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Garlon Polyfab Industries Ltd. And Others v. State Bank Of India And Others
Factual and Procedural Background
This writ petition, filed under Article 32 seeking a writ of mandamus, challenged Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("the Act") as ultra vires and sought quashing of notices dated 31.12.2002 (Annexures 2 and 3). The petitioners include Petitioner No.1, a private limited company, which had taken loans from respondent No.1 (State Bank of India) and U.P. Financial Corporation.
The factual allegations in the petition include: outstanding secured loan amounts alleged as Rs. 137.89 lakhs (U.P. Financial Corporation) and Rs. 39 lakhs (State Bank of India) as principal; a cash credit limit of Rs. 37 lakhs with the State Bank of India; a dispute beginning June 1995 regarding clean bill discounts which led the bank to stop discounting and the company to stop operations with the bank; a proposed one-time settlement in 1999 for Rs. 32 lakhs (allegedly agreed by the Branch) with Rs. 10 lakhs deposited in a no-lien account by promoters; subsequent withdrawal of the settlement by the bank, an increased offer of Rs. 37 lakhs rejected by the bank's local head office by order dated 3.8.2000 (Annexure 4), and a recovery petition filed by the State Bank of India in the Debt Recovery Tribunal (DRT), Allahabad on 18.9.2000 (pending).
The company states it was adversely affected by government searches in 1998, became sick and was referred to the Board for Industrial and Financial Reconstruction (BIFR) in January 2001, with that reference pending. DRT proceedings had been suspended in view of the BIFR reference; in April 2002 BIFR allowed DRT to proceed but restrained recovery during the pendency. On 2.1.2003 the State Bank of India issued six draft notices under section 13(4) of the 2002 Act.
Legal Issues Presented
- Whether Section 13 (particularly Section 13(4)) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is constitutionally invalid (ultra vires), including under Article 14 of the Constitution.
- Whether Section 13 of the 2002 Act is in derogation of Sections 69 and 69-A of the Transfer of Property Act.
- Whether the procedure under Section 13 permits enforcement of security without adequate opportunity of hearing or an adjudicatory forum, leaving the secured creditor as "judge in its own cause".
- Whether action under Section 13(4) is permissible when secured creditors representing less than three-fourths of the total amount outstanding proceed without the consent required under Section 13(9) of the Act.
Arguments of the Parties
Petitioners' Arguments
- The petition sought a declaration that Section 13 is ultra vires and violative of Article 14; and that Section 13 derogates from Sections 69 and 69-A of the Transfer of Property Act.
- It was contended that Section 13 allows enforcement of security without judicial intervention or an adjudicatory forum, effectively making the bank the judge in its own cause.
- The petitioners alleged Section 13(4) involves no provision to consider borrower's explanation in reply to the notice under Section 13(2), thereby denying opportunity of hearing.
- The petitioners argued that the State Bank of India proceeded under Section 13(4) without the consent of the main lender (U.P. Financial Corporation), and that Section 13(9) requires agreement by secured creditors representing not less than three-fourths of the outstanding amount before action under Section 13(4) can be taken.
- Factual allegations were made regarding prior settlement negotiations, a rejected settlement order dated 3.8.2000, a pending DRT petition, and a pending BIFR reference.
