refer Section 35 of the Act,
which provides as under :
"35. The provisions of this Act to override
other laws.- The provisions of this Act shall
have effect, notwithstanding anything
inconsistent therewith contained in any other
law for the time being in force or any
instrument having effect by virtue of any such
law."
43. It may, however, be worthwhile to mention here as
to why and in what circumstances it had been thought
necessary to provide a non-obstante clause in sub-section (1)
of Section 13 of the Act. In a nutshell, the position as
prevailed in 1882 when the Transfer of Property Act was
enacted has undergone a sea-change. What was conceived
correct in the situation then prevailing may not be so in the
present day situation. Functions of different institutions
including the banking and financial institutions have changed
and new functions have been introduced for financing the
industries etc. New economic and fiscal environment is
around more than 100 years later after the enactment of the
Transfer of Property Act. In this connection it has been
pointed out on behalf of the respondents that Rajamannar
Committee was appointed by Government of India which
submitted its report in 1977 indicating the effect of the
changed situation and the relevance of the provisions of the
Transfer of Property Act in context thereof. Mr.Salve has
drawn our attention to the Rajamannar Committee report as
quoted in the Narasimham Committee Report 1998, which
reads as under :
"The Rajamannar Committee appointed by the
Government of India gave its report in 1977
pointing out the development of the law of
mortgages and explaining how it had become
completely anachronistic in the latter part of
the 20th century where mortgages had become
a very important instrument to facilitate
development of commercial credit. The
Rajamannar Committee's recommendations,
that were extracted in the Narasimham Report
(1998) stated ".... thus a distinction was made
in the original schemes as regards mortgages
to which Europeans were parties mortgages
where the properties were situated in the
presidency towns, and mortgages where the
mortgages were of native origin and mortgages
where the property was situate in the mofussil.
This distinction was based on the fact that in
the mofussil, it was the money lenders with
their unscrupulous methods, who were, by
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and large, the persons lending against
mortgage of immovable property ..... evidently,
the situation that prevailed at the time of the
enactment of the Transfer of Property Act
1882, justify the legislative action of the then
Government of India in limiting the right of
sale without the intervention of court .....
....economic conditions have vastly changed
since the enactment of the Transfer of Property
Act in 1882. The role of the unscrupulous
money lenders dominating in the field of credit
is no longer valid ,,, with our reliance on
institutionalization of credit, the banks
another financing institutions are the major
moneylenders of credit today. In their dealings
with their mortgagors, it is anachronistic to
assume that they will adopt the unscrupulous
moneylenders. (Paragraph 1.2.19).
In fact in extending credit, the necessity for
suitable safeguards to banks and other
financing institutions is now rightly stressed.
It is understandable that the legal framework
is essentially conceived to deal with
unscrupulous moneylenders is no longer
appropriate to deal with credit given by banks
and other financing institutions...".
44. As a matter of fact, the Narasimham Committee also
advocates for a legal framework which may clearly define the
rights and liabilities of the parties to the contract and
provisions for speedy resolution of disputes, which is a sine
qua non for efficient trade and commerce, especially for
financial intermediation. Even the guidelines of the Reserve
Bank of India in relation to classifying the NPA's while
stressing the need of expeditious steps in taking a decision for
classifying and identification of NPA's says, a system be
evolved which should ensure that the doubts in asset
classification are settled through specified internal channels
within the time specified in the guidelines. It is thus clear that
while recommending speedier steps for recovery of the debts it
is envisaged by all concerned that within the legal framework,
such provisions may be contained which may curtail the
delays. Nonetheless dues or disputes regarding classification
of NPAs should be considered and resolved by some internal
mechanism. In our view, the above position suggests the
safeguards for a borrower, before a secured asset is classified
as NPA. If there is any difficulty or any objection pointed out
by the borrower by means of some appropriate internal
mechanism it must be expeditiously resolved.
45. In the background we have indicated above, we may
consider as to what forums or remedies are available to the
borrower to ventilate his grievance. The purpose of serving a
notice upon the borrower under sub-section (2) of Section 13
of the Act is, that a reply may be submitted by the borrower
explaining the reasons as to why measures may or may not be
taken under sub-section (4) of Section 13 in case of non-
compliance of notice within 60 days. 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. There may be
some meaningful consideration of the objections raised rather
than to ritually reject them and proceed to take drastic
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measures under sub-section (4) of Section 13 of the Act. Once
such a duty is envisaged on the part of the creditor it would
only be conducive to the principles of fairness on the part of
the banks and financial institutions in dealing with their
borrowers to apprise them of the reason for not accepting the
objections or points raised in reply to the notice served upon
them before proceeding to take measures under sub-section
(4) of Section 13. Such reasons, overruling the objections of
the borrower, must also be communicated to the borrower by
the secured creditor. It will only be in fulfillment of a
requirement of reasonableness and fairness in the dealings of
institutional financing which is so important from the point of
view of the economy of the country and would serve the
purpose in the growth of a healthy economy. It would
certainly provide guidance to the secured debtors in general in
conducting the affairs in a manner that they may not be found
defaulting and being made liable for the unsavoury steps
contained under sub-section (4) of Section 13. At the same
time, more importantly we must make it clear unequivocally
that communication of the reasons not accepting the
objections taken by the secured borrower may not be taken to
give an occasion to resort to such proceedings which are not
permissible under the provisions of the Act. But
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. secured assets without
intervention of the court. Such a person in respect of whom
steps under Section 13(4) of the Act are likely to be taken
cannot be denied the right to know the reason of non-
acceptance and of his objections. It is true, as per the
provisions under the Act, he may not be entitled to challenge
the reasons communicated or the likely action of the secured
creditor at that point of time unless his right to approach the
Debt Recovery Tribunal as provided under Section 17 of the
Act matures on any measure having been taken under sub-
section (4) of Section 13 of the Act.
