IONIK METALLICS vs UNION OF INDIA - 2014 Supreme(Guj) 562

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2014 Supreme(Guj) 562

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
BHASKAR BHATTACHARYA and J.B.PARDIWALA, JJ.
IONIK METALLICS & ORS.
Versus
UNION OF INDIA & ORS.
SPECIAL CIVIL APPLICATION NO. 14908 of 2012 With SPECIAL CIVIL APPLICATION NO. 2970, 2085, 10584, 3304, 3305, 3513, 3728, 3749, 3916, 7053, 7055, 7058, 7059, 7060, 7104, 7308, 7524, 8041, 8302, 8880, 8920, 8949, 8950, 8956, 8957, 8958, 9578, 9579, 9628, 9637, 9952, 9953, 10004, 10005, 10081, 13843, 6804, 17595, 1770 of 2014, 1690 of 2014, 1674 of 2014, 433 of 2014, 18252, 18251, 18245, 17997, 17996, 17995, 17503, 17443, 17233, 15260, 15202, 14792, 14185, 13942, 13489, 13488, 13487, 10651, 10647, 10646, 10643, 10639, 10506, 10503, 10502, 10499, 10494, 10488, 10338, 10243, 10179, 10146, 10141, 10094, 10093, 9729, 9608 of 2013
Decided on: 24/04/2014

Advocates:
Advocate Appeared
MR VISHWAS K SHAH with MR MASOOM K SHAH, MR SACHIN D VASAVADA, MR ISHAR MIHIR PATEL, MR SS PANESAR, MR MAHESH BHAVSAR, MR MP SHAH with MS. KRUTI SHAH, MR SP MAJMUDAR with MR PP MAJMUDAR with MR SHAKTI S JADEJA, MR KANDRAP J TRIVEDI, MR RAVINDRA SHAH with MRS KNAN R SHAH, MR DIGANT B KAKKAD, MR URVEST K GOR for the petitioner
MR S N SOPARKAR, AMAR N BHATT, MR IH SYED, MS NALINI S LODHA, MR ABHIJIT P JOSHI, MR INDRAVADAN PARMAR, MR NITIN K MEHTA, MR BHARAT JANI, MR ABHISHEK M MEHTA, MR RJ TRIVEDI with MR JT TRIVEDI with MS JIGNASA B TRIVEDI, MR DHARMESH V VYAS, MR. LALIT M PATEL, MR PUNIT B JUNEJA, MR K M PARIKH, MR NAGESH SOOD, MR YH MOTIRAMANI with MR BIJU A NAIR, MRS VD NANAVATI, M/S WADIAGHANDY & CO., MR PRANAV G DESAI, MR ANIP GANDHI, MR. YH MOTIRAMANI, MR SH ALMAULA, MR HARDIK S SONI, MR LALIT M PATEL, MR ANIP A GANDHI, MR VIRENDRA M GOHIL, and MS MAUNA BHATT for the Respondents in respective matters.

Headnote:
The High Court held that the amended provisions of Section 2(1)(o) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) are ultra vires Article 14 of the Constitution of India and the object of the Act itself. The Court restored the provisions that existed prior to the amendment of 2004 and existed at the time of the decision of the Supreme Court in the case of Mardia Chemicals Ltd. v. Union of India. The Court, however, upheld the guidelines of the Reserve Bank of India (RBI) challenged in the application.
Fact of the Case:

Various Special Civil Applications were filed challenging the constitutional validity of Section 2(1)(o) of the SARFAESI Act and clause 2.1 of the Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances issued by the RBI. The petitioners contended that the provisions were ultra vires the Constitution and violated Article 14. The RBI and the Union of India defended the provisions, arguing that they were necessary to enable banks and financial institutions to realize long-term assets, manage problem of liquidity, assets-liability mismatch and improve recovery by exercising powers to take possession of security and sell such security and thus, to reduce the NPA by adopting measures for recovery or reconstruction.
Finding of the Court:

