Mardia Chemicals Ltd. v. Union of India
Supreme Court of India · 8 April 2004 · 3 judges
The Court upheld the SARFAESI Act, 2002, subject to safeguards it read in, but struck down Section 17(2), which required a borrower to deposit 75% of the claimed amount before approaching the Debt Recovery Tribunal, as violating Article 14.
Facts
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 lets secured creditors enforce security without the intervention of a court or tribunal. In July 2002 IDBI served Mardia Chemicals Ltd. a notice under Section 13 of the Ordinance then in force, demanding payment within 60 days, failing which it would take possession or management of the secured assets under Section 13(4). Similar notices were served on other borrowers, who challenged the Act in several High Courts; those petitions were transferred to the Supreme Court and heard with writ petitions and appeals. The borrowers attacked Sections 13, 15, 17 and 34, arguing that the Act gave banks arbitrary, one-sided powers, barred civil suits, and offered no fair adjudicatory remedy, since an appeal under Section 17 lay only after action was taken and only on deposit of 75% of the demand.
Questions before the Court
- Is the enforcement of security interest without intervention of the court under Section 13 of the SARFAESI Act unconstitutional for want of a fair procedure?
- Is the requirement in Section 17(2) of depositing 75% of the claimed amount before the Debt Recovery Tribunal entertains the borrower's application valid?
- To what extent does Section 34 bar the jurisdiction of civil courts?
What the Court held
- A notice under Section 13(2) does not attract natural justice, but the secured creditor must consider the borrower's reply with due application of mind and communicate reasons, however brief, for rejecting objections before taking measures under Section 13(4). The reasons do not give a right to approach the Tribunal at that stage.
- Proceedings under Section 17 are not truly appellate but an initial proceeding in lieu of a civil suit. Requiring deposit of 75% of an undetermined, one-sided claim, after the assets have been taken over, is onerous, oppressive and arbitrary; the power to waive or reduce does not cure it. Section 17(2) violates Article 14.
- Section 34 bars civil suits even on matters the Tribunal can determine before any Section 13(4) measure is taken, but a civil suit lies on limited grounds, such as fraud or an absurd and untenable claim, as permitted for English mortgages.
- After measures under Section 13(4) and before sale, the borrower may apply to the Tribunal under Section 17, which may grant stay or interim orders under its ancillary powers.
- With these safeguards, the Act serves the public interest in speedier recovery of NPAs and is valid; the Act and its provisions were upheld except Section 17(2).
Why it matters
The judgment upholds the SARFAESI Act as economic legislation in the public interest, while reading in a duty on secured creditors to consider the borrower's objections and give reasons before taking measures under Section 13(4). It strikes down the 75% pre-deposit in Section 17(2) under Article 14, treats Section 17 proceedings as original rather than appellate, and defines the limited residual jurisdiction of civil courts despite Section 34.
In the Court's words
Copied from the official judgment; each passage links to its page.
“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.”
“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.”
“But looking to the stringent nature of measures to be taken without intervention of court with a bar to approach the court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated. So as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons howsoever brief that may be for not accepting the objections, if raised in the reply, must be communicated to the borrower.”
“We, therefore, subject to what is provided in paragraph 80 above, uphold the validity of the Act and its provisions 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.”
Provisions interpreted
Related judgments
Case and bench
- Parties
- Mardia Chemicals Ltd. Etc. Etc. v. U.O.I. & Ors. Etc. Etc.
- Case
- Transfer Case (Civil) Nos. 92-95 of 2002, with connected writ petitions, transfer cases and civil appeals
- Decided
- 8 April 2004
- Bench
- V.N. Khare, CJI, Brijesh Kumar, Arun Kumar
- Opinions
- Judgment of the Court delivered by Brijesh Kumar, J. No separate opinion appears in the file.
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