The opinion does not contain an itemized or detailed summary of the respondent's counter-arguments in the body of the text beyond the fact that counsel for the parties were heard.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Chiranjit Lal v. Union of India, 1950 SCR 869 | Presumption in favour of the constitutional validity of a statute. | Relied upon to state the heavy burden on challengers of constitutionality and to support the presumption that Section 13 is valid unless clearly shown otherwise. |
| Madhu Limaye v. S.D.M., AIR 1971 SC 2486 | Presumption of constitutionality and related principles. | Grouped with other authorities to underline the presumption in favour of the Act's validity. |
| Hamdard Dawakhana v. Union of India, 1960 2 SCR 671 | Presumption of constitutional validity. | Used as supporting authority for the proposition that a challenger bears a heavy burden. |
| Sunil Batra (II) v. Delhi Administration, 1978 4 SCC 494 | Authority referenced among constitutional jurisprudence cited by the court. | Cited as part of the body of authorities supporting general constitutional principles relied upon by the court. |
| Mark v. State of Kerala, 1979 1 SCC 23 | Authority referenced in the context of constitutional validity jurisprudence. | Included among cases cited to demonstrate legal standards for challenging statutes. |
| Maharashtra State Financial Corporation v. Suvarna Board Mills, JT 1994 5 SC 280 | Principle that a notice to a defaulter to pay dues (failing which possession will be taken) fulfills the requirements of natural justice; no separate show-cause notice required. | Applied to conclude that the notice under Section 13(2) itself satisfies natural justice and affords an opportunity to the borrower to explain before action under Section 13(4) is taken. |
| Maganlal Chhagganlal (P) Ltd. v. Municipal Corporation, AIR 1974 SC 2009 | Principle regarding validity under Article 14 where a special/drastic procedure overlaps ordinary procedure: such a statute may be valid if guidelines can be inferred or if the statute itself limits the class of cases. | Used to explain that the 2002 Act specifies the class of cases covered by Section 13 (secured interest, default, classification as non-performing asset), and therefore does not offend Article 14 on that ground. |
| Northern India Caterers v. State of Punjab, AIR 1967 SC 1581 | Earlier authority referred to in the discussion of Maganlal Chhagganlal (P) Ltd.; noted as reversed by Maganlal. | Referenced to show the legal context in which the Supreme Court explained how a special procedure statute may be tested under Article 14. |
Court's Reasoning and Analysis
The court engaged in a step-by-step legal analysis grounded on the text of the Act and cited authorities:
- Presumption of validity: The court began by reiterating the established presumption in favour of the constitutional validity of statutes and that a heavy burden lies on persons who challenge constitutionality. Several authorities were cited to support this starting point.
- Socio-economic rationale: The court acknowledged that Section 13 is "drastic" but observed that it was enacted against the background of widespread non-repayment of loans which adversely affected the banking system and money circulation; this legislative purpose supported the provision's legitimacy.
- Applicability: By reference to Section 2(zd) (definition of "secured creditor"), the court held that respondent No.1 (State Bank of India) is a secured creditor and thus Section 13 applies to it.
- Opportunity of hearing and natural justice: The court rejected the submission that Section 13(4) permits enforcement without any opportunity of hearing. It examined Section 13(2), which requires the secured creditor to give a notice to the borrower to discharge liabilities within sixty days. The court relied on Maharashtra State Financial Corporation v. Suvarna Board Mills to hold that such a notice itself fulfills natural justice requirements and that the borrower can respond with explanations which the secured creditor must consider before taking action.
- Role of DRT and judicial forum: The court pointed to Section 13(10), which allows the secured creditor to apply to the Debt Recovery Tribunal if sale proceeds are insufficient, indicating that the DRT remains engaged in the process for deficiency claims and is not wholly excluded.
- Special statute analysis and Article 14: Applying the principles in Maganlal Chhagganlal, the court observed that the 2002 Act identifies the specific class of cases covered by Section 13 (existence of secured interest, secured agreement, default and classification as Non-Performing Asset). Because the Act itself delimits the class of cases and the necessity for the special procedure can be inferred from the context and preamble, the court found that Section 13 is not vulnerable to an Article 14 challenge on the basis of mere availability of two procedures.
- Definition of Non-Performing Asset: The court noted the statutory definition of "non-performing asset" in Section 2(o) (classification according to RBI guidelines) and emphasized that the 2002 Act is focused on such assets, distinguishing it from the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which is broader and not restricted to NPAs.
- Relationship with earlier statutes: The court stated that the 2002 Act, being a later special Act, will override contrary provisions in earlier legislation insofar as it covers the same field, but it also explained how the Acts cover different fields (2002 Act restricted to NPAs).