46. We are holding that it is necessary to communicate
the reasons for not accepting the objections raised by the
borrower in reply to notice under Section 13(2) of the Act more
particularly for the reason that normally in the event of non-
compliance with notice, the party giving notice approaches the
court to seek redressal but in the present case, in view of
Section 13 (1) of the Act the creditor is empowered to enforce
the security himself without intervention of the Court.
Therefore, it goes with logic and reason that he may be
checked to communicate the reason for not accepting the
objections, if raised and before he takes the measures like
taking over possession of the secured assets etc.
47. This will also be in keeping with the concept of right
to know and lender's liability of fairness to keep the borrower
informed particularly the developments immediately before
taking measures under sub-section (4) of Section 13 of the
Act. It will also cater the cause of transparency and not
secrecy and shall be conducive in building an atmosphere of
confidence and healthy commercial practice. Such a duty, in
the circumstances of the case and the provisions is inherent
under Section 13(2) of the Act.
48. The next safeguard available to a secured borrower
within the framework of the Act is to approach the Debt
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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.
49. On behalf of one of the respondents Shri
Andhyarujina submitted that as a matter of fact Section 13 of
the Act leaves more scope and provides wider protection to the
borrower as compared to in the case of English mortgage and
in connection with the above submission it has been pointed
out that in case of an English mortgage there is no scope of
intervention of the court unless a case is made out before the
court that action of the mortgagee is fraudulent or it is a case
of the like nature. Otherwise as provided under sub-section
(3) of Section 69 a mortgagor shall only be entitled to the
damages for the wrongful or irregular sale of the property.
Whereas, it is submitted, under the Securitisation rules it is
provided that before putting the property on sale the
authorized officer has to obtain the valuation of immovable
property, a reserved price is to be fixed and a notice of 30 days
before sale is to be served on the borrower. In this connection,
Rule 9, the relevant rule, of the Security Interest
(Enforcement) Rules, 2002 is quoted :
"9. Time of sale, issues of sale certificate
and delivery of possession, etc.- (1) No sale
of immovable property under these rules shall
take place before the expiry of thirty days from
the date on which the public notice of sale is
published in newspapers as referred to in the
proviso to sub-rule (6) or notice of sale has
been served to the borrower.
(2) The sale shall be confirmed in favour of the
purchaser who has offered the highest sale
price in his bid or tender or quotation or offer
to the authorized officer and shall be subject to
confirmation by the secured creditor:
xxx xxx xxx
(3) to 10) xxx xxx xxx"
Therefore, during this period which would be in all more than
60 days it would be open for a borrower to approach the Debt
Recovery Tribunal and file a petition for any appropriate relief
and if a case is so made out, he can even get a relief of stay,
in exercise of ancillary power which vest in the Tri bunal as
per decisions referred and reported in 1969 (2) SCR p.65, ITO
vs. Mohd.Kunhi and 1999 (6) SCC p.755, Allahabad Bank,
Calcutta Vs. Radha Krishna Maity & Ors. Again referring to
Section 19 of the Act it is pointed out that in case in the end
the Tri bunal finds that the secured assets have been
wrongfully transferred or taken possession of an order for
return of such assets can be passed and the borrower in that
even shall also be entitled for compensation.
50. It has also been submitted that an appeal is
entertainable before the Debt Recovery Tribunal only after
such measures as provided in sub-section (4) of Section 13 are
taken and Section 34 bars to entertain any proceeding in
respect of a matter which the Debt Recovery Tribunal or the
appellate Tribunal is empowered to determine. Thus before
any action or measure is taken under sub-section (4) of
Section 13, it is submitted by Mr. Salve one of the counsel for
respondents that there would be no bar to approach the civil
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court. Therefore, it cannot be said no remedy is available to
the borrowers. We, however, find that this contention as
advanced by Shri Salve is not correct. A full reading of section
34 shows that the jurisdiction of the civil court is barred in
respect of matters which a Debt Recovery Tribunal or appellate
Tribunal is empowered to determine in respect of any action
taken "or to be taken in pursuance of any power conferred
under this Act". That is to say the prohibition covers even
matters which can be taken cognizance of by the Debt
Recovery Tribunal though no measure in that direction has so
far been taken under sub-section (4) of Section 13. It is
further to be noted that the bar of jurisdiction is in respect of
a proceeding which matter may be taken to the Tribunal.
Therefore, any matter in respect of which an action may be
taken even later on, the civil court shall have no jurisdiction
to entertain any proceeding thereof. The bar of civil court thus
applies to all such matters which may be taken cognizance of
by the Debt Recovery Tribunal, apart from those matters in
which measures have already been taken under sub-section
(4) of Section 13.
51. However, to a very limited extent jurisdiction of the
civil court can also be invoked, where for example, the action
of the secured creditor is alleged to be fraudulent or their
claim may be so absurd and untenable which may not require
any probe, whatsoever or to say precisely to the extent the
scope is permissible to bring an action in the civil court in the
cases of English mortgages. We find such a scope having been
recognized in the two decisions of the Madras High Court
which have been relied upon heavily by the learned Attorney
General as well appearing for the Union of India, namely
V.Narasimhachariar (supra) p.135 at p.141 and 144, a
judgment of the learned single Judge where it is observed as
follows in para 22:
"The remedies of a mortgagor against the
mortgagee who is acting in violation of the
rights, duties and obligations are twofold in
character. The mortgagor can come to the
Court before sale with an injunction for
staying the sale if there are materials to show
that the power of sale is being exercised in a
fraudulent or improper manner contrary to the
terms of the mortgage. But the pleadings in
an action for restraining a sale by mortgagee
must clearly disclose a fraud or irregularity on
the basis of which relief is sought: 'Adams v.
