Constitutional Validity of SARFAESI Act of 2002 tested under ‘Mardia Chemicals vs. UOI’

Constitutional Validity of SARFAESI Act of 2002 tested under ‘Mardia Chemicals vs. Union of India’

Introduction:

♦ The constitutional validity of SARFAESI was assailed, in particular Sections 13, 15, 17, 34 on the basis that these sections are unreasonable and arbitrary.

♦ IDBI Bank served a notice upon Mardia when the Act came into force. Mardia defaulted—approached Court where a number of similar petitions were clubbed together and answered together.

Issues:

• Whether it was open to challenge SARFAESI 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 was ultra vires of the constitution?
• Whether Sec 17, particularly Sec 17(2) is unreasonable and arbitrary, therefore violative of the Constitution?

Petitioners’ Argument:

1. Sec 13 gave all rights to banks and FIs and neglects the rights of the defaulters. Sec 13 did not take borrower interest into account at all. Moreover, there was no right of representation or adjudicatory mechanism that could be availed by the borrowers.

2. Sec 17(2) stated that 75% of the amount had to be deposited by the defaulter in order to prefer and appeal—amount was too much and hence restricted access to judicial recourse of appeal—it was like a implied bar had been created//to this, UoI contended that there were several other legislations that provided for such preconditions//Pet argued that those were for appeal and not for application of first instance//UoI tried to refute that by stating that the marginal heading of Section 17 was “appeal”

3. Sec 15 dealt with the procedure for taking over the business and management of the entity, especially a company

4. Sec 34 was pari materiae to RDB Act which stated that DRTs have exclusive jurisdiction i.e., bar on civil courts for mattes under SARFAESI+ no civil court shall grant any order or injunction against a bank availing rights under the Act.

5. Since there was already a legislation dealing with this particular area, SARFAESI was unnecessary and multiple legislations were not required to address the same subject matter. It was also pointed out that the most problematic debt bracket was 25,000-1 lakh—didn’t require separate legislation.

Supreme Court held:

• Emphasized the superiority of the Parliament is determining the necessity to enact a legislation.
• Rejected the comparison drawn between RDB Act and SARFAESI since the latter deals with the very specific matter of NPAs (among other differences such as the latter dealing only with secured creditors). Therefore, it is for the Parliament to adjudge the need to legislate
• As for Section 13, the Court held that it was constitutionally valid.
• Secured creditor is only exercising his right because the default leading to sec 13 measure may be looked at as a ‘second default’—NPA + 60 days additional time was given to repay post notice.
• Prior to 2016 Amendment, Section 13 sort of recognized the Right of Redemption. Rule 8 & 9 of SI Rules required that bank should serve a notice confirming sale of secured property and the borrower to could pay off the debt and regain possession any time before the actual sale had occurred
• While SC upheld validity of the section, it strongly pushed for right of representation being made available to borrowers
• Section 17(2) was found to be arbitrary and SC directed that the heading be changed from “appeal” to “application”

Impact of the judgement:

• Now section 13 says that the bank has to consider all representations of a borrower and has to reply within 7 days (which was later changed to 15 days).
• Under section 17, although marginal heading remained the same, the word “appeal” was replaced by “application” within the section (wow). The marginal heading was changed in 2016 and the appeal was replaced by application.
• Now DRTs have jurisdiction for rights of tenants in a property which is kept as security. In such cases, the one who files the application (if he fulfills the requirements), gets the property.
• Section 18 was also substituted slightly. When an appeal is preferred before the DRAT, 50% of amount has to be deposited which can be reduced to 25%. A similar right of waiver was also given to DRT under Section 17

This was later changed in 2016 and DRT cannot waive off the deposit amount, although it can be reduced to 25%.