The provision of appeal under Section 17 of the SARFAESI Act is illusory. [Mardia Chemicals Ltd. Etc. Etc vs. U.O.I. & Ors. Etc. Etc]

Mardia Chemicals Ltd. Etc. Etc vs. U.O.I. & Ors. Etc. Etc 

Transfer Case (civil) 92-95 of 2002

Before the Supreme Court of India

Bench: CJ. Brijesh Kumar, Justice Arun Kumar.

Relevant Acts/ Statutes:       

  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
  • Recovery of Debts due to Banks and Financial Institutions Act, 1993.

Decided on: April 8th, 2004

Brief Facts:

  • Mardia Chemicals Ltd., an Ahmedabad-based company into the industry of Dyes and Pigments, owed banks over Rs.1,400crores. The bankers already filed a suit under the Companies Act 1956 and appointment of an official receiver were also done for recovery of loan.
  • Due to its inability to pay off the debts, the banks declared the company as NPA(Non Performing Assets) and a notice dated 24th July 2002 was served by the Industrial Development Bank of India (IDBI) under section 13 of SARFAESI ordinance in force.
  • The notice required the company to pay the amount of arrears indicated within 60 days, failing which IDBI as secured creditor would be entitled to enforce the security interest without intervention of the court.
  • The company was not a deliberate defaulter.
  • The company had an option to file an appeal with the Debt Recovery Tribunal (DRT) against the bank but could not afford to do so as Section 17 of the act required the borrowers to deposit 75% of the amount claimed by lenders before they could file appeals with debt recovery tribunals.
  • 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 DRT is empowered to determine.
  • Hence Mardia Chemicals and other companies instead of resorting to DRTs’ moved to the court against notices sent to them by banks arguing that Section 17 (2) of the Act which was blocking their ability to take legal recourse against seizure notices.

Issues:

  • 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 Section 13 of the Act ultra vires of the Constitution.
  • Whether the requirement of 75% of the amount due before appeal to the DRT is onerous.

Petitioners’ Arguments:

  • There was no occasion to enact such a draconian legislation to find a short‐cut to realize the dues by issuing a 60 days’ notice under SARFAESI Act. It was not necessary to enact yet another legislation containing drastic steps and procedure depriving the debtors of any fair opportunity to defend themselves.
  • It is on whims and fancies of the financial institutions to classify the assets as non‑performing assets and commence a proceeding under the SARFAESI Act.
  • The provision of appeal under Section 17 of the Act is also illusory. It is a remedy in disguise i.e. a remedy which is available after a damage of 75% of the amount claimed in the notice. Once the secured assets are taken over by the secured creditor there is hardly any possibility for deposit of 75% of the claim thus the borrower is gagged into a helpless position.

Respondents’ Arguments:

  • A right of appeal is a statutory right and it can be circumscribed by the conditions. The other cases lay down that pre-deposit of the amount is perfectly constitutional and not arbitrary.
  • Financial institutions are badly affected by non‐recovery of dues, despite the existing laws like Companies Act 1956 and Recovery of Debts due to Banks and Financial Institutions Act 1993.
  • It becomes difficult for the financial institutions to continue the financial assistance to deserving parties due to heavy blockage of money stuck up with the erring borrowers.

Judgment:

  • After service of 60 days’ notice u/s 13(2), before proceeding to take any action, if the borrower raises any objection or places facts to be considered by secured creditor, such reply to notice must be considered with due application of mind and reasons for not accepting the objections howsoever brief must be communicated to the borrower The Court upheld section 13. So it can be argued that the main structure of the statute has survived.
  • Borrowers would get a reasonably fair deal and opportunity to get the matter adjudicated upon before the Debt Recovery Tribunal. On measures having been taken u/s 13(4), before the date of sale/auction of property it would be open for the borrower to file an appeal(petition) under section 17 of the Act before the DRT.
  • The requirement of deposit of 75% of the amount claimed before entertaining an appeal(petition) under section 17 of the Act is illusory. and an unreasonable condition. The condition is invalid and struck down as it ultra vires of Article 14 of the constitution of India.

(This brief was prepared and submitted to LawBriefs.in by Hima Bindu, Student of a final stage of Institute of Chartered Accounts of India- CA Final.)

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