Scott, (1859) 7 WR (Eng.) 213 (Z49). I need
not point out that this restraint on the
exercise of the power of sale will be exercised
by Courts only under the limited
circumstances mentioned above because
otherwise to grant such an injunction would
be to cancel one of the clauses of the deed to
which both the parties had agreed and annul
one of the chief securities on which persons
advancing moneys on mortgages rely. (See
Rashbehary Ghose Law of Mortgages, Vol.II,
Fourth Edn., page 784).
52. The other decision on which reliance has been
placed is A.Batcha Saheb Vs. Nariman K.Irani & Anr.,
AIR 1955 Madras DB p.491 more particularly on
paragraph 8.
53. We also find it appropriate to mention at this stage
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that in reply to submission made by Shri Dholakia on behalf of
the guarantors that even though a guarantor may stand
discharged as envisaged under Sections 133 and 135 of the
Indian Contracts Act eg., where any variance in terms of the
contract has been made without his consent, then too
guarantor may be proceeded against and he will have no right
to raise an objection, before measures have been taken against
him under Section 13(4) of the Act nor he could approach the
civil court. It is submitted by the respondent in such cases
civil court may have jurisdiction to entertain the case as
character as a guarantor itself is denied.
54. In so far the argument advanced on behalf of the
petitioners that by virtue of the provisions contained under
sub-section (4) of Section 13 the borrowers lose their right of
redemption of the mortgage. In reply it is submitted that
rather such a right is preserved under sub-section (8) of
Section 13 of the Act. Where a borrower tenders to the creditor
the amount due with costs and expenses incurred, no further
steps for sale of the property are to take place. In this
connection, a reference has also been made by the learned
Attorney General to a decision reported in 1977(3) SCC p.247,
Naraindas Kavsondas Vs. S.A.Katam which provides that a
mortgagor can exercise his right of redemption any time until
the final sale of the property by execution of a conveyance. Sri
Sibal, however, submits that it is the amount due according to
the secured creditor which shall have to be deposited to
redeem the property. Maybe so, some difference regarding the
amount due may be there but it cannot be said that right of
redemption of property is completely lost. In cases where no
such dispute is there, the right can be exercised and in other
cases the question of difference in amount may be kept open
and got decided before sale of property.
55. We may then turn to the arguments raised on
behalf of the petitioners that the remedy before the Debt
Recovery Tribunal under Section 17 of the Act, is illusory
burdened with onerous and oppressive condition of deposit of
75% of the amount of the demand notice before an appeal can
be entertained by the Tribunal. We feel that it would be
difficult to brush aside the challenge made to the condition of
such a deposit. Sub-section (2) of Section 17 itself says that
no appeal shall be entertainable unless the borrower has
deposited the aforesaid sum of amount claimed. Much stress
has been given in reply to the proviso to sub-section (2) of
Section 17, according to which the Tribunal has power to
waive or reduce the amount. While waiving the condition of
deposit the amount or reducing it, the Tribunal is required to
record reasons for the same. It is submitted for the
respondents that in an appropriate case, the DRT which is
presided over by a Member of a Higher Judicial Service, would
exercise its discretion and may waive or reduce the amount
required to be deposited in deserving cases. It is, therefore, not
an absolute condition which must in all cases and all
circumstances be fulfilled irrespective of the special features of
a particular case.
56. The contention of the petitioners is that in the first
place such an oppressive provision should not have been
made at all. It works as a deterrent or as a disabling provision
impeding access to a forum which is meant for redressal of the
grievance of a borrower. It is submitted where the possession
of the secured assets has already been taken over or the
management of the secured assets of the borrower including
the right to transfer the same, in that event it would not at all
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be necessary to burden the borrower doubly with deposit of
75% of the demand amount. In a situation where the
possession of the secured assets have already been taken over
or its management, it is highly unreasonable further to ask for
75% of the amount claimed before entertaining the grievance
of the borrower.
57. Secondly, it is submitted that, it would not be
possible for a borrower to raise funds to make deposit of the
huge amount of 75% of the demand, once he is deprived of
the possession/management of the property namely, the
secured assets. Therefore, the condition of deposit is a
condition of impossibility which renders the remedy made
available before the DRT as nugatory and illusory. The
learned Attorney General refutes the aforesaid contention. It is
further submitted that such a condition of pre-deposit has
been held to be valid by this Court earlier and a reference
has been made to a decisions reported in 1975 (2) SCC p.175
at p.202, Anant Mills Co.Ltd. Vs. State of Gujarat to submit
that such a provision is made to regulate the exercise of the
right of an appeal conferred upon a person. The purpose is
that right of appeal may not be abused by any recalcitrant
party and there may not be any difficulty in enforcing the
order appealed against if ultimately it is dismissed and there
may be speedy recovery of the amount of tax due to the
corporation.
