MARDIA CHEMICALS LTD. ETC. ETC. v. UNION OF INDIA AND ORS. ETC. ETC

Citation: [2004] 3 S.C.R. 982

Court: Supreme Court of India

Bench: V.N. KHARE, BRIJESH KUMAR, ARUN KUMAR

Case summary

MARDIA CHEMICALS LTD. ETC. ETC. v. UNION OF INDIA AND ORS. ETC. ETC.pdf

Judgment text

MARDIA CHEMICALS LTD. ETC. ETC. _[ v. UNION OF ! NOIA AND ORS. ETC. ETC. APRIL 8, 2004 [V. N. KHARE, CJ. , BRIJESH KUMAR AND ARUN KUMAR, JJ. ] Securitisation and Reconstruction ofFinancial Assets and Enforcement I + ofSecurity Interest Act, 2002: Validity of the Act-Held: Act enacted for speedier recovery of dues declared as Non performing Assets, better availability ofcapital liquidity and economic growth ofthe country-Though some ofthe provisions have harsh effect on borrowers but they get reasonable protection under the Act-Hence, Act constitutionally valid except sub-section (2) ofsection 17-Constitution ofIndia, I950-Artic/e 14.

Enactment ofAct of2002 for securitisation ofdebts andfaster recovery of Non performing assets when Act of 1993 already in operation-Validity of-Held: On account of mounting dues of banks, recovery through court being time consuming, Act of 1993 failed to bring desired results and also recommendation ofexpert committees to have such law, enactment ofAct of 2002 not uncalled for nor superimposition ofundesired law-Also legitimacy ofsuch Act relating to financial policy which is in public interest cannot be tested-There is presumption ofconstitutionality infavour ofsuch enactment provided person aggrieved gets fair deal-Recovery of Debts due to Banks and Financial Institutions Act, 1993. ,( Section 13, 13(2), (4) and 34-Enforcement of secured assets without , intervention ofcourt under section 13_:.

0bjections/dispute raised by borrower against recovery-Adequate and effective mechanism to resolve dispute- Determination of-Held: In terms ofSection 13(2) it is mandatory to serve 60 days notice before action is taken under Section 13(4)-Replylobjections to notice is to be considered with due application ofmind and internal mechanism is to be evolved-Reasons for non-acceptance of objections is to be communicated to the borrower for his information/knowledge-Furthermore, •,-,I before sale of property borrower can approach tribunal-Hence, there are adequate safeguards for the borrower before action is taken under section 13. MARDIA CHEMICALS LTD. v. U. 0. 1.

983 Section 17(2)-Right to appeal before tribunal-Availability of--On taking over the secured assets /management thereofwith transferable interest or selling the property under section 13(4) and pre deposit of 75% ofamount claimed in demand notice-Validity of-Held: Requirement ofdeposit under Section 17(2) is oppressive, onerous, arbitrary and unreasonable-Hence, Section 17(2) invalid and liable to be struck down-Constitution of India, 1950-Article 14.

Sections I3 and 34-Providing sale of property for enforcement of security assets without intervention of court-If akin to English mortgage under Section 69-Held: Since Section 69 is overridden by Section 13(/), it is not relevant whether transactions are akin to or amount to English mortgage, since irrespective ofthe kind ofmortgage, security interest is to be enforced without intervention ofcourt as per section I3-Extent ofbar ofjurisdiction of civil court under Section 34-Held: Section 34 bars jurisdiction of civil court-However, can be invoked to a limited extent in cases of English mortgage on which they are permissible-Transfer of Property Act, 1882- Section 69.

\ Section 13-Private contract between borrower and financial institutions-Financial transactions-Unrealized dues offinancial institutions- Curtailment of borrower's rights and enforcement ofsecured assets without intervention ofcourt by section 13-Validity of-Held: Though the transaction is between the private parties yet transaction as a whole has impact on the economy ofthe country-In view ofpublic interest even if individual interest offew borrowers is affected to some extent, it would not impinge upon the validity of Act-Hence, the existing rights under contract entered into by private parties could be amended.