- Section 13(9) compliance: On the petitioners' contention that the main lender (U.P. Financial Corporation) had not consented, the court observed that Section 13(9) clearly requires the concurrence of secured creditors representing not less than three-fourths of the outstanding amount where there are multiple secured creditors. The petitioners relied on a letter of the Regional Manager of U.P. Financial Corporation dated 11.12.2002 (Annexure 5) to show non-consent.
- Factual controversy avoided: The court explicitly declined to adjudicate the factual dispute whether the U.P. Financial Corporation (or secured creditors representing three-fourths of the loan amount) was or was not agreeable to action under Section 13(4). Nevertheless, it held as a matter of law that action under Section 13(4) cannot be taken in violation of Section 13(9).
Holding and Implications
Holding: The court rejected the constitutional challenge to Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and held that there is no constitutional invalidity in Section 13. The petition was disposed of finally. Petition Disposed of.
Implications:
- The direct effect of the decision is that the petitioners' challenge to Section 13(4) failed and the writ petition was dismissed (disposed of) by the court.
- The court affirmed that a notice under Section 13(2) satisfies principles of natural justice and that DRT remedies (under Section 13(10)) remain available for unresolved deficiencies after sale of secured assets.
- The court made clear as a legal limitation on secured creditors that Section 13(9)'s requirement for agreement by secured creditors representing not less than three-fourths of the outstanding amount must be respected; action under Section 13(4) cannot be taken in breach of Section 13(9). The court did not resolve the factual question of whether such agreement existed in this case.
- No novel legal principle was announced by the court beyond applying existing constitutional and statutory principles; the opinion primarily upheld the statute's validity and clarified limits (notably Section 13(9)).
Petition Disposed of.
M. Katju, J.:— This writ petition has been filed praying for a writ of mandamus declaring section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘the Act’) as ultra vires and for quashing the notices dated 31.12.2002 Annexures 2 and 3 to the writ petition.
2. We have heard the learned counsel for the parties.
3. The petitioner No. 1 is a private limited company. The petitioner No. 1 took loans from respondent No. 1 (the State Bank of India) and U.P Financial Corporation. It is alleged that the present secured loan outstanding from U.P Financial Corporation is Rs. 137.89 lacs as principal amount, and from respondent No. 1 is Rs. 39 lacs as principal amount. The petitioner No. 1 was having a total cash credit limit of Rs. 37 lacs from the respondent No. 1. A dispute arose between the petitioners and the respondent No. 1 in June, 1995 owing to clean bill limits (discounting) facility and the Bank stopped accepting the same for discounting. It is alleged that for this reason the company stopped operations with the bank and offered to settle the same by way of one time settlement in 1999 at Rs. 32 lacs. It is alleged in paragraph 6 of the writ petition that this was agreed and recommended by the Branch, and the promoters got Rs. 10 lacs deposited from a third party in no lien account with the bank to facilitate the same.
4. It is alleged in paragraph 7 of the writ petition that the respondent No. 1 later on resiled and did not make one time settlement at Rs. 32 lacs on the principal amount, and the petitioners increased the offer upto Rs. 37 lacs. However, the local head office of the bank did not accept this and rejected the offer by the order dated 3.8.2000, Annexure 4 to the writ petition. Thereafter the respondent No. 1 filed a petition for recovery in the Debt Recovery Tribunal, Allahabad on 18.9.2000 which is pending. It is alleged in paragraph 9 of the writ petition that in 1998 the unit of the petitioner was closed on account of a series of searches by the Central Excise Authorities as a result of which the company could not function for about eight months and subsequently became sick.
5. The petitioner was referred to BIFR in January 2001 and the reference is still pending there. The proceeding before the Debt Recovery Tribunal had been suspended in view of the reference pending before the BIFR. It is alleged in paragraph 11 of the writ petition that the Peak Net Worth of the company is Rs. 628.63 lacs and accumulated losses are Rs. 717.46 lacs as on 31.10.2000 In April 2002 the BIFR allowed conducting proceedings before the Debt Recovery Tribunal but restrained it from taking any recovery till the pendency of the reference. On 2.1.2003 the State Bank of India issued six draft notices to the petitioners under section 13 (4) of the Act.