58. In another decision relied upon reported in 1980
(Supp.) SCC p.574, Seth Nandlal Vs. State of Haryana there
was no provision for a waiver or reduction of amount of pre-
deposit, it is submitted, even that the provision was held to be
valid as the purpose was to prevent frivolous appeals and
revisions which impedes the implementation of the ceiling
policy. Referring to yet another decision reported in 1988(4)
SCC p.402, Vijay Prakash D.Mehta and Anr. Vs. Collector of
Customs (Preventive) Bombay, it is submitted that right to
appeal is neither an absolute right nor an ingredient of natural
justice which principles are to be followed in judicial and
quasi-judicial proceedings. A right of appeal is a statutory
right and it can be circumscribed by the conditions. We also
find that there are further observations to the effect that the
condition is for the purpose to act in torrorem to make the
people comply with the provisions of the law. 1993 (1) SCC
p.22, Shyam Kishore & Ors. Vs. Municipal Corporation of
Delhi, has been referred to submit that a similar provision
was upheld without there being any provision for waiver of the
condition. The submission is that such a provision as that of
pre-deposit before maintaining an appeal is not unknown to
law and there are several other statutes containing similar
provisions. Emphasis is on the provision of waiver or
reduction of the amount required to be paid which, it is
submitted, strikes a balance between the right of a person to
appeal and the right of the person appealed against for speedy
recovery of his dues.
59. We may like to observe that proceedings under
Section 17 of the Act, in fact are not appellate proceedings. It
seems to be a misnomer. In fact it is the initial action which is
brought before a Forum as prescribed under the Act, raising
grievance against the action or measures taken by one of the
parties to the contract. It is the stage of initial proceeding like
filing a suit in civil court. As a matter of fact proceedings
under Section 17 of the Act are in lieu of a civil suit which
remedy is ordinarily available but for the bar under Section 34
of the Act in the present case. We may refer to a decision of
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this Court reported in (1974) 2 SCC p. 393 Smt. Ganga Bai
Vs. Vijay Kumar and Ors. where in respect of original and
appellate proceedings a distinction has been drawn as
follows:-
"........There is a basic distinction between the right
of suit and the right of appeal. There is an
inherent right in every person to bring a suit of civil
nature and unless one's choice. It is no answer to a
suit, howsoever frivolous to claim, that the law
confers no such right to sue. A suit for its
maintainability requires no authority of law and it
is enough that no statute bars the suit. But the
position in regard to appeals is quite the opposite.
The right of appeal inheres in no one and therefore
an appeal for its maintainability must have the clear
authority of law. That explains why the right of
appeal is described as a creature of statute."
60. The requirement of pre-deposit of any amount at
the first instance of proceedings is not to be found in any of
the decisions cited on behalf of the respondent. All these cases
relate to appeals. The amount of deposit of 75% of the
demand, at the initial proceeding itself sounds unreasonable
and oppressive more particularly when the secured assets/the
management thereof along with the right to transfer such
interest has been taken over by the secured creditor or in
some cases property is also sold. Requirement of deposit of
such a heavy amount on basis of one sided claim alone,
cannot be said to be a reasonable condition at the first
instance itself before start of adjudication of the dispute.
Merely giving power to the Tribunal to waive or reduce the
amount, does not cure the inherent infirmity leaning one-
sidedly in favour of the party, who, so far has alone been the
party to decide the amount and the fact of default and
classifying the dues as NPAs without participation/association
of the borrower in the process. Such an onerous and
oppressive condition should not be left operative in
expectation of reasonable exercise of discretion by the
concerned authority. Placed in a situation as indicated above,
where it may not be possible for the borrower to raise any
amount to make the deposit, his secured assets having
already been taken possession of or sold, such a rider to
approach the Tribunal at the first instance of proceedings,
captioned as appeal, renders the remedy illusory and
nugatory.
61. In the case of Seth Nandlal (supra), while
considering the question of validity of pre-deposit before
availing the right of appeal the Court held "....right of appeal is
a creature of the statute and while granting the right the
legislature can impose conditions for the exercise of such right
so long as the conditions are not so onerous as to amount to
unreasonable restrictions rendering the right almost illusory.
...." (emphasis supplied). While making said observation this
Court referred to the decision in the case of Anant Mills Co.
Ltd. (supra). In both the above noted decisions this Court
had negated the plea raised against pre-deposit but in the case
of Seth Nandlal (supra) it was found that the condition was not
so onerous since the amount sought to be deposited was
meager and that too was confined to the landholding tax
payable in respect of the disputed area i.e. the area or part
thereof which is declared surplus by the Prescribed Authority
(emphasis supplied) after leaving the permissible area to the
appellant. In the above circumstances it was found that even
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in the absence of a provision conferring discretion on the
appellate authority to waive or reduce the amount of pre-
deposit, it was considered to be valid, for the two reasons
indicated above. The facts of the case in hand are just
otherwise.
62. As indicated earlier, the position of the appeal
under Section 17 of the Act is like that of a suit in the court of
the first instance under the Code of Civil Procedure. No doubt
in suits also it is permissible, in given facts and circumstances
and under the provisions of the law to attach the property
before a decree is passed or to appoint a receiver and to make
a provision by way of interim measure in respect of the
property in suit. But for obtaining such orders a case for the
same is to be made out in accordance with the relevant
provisions under the law. There is no such provision under
the Act.
63. Yet another justification which has been sought to
be given for the requirement of deposit is that the secured
assets which may be taken possession of or sold may fall
short of the dues therefore such a deposit may be necessary.
We find no merit in this submission too. In such an
eventuality the recourse may have to be taken to sub-section
10 of Section 13 where a petition may have to be filed before
the Tribunal for the purpose of making up of the short-fall.
