Important point
Constitutional validity of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, upheld 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.

Headnote:(i) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002-Sections 13, 15, 17 and 34-Constitutional validity of the Act, more particularly, provisions as contained in Sections 13, 15, 17 and 34-Main contention challenging vires of the Act is that the banks and financial institutions have been vested with arbitrary powers, without any guidelines for its exercise-Banks and financial institutions have heavily financed petitioners and other industries-A large sum of amount remains unrecovered-Normal process of recovery of debts through courts being lengthy-Time taken is not suited for recovery of such dues-Recovery of Debts Due to Banks Act enacted in 1993-However, it did not bring the desired results-Committees constituted recommended for such a legislation-A policy laid down by Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset-Whether it is open to challenge the statute on ground that it was not necessary to enact it in prevailing background particularly when another statute was already in operation-(No).
       Held : 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. Hence, in our view, it cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of the NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field namely the Recovery of Debts due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another expert committee was constituted then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. (Para 34)
       We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Recovery of debts due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Considering the totality of circumstances the financial climate world over, if it was thought as a matter of policy, to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy. (Para 36)
       (ii) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002-Sections 13, 17, 34-Enforcement of security interest-Constitutional validity-Whether provisions as contained under Section 13 and 17 of the Act provide adequate and efficacious mechanism to consider and decide 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-(Yes).
       Held : 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. (Para 38)
       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 that direction. (Para 39)
       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. (Para 42)
       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. (Para 45)
       We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13(1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc. 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. (Paras 46, 47 & 48)
       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. (Para 51)
       (iii) Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002-Sections 17, 13(4)-Enforcement of security interest-Appeal-Requirement to deposit 75 of the claim raised in the notice of demand-Constitutional validity of Section 17 challenged-Whether 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 appeal would be entertainable only on deposit of 75 of claim raised in notice of demand-(Yes).
       Held : The condition of pre-deposit in the present case is bad rendering the remedy illusory on the grounds that (i) it is imposed while approaching the adjudicating authority of the first instance, not in appeal, (ii) there is no determination of the amount due as yet (iii) the secured assets or its management with transferable interest is already taken over and under control of the secured creditor (iv) no special reason for double security in respect of an amount yet to be determined and settled (v) 75 of the amount claimed by no means would be a meager amount (vi) it will leave the borrower in a position where it would not be possible for him to raise any funds to make deposit of 75 of the undetermined demand. Such conditions are not alone onerous and oppressive but also unreasonable and arbitrary. Therefore, in our view, sub-section (2) of Section 17 of the Act is unreasonable, arbitrary and violative of Article 14 of the Constitution. (Para 64)

Judgement Key Points

The legal document provided primarily discusses the validity and provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). However, it does not specify a particular monetary threshold or amount to which SARFAESI is applicable.

Generally, the SARFAESI Act applies to secured loans where the amount secured by the security interest exceeds a certain threshold, which is typically prescribed by the Reserve Bank of India or relevant authorities. The document emphasizes the enforcement provisions, the process, and the safeguards but does not specify a specific monetary limit or amount.

Therefore, based on the provided document, there is no explicit mention of a specific amount to which SARFAESI is applicable. It is understood that the applicability depends on the classification of the asset as a non-performing asset and the security interest created, rather than a fixed monetary figure detailed in this particular text.

Judgment

Brijesh Kumar, J.-Leave granted in Special Leave Petition (Civil) Nos. 5013/2003, 9658/2003, 11089/2003, 11267/2003, 11268/2003, 15566/2003, 17465/2003 and special leave petition @ CC 10728 and SLP(C) No. 6723/2003.

2. By means of the above noted bunch of cases some of those having been transferred to this court, the validity of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) (for short ‘the Act’) has been challenged. Some writ petitions were filed in different High Courts on promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Second Ordinance), 2002. However, the Act 54 of 2002 was enacted and enforced, vires of which is in question, more particularly, the provisions as contained in Sections 13, 15, 17 and 34 of the Act. Besides others, we may, for the sake of convenience, refer to the averments made and documents filed in Transferred Case Nos. 92-95 of 2002- M/s. Mardia Chemicals Ltd. Etc. Etc. Vs. Union of India & Ors. Etc. Etc.

3. It appears that a notice dated July 24, 2002 was issued to the petitioner - Mardia Chemicals Ltd. by the Industrial Development Bank of India (for short ‘the IDBI’) under Section 13 of the Ordinance, then in force, requiring it to pay the amount of arrears indicated in the notice within 60 days, failing which the IDBI as a secured creditor would be entitled to enforce the security interest without intervention of the court or Tribunal, taking recourse to all or any of the measures contained in sub-section (4) of Section 13 namely, by taking over possession and/or management of the secured assets. The petitioner was also required not to transfer by way of sale, lease or otherwise any of the secured assets. Similar notices were issued by other financial institutions and banks under the provisions of Section 13 of the Ordinance/Act to different parties who filed petitions in different High Courts.

4. The main contention challenging the vires of certain provisions of the Act is that the banks and the financial institutions have been vested with arbitrary powers, without any guidelines for its exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount of dues, sought to be recovered from the borrowers. The offending provisions as contained under the Act, are such that, it all has been made one sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. Before further detailing the grounds of attack, we may peruse some of the relevant provisions of the Act.

5. The term “borrower” has been defined in clause (f) of Section 2, which provides as under :

“borrower” means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;”

6. “Financial Assistance” has been defined in clause (k), which reads as under:

“financial assistance” means any loan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution;”

7. Similarly, the term “default” is defined in clause (j), as quoted below :

“default” means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in

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2004 Supreme(SC) 442

Important pointConstitutional validity of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, upheld 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.­

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Important point
Constitutional validity of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, upheld 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.