Principle of lender's liability-If ignor~d while enacting 'the Act, its effect-Held: Lender's liability is not ignored-Financial institutions-lenders owe a duty to act fairly and in good faith-They are under obligation to comply with their part ofcontract-Even in absence ofany such legislation, financial institution is to act in such manner-Furthermore, borrowers can seek remedy in case of any wrong on part of the bank. Various· banks and the financial institutions have heavily financed the petitioners and other industries. Petitioner-borrowers defaulted in repayment of secured debt to the banks and the financial institutionssecured creditors.

Financial institutions and banks issued notices to the borrowers under Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance/Act, 2002 to pay the amount of arrears indicated in the notice within 60 days, failing which the secured creditors would enforce security interest without intervention of the court, by taking over possession and/or management of the secured assets including right to transfer by way of sale, lease or otherwise. Hence, the present bunch of cases by petitioner-borrowers challenging the validity of the Act of 2002 on the ground that that the banks and the financial institutions have been vested with arbitrary powers, without any guidelines for its exercise, without any appropriate I • and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount of dues sought to be recovered from the borrowers.

The main questions which arose for consideration in these matters are: (i) Whether the Securitization and Reconstruc~ion of Financial Assets and Enforcement of Security Interest Act, 2002 is valid? (ii) Whether the Act of 2002 could be challenged on the ground that it was not necessary to enact it when Recovery of Debts due to Banks and Financial Institutions Act, 1993 was already in operation? (iii) Whether sections 13 and 17 of the Act provide adequate and efficacious mechanism to consider and decide the objections/disputes raised by a borrower against the recovery, in view of bar to approach the civil court under section 34 of the Act? (iv) Whether the remedy available under section 17 of the Act is illusory since it is available only after the action is taken under section 13(4) and on deposit of 75% of the amount claimed in the demand notice? (v) Whether the provisions under sections 13 and 17(2) of the Act are unconstitutional?

(vi) Whether provision for sale of the properties without intervention of the court under section 13 of the Act is akin to the English mortgage and its effect on the scope of the bar . of jurisdiction of the civil court? (vii) Whether the existing rights under the contract entered into by .. ,.. two private parties could be amended by the provisions of law providing certain powers in favour of one of the parties to the contract? and (viii) Whether the principle of lender's liability has been absolutely /' MARDIA CHEMICALS LTD. v. U. 0. 1. 985 ignored while enacting the Act and its effect? Partly allowing the transfer cases, appeals and t! te petitions, the Court HELD: I. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and its provisions are valid except sub-section (2) of Section 17 of the Act, which is declared ultra vires of Article 14 of the Constitution of India. [1037-F) 2. 1.

Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. Law enacted should not be in derogation of the rights guaranteed to the people under the Constitution. The procedure should be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. [1009-A-BI 2. 2.

Unrealized dues of banking companies and financial institutions utilizing public money for advances were mounting and the economic progress was going down; that the normal process of recovery of debts \ through courts was time consuming and not suited for recovery of such y dues; that the Recovery of Debts due to Banks and Financial Institutions Act, 1993 enacted for recovery of debts due to banks and financial institutions failed to bring desired results; and that the experts committees recommended to have law providing speedier remedy for recovery of dues, as such the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was enacted. It cannot be said that a step taken towards securitisation of debts and to evolve means for faster recovery of Non Performing Assets (NPA) by the enactment of Act of 2002 was uncalled for or that it was superimposition of undesired law \ since the Act of 1993 was already operating in the field.

Such a policy decision relating to financial policy cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such a measure. [1030-D; 1008-D, E, H; 1009-A; 1008-G; 1011-CI 3. I. Under sub-section (2) of Section 13 of the Act it is incumbent upon the secured creditor to serve 60 days notice containing details of the amounts payable and the secured assets before proceeding to take any of y the measures as provided under sub-section (4) of Section 13 of the Act. The purpose of notice is to allow the borrower to submit reply explaining the reasons as to why measures may or may not be taken under sub-section '\ (4) of Section 13. The creditor must consider the objection raised in reply to the notice with due application of mind and an internal mechanism must be particularly evolved to consider such objections.

Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise/communicate them of the reasons for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under subsection (4) of Section 13. 11036-F; 1019-E-HI 3. 2. Communication of reasons not to accept the objections of the borrower would certainly provide information/knowledge to the secured debtors in general. It would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/ business of viz. secured assets without intervention of the court under Section 13(4) of the Act. Such persons cannot be denied this right.

This will also be in keeping with the coucept of right to know and lender's liability of fairness to keep the borrower informed particularly the I developments immediately before taking measures under sub-section (4) of Section 13. It will also cater the cause of transparency and not secrecy and would be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty is inherent under Section 13(2) of the Act. 11020-C, B, D, G-H; 1021-AI 3. 3. Till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed by the borrower. Issue of a notice to the debtor by the creditor does not attract the application of principles of natural justice. It is always open to tell the debtor what he owes to repay.

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. 11035-E, C; E-FI Kishan Chand Arora v. Commissioner of Police, 119611 3 SCR 135; Lachhman Das v. State of Punjab, 119631 2 SCR 353; Chairman, Board of Mining Examination v. Ramjee, 119771 2 SCC 256 and Haryana Financial Y Corporation v. Jagdamba Oil Mills, 120021 3 SCC 496, referred to. 3. 4. Reserve Bank of India lays down guidelines in the matter for t MARDIA CHEMICALS LTD. v. lJ. 0. 1. 987 \ classifying the debt to be NPA as early as possible. The dues or disputes .. ,. regarding classification of NPAs should be considered and resolved expeditiously by some internal mechanism. These are safeguards for a borrower, before a secured asset is classified as NPA. (1019-D-EI 3. 5.

Under Rule 9 of the Security Interest (Enforcement) Rules, 2002 before putting the property on sale the authorized officer has to obtain the valuation of immovable property, a reserved price is to be fixed and a notice of 30 days before sale is to be served on the borrower. During this period borrower could approach the tribunal for appropriate relief and the tribunal in exercise of its ancillary powers would have jurisdiction to pass any stay/interim order subject to the condition that it may deem fit and proper to impose. (1021-G-H; 1037-B( JTO v. Mohd. Kunhi, 11969( 2 SCR 65 and Allahabad Bank, Calcutta -· v. Radha Krishna Maity and Ors. , (19991 6 SCC 755, referred to. 3. 6. By virtue of section 13(4), borrowers right of redemption of property is not completely lost. 'It is preserved under section 13(8) where a borrower tenders to the creditor the amount due with costs and expenses \ incurred, no further steps for sale of the property are to take place.

In cases where there is no such dispute, the right can be exercised and in " other cases the question of difference in amount may be kept open and got decided before the sale. 11023-G-H; 1000-E-F; 1024-CI -j Naraindas Kavsondas v. S. A. Katam, 1197713 SCC 247, referred to. 3. 7. The provision under section 9 is for purpose of assets ... reconstruction. What is envisaged under Section 9 is, the taking over of the management of the business of the borrower company and continuance ~ • of the business of the company by resorting to the measure as provided " under Section 9 of the Act. The provisions as contained under Section 15 of the Act are referable to Section 9 and not to Section 13. The steps as provided to be taken for the purpose, are different from those provided in Chapter Ill relating to enforcement of security interest contained in Section 13 of the Act. 11028-G, D-FI Ramaswamy Aiyengar v. Kailasa Thevar, 11951ISCR292, referred to. "(- 4. 1.

Communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort ,• to such proceedings which are not permissible under the provisions of the Act. Borrower's right to approach Debt Recovery Tribunal as provided ~ under section 17 matures on any measure having been taken under section 13(4) of the Act and before the date of sale of the property it would be open for the borrower to file an appeal under section 17. 11020-C, D, E; 1037-AI 4. 2. Proceedings under Section 17 of the Act are not appellate proceedings. It is in fact a forum where proceedings are originally initiated in case of any grievance against the creditor in respect of any measure j taken under section 13(4) of the Act. The position of the appeal under section 17 is like that of a suit in the court of the first instance under CPC.