64. The condition of pre-deposit in the present case is
bad rendering the remedy illusory on the grounds that (i) it is
imposed while approaching the adjudicating authority of the
first instance, not in appeal, (ii)there is no determination of
the amount due as yet (iii) the secured assets or its
management with transferable interest is already taken over
and under control of the secured creditor (iv) no special reason
for double security in respect of an amount yet to be
determined and settled (v) 75% of the amount claimed by no
means would be a meager amount (vi) it will leave the
borrower in a position where it would not be possible for him
to raise any funds to make deposit of 75% of the undetermined
demand. Such conditions are not alone onerous and
oppressive but also unreasonable and arbitrary. Therefore, in
our view, sub-section (2) of Section 17 of the Act is
unreasonable, arbitrary and violative of Article 14 of the
Constitution.
65. Shri Salve, learned senior counsel, appearing on
behalf of the respondents, submits that so far it relates to the
provision as contained under Section 9 of the Act, it is for the
purposes of assets reconstruction. The steps as provided to be
taken for the purpose, are different from those provided in
Chapter III relating to enforcement of security interest
contained in Section 13 of the Act. Reconstruction companies
are separately registered for the purpose according to the
guidelines of the Reserve Bank of India. It is for the purpose
of proper management of the business of the borrower. It is
aimed at continuance of the business of the company by
resorting to the measure as provided under Section 9 of the
Act. It is submitted that the apprehensions as expressed that
the defaulting party may set up an asset reconstruction
company is misconceived nor there is any substance in the
submission that company in default may constitute such a
company to defeat the interest of the creditor. A
reconstruction company is required to be registered and the
Reserve Bank of India is the authority to issue such a
certificate. In the guidelines framed by the Reserve Bank of
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India enough safeguards have been provided to see that the
persons setting up such a company are not directly or
indirectly in the management of the asset reconstruction of the
borrower. What is envisaged under Section 9 is, the taking
over of the management of the business of the borrower
company and the provisions as contained under Section 15 of
the Act are referable to Section 9 and not to Section 13 of the
Act. He has further submitted that the restrictions against
legal remedy is relating to measures taken under Section 13 of
the Act and not under Section 9 of the Act for reconstruction
of the assets of a borrowing company. A reconstruction
company by the method of reconstruction of the debt,
manages the affair in a manner so as to revive the company
and liquidate the debts to whomsoever they may be due.
66. On behalf of the petitioners one of the contentions
which has been forcefully raised is that existing rights of
private parties under a contract cannot be interfered with,
more particularly putting one party to an advantageous
position over the other. For example, in the present case, in a
matter of private contract between the borrower and the
financing bank or institution through impugned legislation
rights of the borrowers have been curtailed and enforcement of
secured assets has been provided for without intervention of
the court and above all depriving them the remedy available
under the law by approaching to the civil court. Such a law, it
is submitted, is not envisaged in any civilized society governed
by rule of law. As discussed earlier as well, it may be observed
that though the transaction may have a character of a private
contract yet the question of great importance behind such
transactions as a whole having far reaching effect on the
economy of the country cannot be ignored, purely restricting it
to individual transactions more particularly when financing is
through banks and financial institutions utilizing the money of
the people in general namely, the depositors in the banks and
public money at the disposal of the financial institutions.
Therefore, wherever public interest to such a large extent is
involved and it may become necessary to achieve an object
which serves the public purposes, individual rights may have
to give way. Public interest has always been considered to be
above the private interest. Interest of an individual may, to
some extent, be affected but it cannot have the potential of
taking over the public interest having an impact in the socio-
economic drive of the country. The two aspects are inter-
twined which are difficult to be separated. There have been
many instances where existing rights of the individuals have
been affected by legislative measures taken in public interest.
Certain decisions which have been relied on behalf of the
respondents, on the point are 1951 SCR p.292, Ramaswamy
Aiyengar Vs. Kailasa Thevar. In that case by enacting the
Madras Agriculturalist's Relief Act, relief was given to the
debtors who were agriculturists as a class, by sealing down
their debts. The validity of the Act was upheld though it
affected the individual interest of creditors. In Dahya Lala Vs.
Rasul Mohd.Abdul Rahim, 1963(3) SCR p.1, the tenants
under the Provisions of the Bombay Tenancy Act, 1939 were
given protection against eviction and they were granted the
status of protected tenant, who had cultivated the land
personally six years prior to the prescribed date. It was found
that the legislation was with the object of improving the
economic condition of the peasants and for ensuring full and
efficient use of land for agricultural purpose. By a statutory
provision special benefit was conferred upon the tenants in
Madras city where they had put up a building for residential or
non-residential purposes and were saved from eviction, it did
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though affect the existing rights of the landlords. See also
1963 (Supp.)1 SCR p.282, Swami Motor Transports Pvt. Ltd.
Vs. Shri Sankraswamigal Mutt and Raval & co. Vs.
K.G.Ramachandran, 1974 (1) SCC p.424. Similarly it is also
to be found that in the case reported in 2001(5) SCC p.546
Kanshi Ram Vs. Lachhman the law granting relief to the
debtors protecting their property was upheld. Also see 1978(2)
SCC 1, Pathumma Vs. State of Kerala, 1977(2) SCC p.670
Fatehchand Himmatlal Vs. State of Maharashtra, 1962(1)
SCR p.852, Ramdhandas Vs. State of Punjab.