6. In paragraph 14 of the writ petition it is alleged that the total loan component of State Bank of India constitutes less than 75% and it proceeded without having consent of the main lender U.P Financial Corporation whose dues comes to Rs. 4.50 crores. It is contended that in view of section 13 (9) of the Act no secured creditor (is entitled to exercise any right under section 13 (4) of the Act unless such right is agreed upon by secured creditors) representing not less than 3/4 of the total value of amount outstanding. Hence it is alleged that the impugned notices are bad. It is alleged in paragraph 18 of the writ petition that the proceeding under the Act are not maintainable.
7. It is alleged in paragraph 19 of the writ petition that section 13 of the Act is in express derogation of sections 69 and 69-A of the Transfer of Property Act. In paragraph 20 of the writ petition it is alleged that section 13 of the Act provides for enforcement of security without intervention of the Court or Tribunal. It is alleged that there is no ad-judicatory forum for settlement of any dispute which may be genuine, and the Bank (secured creditor) has been made judge in its own cause which is against the fundamental principle of law and violative of Article 14 of the Constitution. In paragraph 21 of the writ petition it is alleged that under section 13 there is no provision for considering any explanation by the borrower in reply to the notice under section 13 (2) which means that no opportunity of hearing need be given to the borrower. Hence it is alleged that section 13 (4) of the Act is ultra vires Article 14 of the Constitution. It is alleged in paragraph 22 of the writ petition that before the Debt Recovery Tribunal the bank will have to prove its case and a judicial decision would be taken. However, under section 13 the bank besides being the plaintiff is also the judge of its own case which is a drastic provision. No appeal is provided under the Act.
8. We are of the opinion that there is no merit in the challenge to section 13 (4) of the Act. It may be mentioned that there is always a presumption in favour of the constitutional validity of an Act vide Chiranjit Lal v. Union of India . 1950 SCR 869.; Madhu Limaye v. S.D.M . AIR 1971 SC 2486.; Hamdard Dawakhana v. Union of India . 1960 2 SCR 671.; Sunil Batra (Ii); v. Delhi Administration. . 1978 4 SCC 494; and mark v. State of Kerala . 1979 1 SCC 23. etc. A heavy burden lies on the person who challenges the constitutional validity of a statute. We do not see any constitutional invalidity in section 13 of the Act.
9. No doubt section 13 is a drastic provision but it appears to have been enacted in view of the grave financial position in the country that huge amounts of loans of banks are outstanding which the borrowers have avoided repaying by various devices. Unless loans of the bank are returned the bank or the financial institution cannot again advance money to someone else. Money must be kept in circulation, but that is not possible if loans are not repaid.
10. Section 2 (zd) of the Act defines a secured creditor as follows:
“secured creditor” means any bank or financial institution or any consortium or group of bank or financial institutions and includes—
(i) debenture trustee appointed by any bank or financial institution; or
(ii) securitisation company or reconstruction company; or
(iii) any other trustee holding securities on behalf of a bank or financial institution,
in whose favour security interest is created for due repayment by any borrower of any financial assistance.”
11. Thus the respondent No. 1 is a secured creditor and hence section 13 will apply in its case.
12. In our opinion it is not correct that the loanee does not get any opportunity of hearing before the action is taken under section 13 (4) of the Act. Section 13 (2) itself mentions that where a borrower who is under a liability to a secured creditor under a security agreement makes any default in repayment of a secured debt or instalment thereof, the secured creditor may require the borrower by notice to discharge in full his liabilities to the secured creditor within sixty days failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).
13. In the Maharashtra State Financial Corporation v. Suvarna Board Mills . JT 1994 5 SC 280., it was held by the Supreme Court that where a notice is given to a defaulter to pay the dues failing which possession of the property will be taken, no further show cause notice is required. Such notice itself fulfills the requirements of natural justice.