The High Court held that the classification created by the amended clause (a) of Section 2(1)(o) of the SARFAESI Act has no nexus with the object of the Act and is violative of Article 14 of the Constitution. The Court found that there was no justifiable reason for taking away the exclusive power of the RBI to formulate guidelines for declaring the asset of borrowers as NPA in respect of some of the financial institutions. The Court also held that the RBI guidelines were not violative of Article 14 of the Constitution.
Issues: 1. Whether the amended provisions of Section 2(1)(o) of the SARFAESI Act are ultra vires Article 14 of the Constitution of India? 2. Whether the guidelines issued by the RBI are violative of Article 14 of the Constitution of India?
Ratio Decidendi: 1. The Court held that the amended provisions of Section 2(1)(o) of the SARFAESI Act are ultra vires Article 14 of the Constitution of India and the object of the Act itself. The Court found that the classification created by the amended clause (a) of Section 2(1)(o) of the SARFAESI Act has no nexus with the object of the Act and is violative of Article 14 of the Constitution. The Court also found that there was no justifiable reason for taking away the exclusive power of the RBI to formulate guidelines for declaring the asset of borrowers as NPA in respect of some of the financial institutions. 2. The Court held that the RBI guidelines are not violative of Article 14 of the Constitution of India. The Court found that the guidelines were necessary to enable banks and financial institutions to realize long-term assets, manage problem of liquidity, assets-liability mismatch and improve recovery by exercising powers to take possession of security and sell such security and thus, to reduce the NPA by adopting measures for recovery or reconstruction.
Final Decision: The High Court held that the amended provisions of Section 2(1)(o) of the SARFAESI Act are ultra vires Article 14 of the Constitution of India and the object of the Act itself. The Court restored the provisions that existed prior to the amendment of 2004 and existed at the time of the decision of the Supreme Court in the case of Mardia Chemicals Ltd. v. Union of India. The Court, however, upheld the guidelines of the RBI challenged in the application.

JUDGMENT

(PER : HONOURABLE THE CHIEF JUSTICE MR. BHASKAR BHATTACHARYA)

1. All these Special Civil Applications were heard analogously as in all these matters, the questions that had arisen for consideration were whether the provisions contained in section 2 (1)(o) of the Securitisation And Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 [hereinafter referred to as the Securitisation Act or SARFAESI Act] and clause 2.1 of the guidelines issued by the Reserve Bank of India known as Prudential Norms on Income Recognition, Asset Classification and Provisioning -pertaining to Advances are ultra vires the Constitution of India, and, consequently, the actions taken by various Banks concerned under the Securitisation Act are illegal and without authority of law.

2. We, however, propose to treat the Special Civil Application No. 14908 of 2012 as the lead matter.

3. The case made out by the petitioners in SCA No. 14908 of 2012 may be summed up thus:

[a]. The petitioners are the borrowers and/or guarantors of Punjab National Bank, which is the respondent No.2 in this writ-petition, whose account with the respondent-Bank had allegedly become Non Performing Assets [NPA, for short hereafter] according to the respondent No.2. The respondent No.1 is the Union of India and it has been made party as the petitioners wanted to challenge the law enacted by the Parliament as invalid. Similarly, the Reserve Bank of India has also been made party as the guidelines of the Reserve Bank indicated above have been challenged. We, consequently, also issued notice to the learned Attorney General of India pursuant to which Mr. I. H. Syed, the learned Assistant Solicitor General of India, has appeared.

[b]. According to the petitioners, their account had not become NPA although the respondent No.2-Bank had alleged in the Demand Notice that their accounts had become NPA on 30th June 2012 in accordance with the aforesaid RBI Guidelines. The petitioners contend that the notice under section 13 (2) of the Securitisation Act is vague and ambiguous one inasmuch as there is no explanation as to how the petitioners' account had become NPA. The petitioners further contend that the Bank cannot, of its own will and fancy, declare the accounts of the petitioners as NPA and it has to show the cogent reasons and explanation and indicate how the account had become NPA from a performing one.

[c]. The petitioners have further submitted that the amended definition of section 2 (1) (o) of the Securitisation Act, which defines NPA, should be declared as ultra vires the Constitution of India. The petitioners have further prayed that the clause 2.1 of the Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, issued by the Reserve Bank of India, should also be declared as ultra vires.

[d]. All the respondents, including various respondent-Banks and the Union of India have opposed this writ application by filing separate affidavits in which the respondents have submitted that this writ-application should not be entertained on the ground of lack of bona fide of the petitioners, and, at the same time, the provisions contained in section 2(1) (o) of the Securitisation Act and the guidelines of the RBI challenged herein are quite in conformity with the provisions of the Constitution of India. According to the respondents, the sole object of the petitioners is to delay the execution of the sale of the secured assets although the petitioners have not paid the dues of the concerned Bank. The respondents, therefore, pray for dismissal of the writ-application.

4. Facts and the contentions in the remaining 78 writ-applications are also more or less similar.

5. The Union of India has opposed these writ-applications by filing an affidavit [in Special Civil Application No. 2970 of 2013], which has been adopted in all these matters, and their objections may be summed up thus:

[A]. SARFAESI Act was enacted and passed b

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2014 Supreme(Guj) 562

Cases Referred (24)