67. It is well known that in different states Rent Control
legislations were enacted providing safeguards to the sitting
tenants as against the existing rights of the landlords, which
before coming into force of such law were governed by contract
between the private parties. Therefore, it is clear that it has
always been held to be lawful, whenever it was necessary in
the public interest to legislate irrespective of the fact that it
may affect some individuals enjoying certain rights. In the
present we find that case the unrealized dues of banking
companies and financial institutions utilizing public money for
advances were mounting and it was considered imperative in
view of recommendations of experts committees to have such
law which may provide speedier remedy before any major
fiscal set back occurs and for improvement of general financial
flow of money necessary for the economy of the country that
the impugned Act was enacted. Undoubtedly such a legislation
would be in the public interest and the individual interest
shall be subservient to it. Even if a few borrowers are affected
here and there, that would not impinge upon the validity of the
Act which otherwise serves the larger interest.
68. The main thrust of the petitioners as indicated in
the earlier part of this judgment to challenge the validity of
the impugned enactment is that no adjudicatory mechanism is
available to the borrower to ventilate his grievance through an
independent adjudicatory authority. Access to the justice, it is
submitted, is hall-mark of our system. Section 34 of the Act
bars the jurisdiction of the civil courts to entertain a suit in
matters of recovery of loans. The remedy of appeal available
under the Act as contained in Section 17 can be availed only
after measures have already been taken by the secured
creditor under sub-section (4) of Section 13 of the Act which
includes sale of the secured assets, taking over its
management and all transferable rights thereto. Virtually it is
no remedy at all also in view of the onerous condition of
deposit of 75% of the claim of the secured creditor. Before
filing an appeal under Section 17 of the Act, decision is to be
taken in respect of all matters by the bank or financial
institution itself which can hardly be said to be an
independent agency rather they are a party to the transaction
having unilateral power to initiate action under sub-section (4)
of Section 13 of the Act. So far remedy under Article 226 of
the Constitution of India is concerned, the submission is that
it may not always be available since the dispute may be only
between two private parties, the banking companies, co-
operative Banks or financial institutions, foreign banks, some
of them may not be authorities within the meaning of Article
12 of the Constitution of India against whom a writ petition
could be maintainable. Thus the position that emerges is that
a borrower is virtually left with no remedy. Where access to the
court is prohibited and no proper adjudicatory mechanism is
provided such a law is unconstitutional and cannot survive.
In support of the aforesaid contentions besides others, reliance
has particularly been placed upon a case reported in (1997) 3
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SCC p.261, L.Chandrakumar vs. Union of India & Ors. and
2003(6) SCC 675, Surya Dev Rai vs. Ram Chander Rai &
Ors.. A reference has also been made to the decision of
Kihoto Hollohan (supra). In the case of L.Chandra Kumar
(supra) it is held, some adjudicatory process through an
independent agency is essential for determining the rights of
the parties more particularly when the consequences which
flow from the offending Act defeat the civil rights of a party.
69. On behalf of respondents time and again stress has
been given on the contention that in a contractual matter
between the two private parties they are supposed to act in
terms of the contract and no question of compliance with the
principles of natural justice arises nor the question of judicial
review of such actions need to be provided for. However, at
the very outset, it may be pointed that the contract between
the parties as in the present cases, is no more as private as
sought to be asserted on behalf of the respondents. If that
was so in that event parties would be at liberty to seek
redressal of their grievances on account of breach of contract
or otherwise taking recourse to the normal process of lawas
available, by approaching the ordinary civil courts. But we
find that a contract which has been entered into between the
two private parties, in some respects has been superseded by
the statutory provisions or it may be said that such contracts
are now governed by the statutory provisions relating to
recovery of debts and bar of jurisdiction of the civil court to
entertain any dispute in respect of such matters. Hence, it
cannot be pleaded that the petitioners cannot complaint of the
conduct of the banking companies and financial institutions
for whatever goes in between the two is absolutely a matter of
contract between private parties, therefore, no adjudication
may be necessary.
70. At this stage we may also take note of the
arguments raised on behalf of the petitioners that in the
present day world concept of lender's liability has also
developed which cannot be ignored. We have already referred
to certain facts in relation to this point that at one stage a
statement was made at the floor of the House that it was
necessary to legislate on lender's liability. No such Bill
though seems to have been introduced. Certain decisions
pertaining to the liability of the lenders have been cited on
behalf of the petitioners and a few others by the learned
counsel for the respondents. Learned counsel for the
petitioners emphatically submitted that the Act is loaded
against the borrowers and no provision regarding the liability
of the lenders has been made in the Act. Given below are some
of the cases on the point cited by the parties:
KMC Co. Vs. Irving Trust Co., 757 F2d752 (6th
Cir.1985), Palisades Properties, Inc. Vs. Brunetti, 44 NJ
117, 207 A2d 522, 531 (1965).
71. Arguments have been advanced as to how far
principles of lender's liability are applicable. Whatever be the
position, however, it cannot be denied that the financial
institutions namely, the lenders owe a duty to act fairly and in
good faith. There has to be a fair dealing between the parties
and the financing companies/institutions are not free to
ignore performance of their part of the obligation as a party to
the contract. They cannot be free from it. Irrespective of the
fact as to whatever may have been held in decisions of some
American courts, in view of the facts and circumstances and
the terms of the contract and other details relating to those
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matter, that may or may not strictly apply, nonetheless even
in absence of any such decisions or legislation, it is incumbent
upon such financial institutions to act fairly and in good faith
complying with their part of obligations under the contract.
This is also the basic principle of concept of lender's liability.
It cannot be a one-sided affair shutting out all possible and
reasonable remedies to the other party, namely borrowers and
assume all drastic powers for speedier recovery of NPAs.