As matter of fact proceedings under Section 17 are in lieu of a civil suit which remedy is ordinarily available but for the bar under Section 34 of the Act. 11026-A-BI Smt. Ganga Bai v. Vijay Kumar and Ors,. 1197412 SCC 393, referred to. 4. 3.

The condition of pre-deposit of 75 % of the demand notice under I section 17(2) is bad rendering the remedy illusory on the grounds that (i) it is imposed while approaching the adjudicating authority of the first instance, not in appeal, (ii) there is no determination of the amount due as yet, (iii) the secured assets or its management with transferable interest is already taken over and under control of the secured creditor and in some cases property is sold, (iv) no special reason for double security in ~ respect of an amount yet to be determined and settled, (v) 75% of the amount claimed by no means would be a meager amount (vi) it will leave le the borrower in a position where it would not be possible for him to raise any funds to make deposit of 75% of the undetermined demand, and (vii) 1 power given to the tribunal under proviso to section 17(2) to waive or .. reduce the amount is discretionary.

Such condition is onerous, oppressive and arbitrary against all the canons of reasonableness. Therefore, the requirement of deposit of 75% of amount claimed before entertaining an appeal under sub-section (2) of Section 17 of the Act is unreasonable, arbitrary and violative of Article 14. 11028-A-Cf Anant Mills Co. ltd. v. Stale ofGujarat, 1197512 SCC 175; Seth Nandlal y v. Slate ofHat)'ana, 119801 (Supp. ) SCC 574; Vijay Prakash D. Mehta and Anr. v. Collector ofCustoms (Preventive) Bombay, [198814 SCC 402; Shyam Kishore v. Municipal Corporation ofDelhi, 119931 I SCC 22; Kishanchand ' ru I I MARDIA CHEMICALS LTD. v. U. 0. 1. 989 Arora v. Commissioner ofPolice. 1196113 SCR 135; Chi/1/a Lingam and Ors. v. Government ofIndia and Ors. , 119701 3 SCC 768 and Organo Chemical Industries and Anr. v. Union ofIndia and Ors. , 119791 4 SCC 573, referred to. 4. 4.

It cannot be said that the secured assets which may be taken possession of or sold may fall short of the dues, therefore, such a deposit may be necessary. In such an eventuality recourse may have to be taken to sub-section 10 of Section 13 where a petition may have to be filed before the tribunal for the purpose of making up of the short-fall. 11027-G-HI 5. A full reading of section 34 shows that the jurisdiction of the civil court is barred in respect of matters which Debt Recovery Tribunal or appellate Tribunal is empowered to determine in respect of any action taken or to be taken in pursuance of any power conferred under this Act. The prohibition covers even matters which can be taken cognizance of by the Debt Recovery Tribunal though no measure in that direction has so far been taken under section 13(4).

The bar of civil court thus applies to all such matters which may be taken cognizance of by the DRT, apart from \ those matters in which measures have already been taken under subsection (4) of Section 13. However, to a very limited extent jurisdiction of the civil court can also be invoked, in the cases of English mortgages on which they are permissible. (1022-D-F; 1022-GI V. Narasimhachariar v. Egmore Benefit Society. AIR (1955) Madras 343 and A. Batcha Saheb v. Nariman K. Irani and Anr. , AIR (1955) Madras 491, approved. 6. The non-obstante clause under Section 13(1) of the Act provides that notwithstanding anything contained in Section 69 of the Transfer of the Property Act, a secured interest can be enforced without intervention ofthe cpurt. It overrides the provision as contained under Section 69 where it is said that in no cases, other than those as enumerated in clauses (a), (b) and (c), a mortgage shall be enforced without intervention of the court.

