Order — Hon'ble The Chief Justice
The constitutional validity of provisions of Section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement Security Interest Act, 2002 as amended by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment Act) Ordinance 2004 (Act 30 of 2004) is challenged in these writ petitions under Article 226 of the Constitution of India.
2. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (hereinafter referred to as ‘the Act’) has been enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected thereto. The Act enables the banks and financial institutions to realise long-term assets, manage problems of liquidity, asset liability mis-match and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. The Act further provides for setting up asset reconstruction companies which are empowered to take possession of secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured assets and take over the management of the business of the borrower. In Mardia Chemicals Limited v. Union of India, 2004 (4) S.C.C 311, the constitutional validity of the Act, except the provisions of Sub-section (2) of Section 17of the Act, has been upheld by the Supreme Court. The findings of the Supreme Court, as summed up in para-graph-80 of the judgment, read as follows: —
“80. Under the Act in consideration, we find that before taking action a notice of 60 days is required to be given and after the measures under Section 13(4) of the Act have been taken, a mechanism has been provided under Section 17 of the Act to approach the Debts Recovery Tribunal. The above noted provisions are for the purpose of giving some reasonable protection to the borrower. Viewing the matter in the above perspective, we find what emerges from different provisions of the Act, is as follows:
1. Under sub-section (2) of Section 13 it is incunbent 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 Debts Recovery Tribunal under Section 17 of the Act, at that stage.
2. As already discussed earlier, on measures having been taken under sub-section (4) of Section 13 and before the date of sale/auction of the property it would be open for the borrower to file an appeal (petition) under Section 17 of the Act before the Debts Recovery Tribunal.
3. That the Tribunal in exercise of its ancillary powers shall have jurisdiction to pass any stay/interim order subject to the condition as it may deem fit and proper to impose.
4. In view of the discussion already held in this behalf, we find that the requirement of deposit of 75% of the amount claimed before entertaining an appeal (petition) under Section 17 of the Act is an oppressive, onerous and arbitrary condition against all the canons of reasonableness. Such a condition is invalid and it is liable to be struck down.
5. As discussed earlier in this judgment, we find that it will be open to maintain a civil suit in civil court, within the narrow scope and on the limited grounds on which they are permissible, in the matters relating to an English mortgage enforceable without intervention of the court.”
3. Section 17 of the Act prior to the amendment reads as follows: —
SECTION 17 - Right to appeal:
“(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor or his authorised 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 measures had been taken.
(2) Where an appeal is preferred by a borrower, such appeal shall not be entertained by the Debts Recovery Tribunal unless the borrower has deposited with the Debts Recovery Tribunal seventy-five per cents of the amount chaired in the notice referred to in sub-section (2) of Section 13. Provided that the Debts Recovery Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.
(3) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be, dispose of the appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and rules made thereunder.”
4. Section 17 of the Act was amended by Act 30 of 2004 in the light of the decision in Mardia Chemical's case and the amended provisions were brought into force with effect from 29.12.2004 The provisions of Section 17 of the Act, after the amendment, read as follows: —
“(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor or his authorised officer under this Chapter, (may make an application along with such fee, as may be prescribed) to the Debts Recovery Tribunal having jurisdiction in the matter within forty five days from the date on which measures had been taken.
(Provided that different fees may be prescribed for making the application by the borrower and the person other than then borrower).
(Explanation: For the removal of doubts it is hereby declared that the communication of the reasons to the borrower by the secured creditor for not having accepted his representation or objection or the likely action of the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person (including borrower) to make an application to the Debts Recovery Tribunal under sub-section (1) of Section 17).
(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of Section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of the Act and the rules made thereunder.
(3) The Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of Section 13, taken by the Secured creditor are not in accordance with the provisions of this Act and the rules made there under, and require restoration of the management of the secured assets to the borrower or restoration of possession of the secured assets to the borrower, it may be order, declare the recourse to any one or more measures referred to in sub-section (4) of Section 13 taken by the secured creditors as invalid and restore the possession of the secured assets to the borrower or restore the management of the secured assets to the borrower, as the case may be, and pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of Section 13.
(4) If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub-section (4) of Section 13, is in accordance with the provisions of this Act and the rules made thereunder, then, notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be entitled to take recourse to one or more the measures specified under sub-section (4) of Section 13 to recover his secured debt.
(5) Any application made under sub-section (1) shall be dealt with by the Debts Recovery Tribunal as expeditiously as possible and disposed of within sixty days from the date of such application:
Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be recorded in writing, so however, that the total period of pendency of the application with the Debts Recovery Tribunal, shall not exceed four months from the date of making such application made under sub-section (1)
(6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as specified in subsection (5), any party to the application may make an application, in such form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application, make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal.
(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal, shall, as far as may be, dispose of application in accordance with the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and land the rules made thereunder.”
5. It is seen that by the amendment, the legislature has deleted sub Section (2) of Section 17 of the Act, which was held to be unconstitutional by the Supreme Court in Mardia Chemical's case and sub sections 2 to 6 were inserted in section 17 of the Act and original sub section (3) is renumbered as sub section (7). The principal contention of the petitioners is that the amended provisions of Section 17 of the Act are contrary to the judgment of the Supreme Court in Mardia Chemical's case.
6. The contention is that the remedy of the application filed under Section 17 of the Act, which is declared to be in nature of suit by the Supreme Court is to-tally taken away by the amendment and in any event, the remedy is now reduced to only an empty formality and does not protect the rights of the borrowers, mortgagers and guarantors. The contention is that the scope of the jurisdiction of the Debt Recovery Tribunal under Section 17 of the Act has been restricted only to ascertain the compliance of the provisions of the Act alone and therefore the amendment is wholly arbitrary and violative of Article 14 of the Constitution of India.