Possessing more drastic powers calls for exercise of higher
degree of good faith and fair play. The borrowers cannot be
left remediless in case they have been wronged against or
subjected to unfair treatment violating the terms and
conditions of the contract. They can always plead in defence
deficiencies on the part of the banks and financial institutions.
72. Shri Soli J.Sorabjee, learned Attorney General
submits that basically there is a presumption in favour of the
constitutionality of an enactment and unless it is found that a
provision enacted results in palpably arbitrary consequences,
courts refrain from declaring the law invalid as legislated by
the legislature. In support of this contention, he has relied
upon a decision of this Court reported in (1981) 4 SCC p.675,
R.K.Garg V. Union of India. He has particularly drawn our
attention to the following passage :
"The first rule is that there is always a
presumption in favour of the constitutionality
of a statute .... This rule is based on the
assumption, judicially recognized and
accepted, that the legislature understands and
correctly appreciates the needs of its own
people, its laws are directed to problems made
manifest by experience ... Every legislation
particularly in economic matters is essentially
empiric and it is based on experimentation or
what one may call trial and error method ...
There may be crudities and inequities in
complicated experimental economic legislation
but on that account alone it cannot be struck
down as invalid. The courts cannot ..... be
converted into tribunals for relief from such
crudities and inequities..... The Court must
therefore adjudge the constitutionality of such
legislation by the generality of its provisions
and not by its crudities or inequities or by the
possibilities of abuse of any of its provisions.
....The Court must defer to legislative judgment
in matters relating to social and economic
policies and must not interference, unless the
exercise of legislative judgment appears to be
palpably arbitrary"
(emphasis supplied).
73. The following observations have also been referred
as made in Bhavesh D.Parish & Ors. v. Union of India &
Anr., 2000 (5) SCC 471 at 486 :
"......it is necessary that while dealing with
economic legislations, this Court, while not
jettisoning its jurisdiction to curb arbitrary
action or unconstitutional legislation, should
interfere only in those few cases where the
view reflected in the legislation is not possible
to be taken at all"
(emphasis supplied)
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74. A reference has also been made for similar
observations to the cases reported in 1980 (4) SCC p.507 at
513-514, Srinivas Enterprises v. Union of India and 1967 (1)
SCR p.15 at p.36, Jalan Trading V. Union of India. While
referring to the observations made in a case reported in 1962
(3) SCR p.786 at p.829-30, the Collector of Customs,
Madras V. Nathella Samapathu Chetty, it is submitted that
the intent of the Parliament shall not be defeated merely for
the reason that it may operate a bit harshly on a small section
of public where it may be necessary to make such provisions
of achieving the desired objectives to ensure that the nefarious
activities of smuggling etc. had to be necessarily curbed. In
Fatehchand Himmatlal (supra) where debts of the
agriculturists were wiped of, this Court observed :
"Every cause claims its martyr and if the law,
necessitated by practical considerations,
makes generalizations which hurt a few, it
cannot be helped by the Court. Otherwise, the
enforcement of the Debt Relief Act will turn
into an enquiry into scrupulous and
unscrupulous creditors, frustrating through
endless litigation, the instant relief to the
indebted which is the promise of the
legislature." [See p.689 para 44]
Yet in another decision referred to reported in 1961 (3) SCR
p.135, Kishanchand Arora Vs. Commissioner of Police, it
has been held that absence of appeal does not necessarily
render the legislation unreasonable. Provision for appeal is not
an absolute necessity. For same propositions a reference has
also been made to Chinta Lingam & Ors. v. Government of
India & Ors., 1970 (3) SCC 768 at 772, where it has been
observed that when the power has to be exercised by one of
the highest officers the fact that no appeal has been provided
is not material. In respect of appellate provision once again
our attention has been drawn to the observations made by this
Court in 1979 (4) SCC 573 at p.582-83, paras 15 & 16,
Organo Chemical Industries & Anr. Vs. Union of India &
Ors., to the effect that an appeal is a desirable corrective but
not an indispensable imperative. It is, however, further
observed in this decision that it may all depend upon the
nature of the subject matter, other available correctives and
the possible harm flowing from the wrong orders.
75. In relation to the argument on behalf of the
petitioners that they are entitled to be heard before a notice
under sub-section (2) of Section 13 is issued failing which
there is denial of principles of natural justice, a reference has
been made to certain decisions to submit that in every case, it
is not necessary to make a provision for providing a hearing.
For example, in the case of a licensing statute, see 1961(3)
SCR p.135, Kishan Chand Arora (supra). The other decisions
referred to are : 1963 (2) SCR p.353 Lachhman Das V. State
of Punjab, 1977 (2) SCC 256 at 262, Chairman, Board of
Mining Examination v. Ramjee and 2002(3) SCC 496 at 504
para 7, Haryana Financial Corporation V. Jagdamba Oil
Mills to submit that concept of natural justice is not a straight
jacket formula. It, on the other hand, depends upon the facts
of the case, nature of the enquiry, the rules under which the
Tribunal is acting and what is to be seen that no one should
be hit below the belt. Relationship between the creditor and
the debtor, it is submitted, is essentially in the realm of a
contract.
76. In regard to the submission made by the parties as
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indicated in preceding paragraphs, we would like to make it
clear that issue of a notice to the debtor by the creditor does
not attract the application of principles of natural justice. It is
always open to tell the debtor what he owes to repay. No
hearing can be demanded from the creditor at this stage. So
far the provision of appeal is concerned, we have already
discussed in the earlier part of the judgment that proceedings
under Section 17 of the Act have been wrongly described as
appeal before the Debt Recovery Tribunal. It is in fact a forum
where proceedings are originally initiated in case of any
grievance against the creditor in respect of any measure taken
under sub-section (4) of Section 13 of the Act. Hence, the
decisions on the point as to whether provision for an appeal is
essential or not are not of any assistance in the facts of the
present case.