Clause (a) relates to English mortgage in which a mortgaged property is permitted to be sold without intervention of the court. Once the said condition, in section 69 the general law on the subject has been overridden by the special enactment namely the Securitisation Act, it would not make much of a difference as to whether the transactions in question are akin to or amount to English mortgage or not, since irrespective of the kind of the mortgage the secured interest is liable to be enforced without I '\ intervention of the court as per section 13 of the Act. 11017-D-FI V. Narasimhachariar v. Egmore Benefit Soc;ety, AIR (1955) Madras 135; VP. Padmavati v. P. S. Swaminathan lyer, AIR (1955) Madras 343 and Bank ofMaharashtra ltd, Puna v. Official liquidator, High Court Buildings, AIR (1969) Mysore 280, referred to. 7. 1.

The transaction between the borrower and the financing bank may have a character oi a private contract yet the question of great importance behind such transactions as a whole having far reaching effect on the economy of the country cannot be ignored, purely restricting it to individual transactions more particularly when financing is through banks and financial institutions utilizing the money of the people in general namely, the depositors in the banks and public money at the disposal of the financial institutions. Therefore, wherever public interest to such a large extent is involved and it may become necessary to achieve an object which serves the public purposes, interest of an individual may, to some extent, be affected but it cannot have the potential of taking over the public interest having an impact in the socio-economic drive of the country. 11029-C-EI I 7. 2.

Impugned Act was enacted for improvement of general financiai now of money necessary for the economy of the country. Undoubtedly such legislation would be in the public interest and the individual interest shall be subservient to it. Even if a few borrowers are affected here and there, that would not impinge upon the validity of the Act which otherwise serves the larger interest. 11030-E-FI Ramaswamy Aiyengar v. Kailasa Thevar, 11951 I SCR 292; Dahya Lala, v. Rasul MohdAbdul Rahim, 1196313 SCR I; Swami Motor Transports Pvt. ltd. v. Shri Sankraswamigal Mutt, 1963 (Supp. ) 1 SCR 282; Raval & Co. v. K. G. Ramachandran, 1197411 SCC 424; Kanshi Ram v. lachhman, [200115 SCC 546; Pathumma v. State of Kera/a, 119781 2 SCC l; Fatehchand Himmat/al v. State of Maharashtra, 119771 2 SCC 670 and Ramdhandas v. State ofPunjab, 119621 I SCR 852, referred to. 7. 3 The contract between the parties is no more private.

The contract entered into between the two private parties, are now governed by the statutory provisions relating to recovery of debts and bar of jurisdiction of the civil court to entertain any dispute in respect of such matters. It cannot be said that the petitioners cannot complain of the conduct of the MARDIA CHEMICALS LTD. v. U. 0. 1. 991 banking companies and financial institutions for whatever goes in between the two is absolutely a matter of contract between private parties, therefore, no adjudication may be necessary. 11031-F, G-HI 8. Lender-financial institutions possess all drastic powers for speedier recovery of NPA which calls for exercise of higher degree of good faith and fair play. Lenders owe a duty to act fairly and in good fa. ith. There has to be a fair dealing between the parties and the financing companies/ institutions are not free to ignore performance of their part of the + obligation as a party to the contract.

Even in absence of any legislation, it is incumbent upon the financial institutions to act in such manner. This is the basic principle of concept of lender's liability. Borrowers cannot be denied possible and reasonable remedies in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract. They can always take a plea against the financial institutions. [1032-G, E, F, HI KMC Co. v. Irving Trust Co. , 757 F2d 752 (6th Cir. 1985) and Palisades \, Properties, Inc. v. Brunetti, 44 NJ 117, 207 A2d 522; 531 (1965), referred to. )' 9. 1. In view of the provisions of section 34 and section 17 of the Act virtually there is no remedy for the borrowers. Also before filing an appeal under Section 17, decision taken by the bank or financial institution itself can be hardly said to be an independent agency rather they are a party to the transaction under Section 13(4) of the Act.