7. We have heard Mr. Vijay Narayan, learned senior counsel, Mr. K. Venkatapathy, learned senior counsel, Mr. Sathish Parasaran, Ms. D. Meera, Mr. M.S Shanmugasundaram, Mr. K. Selvaraj, Mr. K. Venkatasubbaraju, Mr. G. Jeremiah, Mr. K. Mohana Murali, Mr. K. Moorthy, Mr. T.L Thirumalaisamy, Mr. V. Kalyanaraman, Mr. P. Seshubalan and Mr. B. Ravi Raja, learned counsel appearing for the petitioners in the respective writ petitions and Mr. V.T Gopalan, learned Additional Solicitor General appearing for Union of India, Mr. T.S Gopalan, Mr. Srinath Sridevan, Mr. V. Paul Doss, Mr. N.V Srinivasan, Mr. K. Rajasekaran, Mr. Jayesh Dolia, Mr. S. Sethuraman, Mr. V.V Sivakumar, Mr. P.D Audikesavalu, Mr. V. Radhakrishnan and Mr. M. Sathyanaranan, learned counsel appearing for the respondents/banks and financial institutions in the respective writ petitions.
8. Learned counsel appearing for the petitioners strenuously contended that in Mardia Chemical's case, the Supreme Court has clearly held that the proceedings under Section 17 of the Act are in lieu of Civil Suit, which remedy is already available but barred under Section 34 of the Act. Our attention was drawn to the observations in paragraphs 59, 62 and 71 of the judgment, which read as follows: —
“59. We may like to observe that proceedings under Section 17 of the Act, in fact, are not appellate proceedings. It seems to be a misnomer. In fact it is the initial action which is brought before a forum as prescribed under the Act, raising grievance against the action or measures taken by one of the parties to the contract. It is the stage of initial proceeding like filing a suit in civil court. As a matter of fact proceedings under Section 17 of the Act are in lieu of a civil suit which remedy is ordinarily available but for the bar under Section 34 of the Act in the present case. We may refer to a decision of this court in Ganga Bai v. Vijay Kumar where in respect of original and appellate proceedings a distinction has been drawn as follows: (SCC p. 397, para 15)
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 the suit is barred by statute one may at one's peril, bring a suit of one's choice. It is no answer to a suit, howsoever frivolous to claim, that the law confers no such right to sue. A suit for its maintainability requires no authority of law and it is enough that no statute bars the suit. But the position in regard to appeals is quite the opposite. The right of appeal inheres in no one and therefore an appeal for its maintainability must have the clear authority of law. That explains why the right of appeal is described as a creature of statute.”
62. As indicated earlier, the position of the appeal under Section 17 of the Act is like that of a suit in the court of the first instance under the Code of Civil Procedure. No doubt, in suits also it is permissible, in given facts and circumstances and under the provisions of the law to attach the property before a decree is passed or to appoint a receiver and to make a provision by way of interim measure in respect of the property in suit. But for obtaining such orders a case for the same is to be made out in accordance with the relevant provisions under the law. There is no such provision under the Act.”
“71. Arguments have been advanced as to how far principles of lender's liability are applicable. Whatever be the position, however, it cannot be denied that the financial institutions, namely, the lenders owe a duty to act fairly and in good faith. There has to be a fair dealing between the parties and 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 matters, that may or may not strictly apply, nonetheless, even in absence of any such decisions or legislation, it is incumbent upon such financial institutions to act fairly and in good faith complying with their part of obligations under the contract. This is also the basic principle of the concept of lender's liability. It cannot be a one-sided affair shutting out all possible and reasonable remedies to the other party, namely, borrowers and assumes 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.”
9. Relying on the above observations, it is contended that by virtue of amendment, the scope of Section 17 of the Act is restricted as to the compliance of the provisions of the Act alone and various other grounds such as demand of amount has been recovered and failure to follow the mandatory guidelines of Reserve Bank of India and offer of one time settlement, calculation of interest and nature of secured creditors and all the incidental questions cannot be gone into by the Debt Recovery Tribunal.
10. We are afraid that the contention is totally mis-conceived. The provisions of Section 17(1) of the Act provides remedy for the borrower/guarantor/mortgagor to challenge the action of the Bank under Section 13(4) of the Act before the Debt Recovery Tribunal. The Debt Recovery Tribunal is required to decide whether the action of the Bank/Financial Institutions, under Section 13(4) is in accordance with the provisions of the Act and the rules framed thereunder. It is open to the borrower/guarantor/mortgagor to demonstrate before the Debt Recovery Tribunal that resort to Section 13 of the Act is not permissible by law. In a given case, the claim of the Bank/Financial Institutions may be barred by limitation or there may be cases, where the adjustment of the amount paid is not reflected in the notice or the calculation of interest may not be in accordance with the contract between the parties. Needless to say that all such grounds, which render the action of the Bank/Financial Institutions illegal can be raised in the proceedings under Section 17 of the Act before the Debt Recovery Tribunal.
11. Learned Additional Solicitor General and the learned counsel appearing for banks and financial institutions fairly stated that all the objections which can be legally raised in the reply to the notice under Section 13(2) of the Act can also be raised in the proceedings under Section 17(1) of the Act. It would be for the Debt Recovery Tribual to decide in each case whether the action of the bank is in accordance with the provisions of the Act and is legally sustainable.
12. In our opinion, the writ petitions are devoid of merit and hereby dismissed with liberty to the writ petitioners to raise all the contentions before the Debt Recovery Tribunal as permissible by law. No costs. Consequently, connected miscellaneous petitions are closed.
VCJ/VCS