77. It is also true that till the stage of making of the
demand and notice under Section 13(2) of the Act, no hearing
can be claimed for by the borrower. But looking to the
stringent nature of measures to be taken without intervention
of court with a bar to approach the court or any other forum
at that stage, it becomes only reasonable that the secured
creditor must bear in mind the say of the borrower before such
a process of recovery is initiated. So as to demonstrate that
the reply of the borrower to the notice under Section 13(2) of
the Act has been considered applying mind to it. The reasons
howsoever brief that may be for not accepting the objections, if
raised in the reply, must be communicated to the borrower.
True, presumption is in favour of validity of an enactment and
a legislation may not be declared unconstitutional lightly more
so, in the matters relating to fiscal and economic policies
resorted to in the public interest, but while resorting to such
legislation it would be necessary to see that the persons
aggrieved get a fair deal at the hands of those who have been
vested with the powers to enforce drastic steps to make
recovery.
78. It was sought to be argued that fairness cannot be a
one way street. The plea of absence of natural justice lies ill
in the mouth of chronic defaulters who have not paid the
principal amounts admittedly due to the banks. The said
argument pre-supposes admission of the liability by the
borrowers and all of them to be chronic defaulters. It would
only be pre-judging an issue. We hope it was not meant to be
said that all those who defaulted according to the banks and
financial institutions must be condemned unheard who might
not deserve any hearing to place their side of the case, unless
they must go through the crushing pre-conditions of deposit
of 75% of the amount demanded over and above their secured
assets already having been taken possession of. We feel this
can well be one example of hitting below the belt.
79. Some submissions have been made pointing out
that in certain circumstances it would not be clear as to in
what manner the provisions of the Act would be workable. We
feel the objections pointed out are not such which render the
statute invalid or unconstitutional. Such problems about
working of any particular provision of the Act in any particular
factual situation, may be considered as and when it may arise.
We, therefore, do not think it necessary to go into those
questions.
80. Under the Act in consideration, we find that before
taking action a notice of 60 days is required to be given and
after the measures under Section 13(4) of the Act have been
taken, a mechanism has been provided under Section 17 of
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the Act to approach the Debt Recovery Tribunal. The above
noted provisions are for the purposes of giving some
reasonable protection to the borrower. Viewing the matter in
the above perspective, we find what emerges from different
provisions of the Act, is as follows :-
1. Under sub-section (2) of Section 13 it is
incumbent upon the secured creditor to serve 60
days notice before proceeding to take any of the
measures as provided under sub-section (4) of
Section 13 of the Act. After service of notice, if the
borrower raises any objection or places facts for
consideration of the secured creditor, such reply to
the notice must be considered with due application
of mind and the reasons for not accepting the
objections, howsoever brief they may be, must be
communicated to the borrower. In connection with
this conclusion we have already held a discussion in
the earlier part of the judgment. The reasons so
communicated shall only be for the purposes of the
information/knowledge of the borrower without
giving rise to any right to approach the Debt
Recovery Tribunal under Section 17 of the Act, at
that stage.
2. As already discussed earlier, on measures having
been taken under sub-section (4) of Section 13 and
before the date of sale/auction of the property it
would be open for the borrower to file an appeal
(petition) under Section 17 of the Act before the Debt
Recovery Tribunal.
3. That the Tribunal in exercise of its ancillary
powers shall have jurisdiction to pass any
stay/interim order subject to the condition at it may
deem fit and proper to impose.
4. In view of the discussion already held on this
behalf, we find that the requirement of deposit of
75% of amount claimed before entertaining an
appeal (petition) under Section 17 of the Act is an
oppressive, onerous and arbitrary condition against
all the canons of reasonableness. Such a condition
is invalid and it is liable to be struck down.
5. As discussed earlier in this judgment, we find that
it will be open to maintain a civil suit in civil court,
within the narrow scope and on the limited grounds
on which they are permissible, in the matters
relating to an English mortgage enforceable without
intervention of the court.
81. In view of the discussion held in the judgment and
the findings and directions contained in the preceding
paragraphs, we hold that the borrowers would get a
reasonably fair deal and opportunity to get the matter
adjudicated upon before the Debt Recovery Tribunal. The
effect of some of the provisions may be a bit harsh for some of
the borrowers but on that ground the impugned provisions of
the Act cannot be said to be unconstitutional in view of the
fact that the object of the Act is to achieve speedier recovery of
the dues declared as NPAs and better availability of capital
liquidity and resources to help in growth of economy of the
country and welfare of the people in general which would
subserve the public interest.
82. We, therefore, subject to what is provided in
paragraph 80 above, uphold the validity of the Act and its
provisions except that of sub-section (2) of Section 17 of the
Act, which is declared ultra vires of Article 14 of the
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Constitution of India.
83. Before we part with the case, we would like to
observe that where a secured creditor has taken action under
Section 13(4) of the Act, in such cases it would be open to
borrowers to file appeals under Section 17 of the Act within
the limitation as prescribed therefor, to be counted with effect
from today.
84. The transfer cases, appeals and the petitions thus
stand partly allowed limited to the extent indicated above. For
the rest of the reliefs, they stand dismissed.
Costs easy.
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