Furthermore, remedy under Artitle 226 of the Constitution, may not always be available since the dispute may be only between two private parties, the ban1. ing companies, co-operative Banks or financial institutions, foreign banks, \ some of them may not be authorities within the meaning of Article 12 against whom a writ petition could be maintainable. Thus, the borrower is virtually left with no remedy. Where access to the court is prohibited and no proper adjudicatory mechanism is provided such a law is unconstitutional and cannot survive. 11030-H; 1031-A-C[ Indian National Congress (I) v. Institute of Social Welfare and Ors. , 12002[ 5 SCC 685; Kihoto Hallahan v. Zachillhu and Ors. 11992[ Suppl. 2 ) SCC 65; Associated Cement Companies ltd. v. P. N. Sharma, (1965( 2 SCR 365; l. Chandrakumar v. Union of India and Ors. , (1997( 3 SCC 261 and Surya Dev Rai v. Ram Chander Rai and Ors. , (2003( 6 SCC 675, referred to. . J 9. 2.

rt is true that presumption is in favouc of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. 11035-F-GI R. K. Garg v. Union ofIndia, [1981] 4 SCC 675; Bhavesh D. Parish & I .. Ors. v. Union ofIndia and Anr. , 120001 5 SCC 471; Srinivas Enterprises v. Union ofIndia, [19801 4 SCC 507; Jalan Trading v. Union ofIndia, 119671 I SCR 15 and Collector ofCustoms, Madras v. Nathe/la Samapathu Chetty, [1962[ 3 SCR 786, referred to. 9. 3. The borrowers would get a reasonably fair deal and opportunity to get the matter adjudicated upon before the Debt Recovery Tribunal.

The effect of some of the provisions may be a bit harsh for some of the borrowers but on that ground the impugned provisions of the Act cannot be said to be unconstitutional since the object of the Act is to achieve ,/ speedier recovery of the dues declared as NPAs and better availability of capital liquidity and resources to help in growth of economy of the country and welfare of the people in general which would subserve the public interest. [1037-D-EI 9. 4. In cases where a secured creditor has taken action under Section 13(4) of the Act, it would be open to borrowers to file appeals under Section 17 of the Act within the limitation as prescribed therefor, to be counted with effect from the date of this judgement. [1037-G-HI ,1 CIVIL ORIGINAL JURISDICTION : Transfer Case (C) Nos. 92-95 of 2002. WITH W. P. (C) Nos. :140/2003, 649, 673/2002, T. C. (C) No. 10/2003, W. P. (C) No. 322/2003, T. C. (C) No. 46/2003, W. P. (C) No. 643/2002, T. C. (C) No. 12/2003, W. P. (C) No. 48/2003, C. A.

No. 2177/2004, W. P. (C) Nos. 176, 190, 21911003, C. A. No. 2181/2004, W. P. (C) No. 147/2003, T. P. (C) No. 326/2003, ' W. P. (C) Nos. 279, 231/2003, C. A. No. 2176/2004, W. P. (C) No. 292/2003, C. A. Nos. 2175, 2174/2004, T. P. (C) No. 403/2003, W. P. (C) No. 379/2003, C. A. No. 2173/2004, T. C. (C) No. 11/2003, W. P. (C) Nos. 366/2003, 541/2002, MAROIA CHEMICALS LTD. v. U. 0. 1. 993 J. r- C. A. No. 2172/2004, W. P. (C) Nos. 477, 496, 499/2003, T. P. (C) No. 756/ 2003, W. P. (C) Nos. 545, 557/2003, C. A. Nos. 2171, 2180/2004, W. P. (C) Nos. 590/2003, 13/2004 and 546 of 2003. L. Nageswara Rao, Additional Solicitor General, Kapil Sibal, Ashok H. Desai, S. K. Dholakia, V. K. Munshi, Bhaskar P. Gupta, T. R. Andhyarujina, Harish N. Salve, Dr. A. M. Singhvi, N. S. Sistani, Sunil Kumar Jain, S. Borthakur, Ansar Ahmad Chaudhary, Brijesh Kalappa, Ms. Radha Rangaswamy, B. Devasekhar, Ravi Ashri, P. K. Manohar, Ajay Choudhary, ~ Paras Kuhad, R. N. Karanjawala, Hrishikesh Baruah, Ms.

