Chemicals Ltd. Vs. U.O.I. & Ors  Insc 237 (8 April 2004)
Brijesh Kumar & Arun Kumar.
PETITION (CIVIL) NO.140 OF 2003 M/s.Ashok Mfg.Co.Pvt.Ltd. & Ors. Versus
PETITION (CIVIL) NO.649 OF 2002 Major Mahajan Mandal & Ors. Versus U.O.I.
PETITION (CIVIL) NO.673 OF 2002 Supreme Rubber Industries Versus U.O.I. & Anr.
CASE (CIVIL) NO. 10 OF 2003 Modern Terry Towels Ltd. & Ors. Versus State of
Rajasthan & Ors.
PETITION (CIVIL) NO.322 OF 2003 Sohanlal Rara Versus U.O.I. & Anr.
CASE (CIVIL) NO. 46 OF 2003 J.K.Udaipur Udyog Ltd. Versus U.O.I. & Anr.
PETITION (CIVIL) NO.643 OF 2002 Shree Synthetics Ld. & Anr Versus U.O.I.
CASE (CIVIL) NO. 12 OF 2003 Sobhag Textiles Ltd. Versus U.O.I. & Anr.
PETITION (CIVIL) NO.48 OF 2003 M/s.REL Industries .Ltd. Versus U.O.I. &
APPEAL NO. OF 2004 (Arising out of SLP (C) No.5013 of 2003) M/s.Oriental Motors
& Anr. Versus Punjab & Sindh Bank & Anr.
PETITION (CIVIL) NO.176 OF 2003 M/s.Mahendra Commercial Ltd. & Anr. Versus
U.O.I. & Anr.
PETITION (CIVIL) NO.190 OF 2003 H.R.Brothers & Ors. Versus U.O.I. & Anr.
PETITION (CIVIL) NO.219 OF 2003 M/s.Tirthankar Agro & Ors. Versus U.O.I.
APPEAL NO. OF 2004 (Arising out of SLP (C) No.9658 of 2003) Citisteel
Corporation & Ors. Versus U.O.I. & Anr.
PETITION (CIVIL) NO.147 OF 2003 M/s.Punjab Breeders Ltd.. Versus U.O.I. &
PETITION (CIVIL) NO. 326 OF 2003 Bank of Rajasthan Ltd. Versus Naresh Kumar Nevatia
PETITION (CIVIL) NO.279 OF 2003 Euro India Biotech Ltd. & Ors. Versus
U.O.I. & Ors.
PETITION (CIVIL) NO.231 OF 2003 Pradeep Sohawala Versus U.O.I. & Ors.
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.
PETITION (CIVIL) NO.292 OF 2003 Patheja Brothers Forgings & Stampings&Anr.
Versus U.O.I. & Anr.
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.
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.
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.
APPEAL NO. OF 2004 (Arising out of SLP (C) No.15566 of 2003) N.C.Jain Versus
Bank of Baroda & Ors.
CASE (CIVIL) NO. 11 OF 2003 Soni Tourism Pvt. Ltd. & Ors. Versus U.O.I.
PETITION (CIVIL) NO.366 OF 2003 G.V.Venkateshiah Versus State Bank of India
PETITION (CIVIL) NO.541 OF 2002 M/s.Amulet International Pvt.Ltd. & Ors. Versus
U.O.I. & Anr.
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.
PETITION (CIVIL) NO.477 OF 2003 M/s.Rama Steel Industries & Ors. Versus
U.O.I. & Anr.
PETITION (CIVIL) NO.496 OF 2003 M/s.Pahadewali Ispat Pvt.Ltd. & Anr. Versus
U.O.I. & Anr.
PETITION (CIVIL) NO.499 OF 2003 M/s.KPJ Tradevest Pvt.Ltd. & Anr. Versus
U.O.I. & Ors.
PETITION (CIVIL) NO. 756 OF 2003 M/s.Vaishno Cold Storage & Ors. Versus
U.O.I. & Anr.
PETITION (CIVIL) NO.545 OF 2003 M/s.Madhumilan Syntex Ltd. & Anr. Versus
U.O.I. & Anr.
PETITION (CIVIL) NO.557 OF 2003 J.K.Jain & Ors. Versus U.O.I. & Anr.
APPEAL NO. OF 2004 (Arising out of SLP (C) No...... of 2003(CC 10728) M/s.Suneeta
Wool & Readymade Emporium Versus Allahabad Bank, Jhansi
APPEAL NO. OF 2004 (Arising out of SLP (C) No.6723 of 2003) Pushpinder Kaur
& Anr. Versus Punjab & Sindh Bank & Anr.
PETITION (CIVIL) NO.590 OF 2003 M/s.Nabe International & Ors. Versus U.O.I.
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.
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.
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
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.
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
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.
term "borrower" has been defined in clause (f) of Section 2, which
provides as under :
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" has been defined in clause (k), which reads as
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;"
Similarly, the term "default" is defined in clause (j), as quoted below
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"
"Non Performing Asset" has been defined in clause(o) of Section 2
which means :
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".
"Reconstruction company" has been defined in clause(v) of Section 2
which means :
company" means a company formed and registered under the Companies Act,
1956 (1 of 1956) for the purpose of asset reconstruction;
"Secured asset" has been defined in clause(zc) of Section 2 which
Asset" means the property on which security interest is created."