14. The aforesaid decision of the Supreme Court is a clear proposition that once a notice is given to the borrower to pay his dues failing which possession of the property will be taken, this itself amounts to compliance of the principles of natural justice. In response to this notice it is open to the borrower to give any explanation which he requires and obviously this explanation must be considered by the secured creditor before taking action under section 13 (4).
15. Under section 13 (10) of the Act 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 before the Debt Recovery Tribunal. This implies that the Debt Recovery Tribunal is not totally out of the picture but it is open to the secured creditor to take action under section 13 for recovering debt dues after sale of the secured assets.
16. In Maganlal Chhagganlal (P) Ltd. v. Municipal Corporation . AIR 1974 SC 2009., it was held by the Supreme Court, while reversing its own earlier decision in Northern India Caterers v. State of Punjab . AIR 1967 SC 1581., that where a statute providing for a more drastic procedure different from the ordinary procedure and covers the whole field covered by the ordinary procedure without any guidelines as to the class of cases in which either procedure is to be resorted to, the statute will be hit by Article 14. However, the Supreme Court went on to say that the necessary guidelines could be inferred from the preamble and surrounding circumstances as well as the provisions of the statute and in such a case the statute will not be hit by Article 14. Then again, where the statute itself covers only a class of cases the statute will not be bad. The fact that in such cases the executive will choose which cases are to be tried under the special procedure will not affect the validity of the statute. Hence the contention that the mere availability of two procedures will vitiate one of them is not supported by reason or authority.
17. In the present case the impugned Act itself mentions the class of cases which will be covered by section 13 of the Act. In the first place, there must be a secured interest created in favour of a secured creditor. Secondly there must be a secured agreement under which the borrower will have the liability. Thirdly the borrower must make a default for repayment of a secured debt or any instalment thereof and then again such debt has to be classified by the secured creditor as a non-performing asset.
18. A non-performing asset has been defined in section 2 (o) of the Act as follows:
“Non-performing asset means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss assets, in accordance with the directions or under guidelines relating to assets classification issued by the Reserve Bank.”
19. The Act of 2002 is thus a special Act and it will override any provision to the contrary in the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 or any other earlier Act of Parliament or the State legislature pertaining to the field it covers.
20. It may be noted that under section 13 (2) of the 2002 Act the secured creditor has to first classify the debt as a non-performing asset, and only then can action be taken under section 13 (4). There is no such requirement in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. In fact the 1993 Act is not restricted to non-performing assets. Thus the field covered by the 2002 Act and the 1993 Act are different. The 1993 Act does not refer to non-performing assets at all, and such assets have not to be classified in accordance with the Reserve Bank guidelines and directives.
21. The obvious purpose of enacting the impugned Act was that the loans of banks and financial institutions were not being recovered promptly and this was adversely affecting the financial health of the nation. Unless loans are repaid promptly money will not remain in circulation, and the banks and financial institutions may get into trouble. In fact already many banks and financial institutions are in financial difficulty due to non-repayment of the loans.
22. We see no constitutional invalidity in section 13 of the Act No. 54 of 2002. Rather it serves a salutary purpose. The challenge to the aforesaid provision therefore fails.
23. However, as regard the petitioners' plea relating to section 13 (9) of the Act, the provision itself makes it clear that where there are more than one secured creditors, no secured creditor can exercise the right under section 13 (4) unless the secured creditors representing not less than three fourth of the outstanding amount agree. The petitioners have relied on the letter of the Regional Manager of the U.P Financial Corporation dated 11.12.2002 (Annexure 5) to demonstrate that the U.P Financial Corporation is not agreeable to take action under section 13 (4) against petitioner No. 1.
24. We are not going into the factual controversy as to whether the U.P Financial Corporation is now agreeable to take action under section 13 (4) or not, and whether the secured creditors representing three fourth or more of the loan amount are agreeable to take action under section 13 (4). However, we make it clear that action under section 13 (4) cannot be taken in violation of section 13 (9) of the Act.
25. With these observations the petition is disposed off finally.
Petition Disposed of.
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