"Secured creditor" has been defined in clause(zd) of Section 2 which
Creditor" means "any bank or financial institution or any consortium
or group of banks or financial institutions and includes –
trustee appointed by any bank or financial institution; or
securitization company or reconstruction company; or
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;"
"Secured Debt" has been defined in clause(ze) of Section 2 which means
Debt" means a debt which is secured by any security interest."
"Security interest" has been defined in clause(zf) of Section 2 which
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
Section 13, which is relevant for our present purpose, provides:
of security interest.-
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.
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).
The notice referred to in sub-section (2) shall given details of the amount
payable by 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.
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:-
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;
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;
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;
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.
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.
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.
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.
the dues of the secured creditor together with all costs, charges and expenses
incurred by him are tendered to the secured creditor at 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.
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:
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
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.
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 (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."
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 10 lacs to one crore
constitute only 13.90% of the total dues.
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
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.
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.
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 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.
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
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.
law, it is submitted, is arbitrary and suffers from the vice of
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.
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 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.
on a decision of this Court reported in 2002(5) SCC 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
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.
v. Dublic Corpn. It was held thus :
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.
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 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.
has also been given upon the condition of deposit of 75% of claim before
entertainment of the appeal.
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
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.
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) 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
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.
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 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.
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.
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.
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:
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 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."
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.
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.
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.
A.M. Singhvi has also made similar submissions in support of validity of the
indicated earlier, arguments on the same lines were advanced by some of the
counsels and others adopted the same.
Taking an overall view of the rival contentions of the parties, we feel the
main questions which broadly fall for consideration by us are :
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?
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?
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?
Whether the terms or existing rights under the contract entered into by two
private parties could be amended by the provisions of law providing certain
powers in one sided manner in favour of one of the parties to the contract?
Whether provision for sale of the properties without intervention of the court
under Section 13 of the Act is akin to the English mortgage and its effect on
the scope of the bar of the jurisdiction of the civil court?
Whether the provisions under Sections 13 and 17(2) of the Act are
unconstitutional on the basis of the parameters laid down in different
decisions of this Court?
Whether the principle of lender's liability has been absolutely ignored while
enacting the Act and its effect?
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.
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.
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.
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 :
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 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.
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 :
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.
result, the economy has not been able to reap the full benefits of the reforms
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
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
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 :
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
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:
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
and/or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,
account remains 'out of order' for a period of more than 180 days, in respect
of an Overdraft/Cash Credit (OD/CC),
bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
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
amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
Banks should establish appropriate internal systems to eliminate the tendency
to delay or postpone the identification of NPAs, especially in respect of high
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.
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.
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.
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 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
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 :
Right to appeal .-
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.
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 :
that the Debts Recovery Tribunal may, for reasons to be recorded in writing,
waive or reduce the amount to be deposited under this section.
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
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:-
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)."
Mainly it is to be considered as to whether there is 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 :
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 –
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;
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;
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
such power shall be exercised unless and until –
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
interest under the mortgage amounting at least to five hundred rupees is in
arrear and unpaid for three months after becoming due.
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 damnified by an
unauthorized, or improper, or irregular exercise of the power shall have his
remedy in damages against the person exercising the power.
. . . . . .
. . . . . .
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 :
'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" 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 interest can be
enforced without intervention of the court.
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 :
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."
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 :
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.
distinction was based on the fact that in the mofussil, it was the money
lenders with their unscrupulous methods, who were, by 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 .....
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).
fact in extending credit, the necessity for suitable safeguards to banks and
other financing institutions is now rightly stressed.
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...".
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.
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 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.
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.
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.
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.
The next safeguard available to a secured borrower within the framework of the
Act is to approach the Debt Recovery Tribunal under Section 17 of the Act. Such
a right accrues only after measures are taken under sub-section (1) of Section
13 of the Act.
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.
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 :
Time of sale, issues of sale certificate and delivery of possession, etc.-
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.
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 (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,
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.
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 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
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.
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:
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).
The other decision on which reliance has been AIR 1955 Madras DB p.491 more
particularly on paragraph 8.
also find it appropriate to mention at this stage 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.
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, 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
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.
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 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.
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 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
another decision relied upon reported in 1980 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) 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 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.
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 this Court
reported in (1974) 2 SCC p. 393 Smt. Ganga Bai 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.
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."
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
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.
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 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.
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.
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.
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.
The condition of pre-deposit in the present case is bad rendering the remedy
illusory on the grounds that
is imposed while approaching the adjudicating authority of the first instance,
not in appeal,
is no determination of the amount due as yet
secured assets or its management with transferable interest is already taken
over and under control of the secured creditor
special reason for double security in respect of an amount yet to be determined
75% of the amount claimed by no means would be a meager amount
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.
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.
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 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.
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.
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.
decisions which have been relied on behalf of the respondents, on the point are
1951 SCR p.292, Ramaswamy 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 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 though affect the
existing rights of the landlords. See also 1963 (Supp.)1 SCR p.282, Swami Motor
Transports Pvt. Ltd. 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 debtors protecting
their property was upheld. Also see 1978(2)
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.
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.
support of the aforesaid contentions besides others, reliance has particularly
been placed upon a case reported in (1997) 3 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.
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
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: 117,
207 A2d 522, 531 (1965).
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 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.
is also the basic principle of concept of lender's liability.
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.
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 :
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 ...
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.
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).
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 :
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)
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 :
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 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, 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.
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.
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.
regard to the submission made by the parties as 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
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.
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.
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.
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.
therefore, do not think it necessary to go into those questions.
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 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 :-
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.
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.
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.
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.
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.
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.
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
Constitution of India.
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.
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
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