Jasmine Damkewala, Gaurav Khanna, Krishan Kumar Gogna, Ms. Nandini Gore, Ms. Padmalakshmi Nigam, Arunabh Chouwdhury, Ms. Manik Karnajawala, Shakeel Ahmed, A. T. Patra, Nipun Malhotra Prateek Jalan, Siddharth Bhatnagar, Nirnimesh Dube, Ms. Sonat Tripathi, Ms. Indra Sawhney, V. Sudeer, M. B. Rama Subba Raju, Balaji Srinivasan, S. Srinivasan, Ms. S. Sunita, Ms. Kiran Suri, Ms. Kirti R. Mishra, Bhupender Yadav, Ms. Babita Yadav, R. C. Kohli, Tripurari Ray, Vishwajit Singh, Ritesh Agrawal, P. O. Shanna, Ashish Dholakia, Ms. Sumita Hazarika, Manoj Swarup, Uday Gupta, P. N. Puri, Y. Raja Gopala ). Rao, Mahesh Agarwal, Rishi Agarwal, Vivek Yadav, E. C. Agrawala, M. l. S. y Rupal, Madhup Singhal, Ms. Suruchii Aggarwal, Jitendra Mohan Sharma, Manoj Swarup, Ms. Lalita Kohli, Anubhav Kumar, Ashok Kumar Gupta, S. N. Bhat, Nikhil Nayyar, Ms. Shobha, Manoj Sharma, Ms.

Sheetal Aggarwal, Manish Jain, Atul Sharma, Praveen Jain, Pramod Swarup, Uday Gupta, Vivek Narayan, Prem Malhotra, Saurabh Kirpal, Rajiv Shakdhar, Manish Singhvi, Ms. V. Mohana, Ms. Sushma Suri, Ms. P. S. Shroff, Sunil Dogra, Ms. Rashi Malhotra, Vikram B. Trivedi, Bharat Sangal, Ms. Sangeeta S. Panicker, R. R. Kumar, S. Mehta, Pranab Kumar Mullick, Rajeev Sharma, Deepak Goel, Rishi Malhotra, M. P. S. Thomar, Ms. Sandhya Goswami, V. Maheshwari, ... .... ' Rameshwar Prasad Goyal, S. H. Bhujani, Ms. Sayali Phatak, O. P. Gaggar, Dhruv Mehta, Mohit Chaudhary, Ms. Shalini Gupta, Pradeep Dewan, Dr. Manmohan Sharma, Pramod B. Agarwala, G. S. Sistani, Rajender Wali, Rakesh Singh, Arun K. Sinha, Sanjay R. Hegde, P. S. Shetty, Anil K. Misra Janendra Lal, Ms. Yasmin Tarapore, Ms. Divya Lal, V. Ramasubramanian, M. T. George, Ms. Kamini Jaiswal, Ms. Shomila Bakshi, Ms. Barooah, R. N. Keshwani, Ms. Ruchi A Mahajan, Ms. S. Janani, Ms. Reena Kumar, Akhil Sibal, S. U. K. Sagar, Ms. Bina Madhavan, Ms.

Pooja Nanekar, Arun Aggarwal, Sanjay ") Kapur, Rajiv Kapur, Ms. Shubhra Kapur, Rakesh Singh, D. K. Sinha, Ms. Jayashree Wad, Ashish Wad, Ms. Yugandhara Jha, Anshu Bhanot, Satyajit Desai, Venkateswara Rao Anumolu, Ashok Kumar Jain, B. K. Jain, Pankaj Jain, Bijoy Kumar Jain, Rajesh Jain, S. S. Ray, Ms. Rakhi Ray, Ms. Pooja Bhatnagar, Ms. Shilpi Jha, Nina Gupta, Bina Gupta, Rajiv Mehra, M. Dutta and Rajiv Mehta for the appearing parties. The Judgment of the Court was delivered by BRIJESH KUMAR, J. I. Leave granted in Special Leave Petition (Civil) Nos. 5013/2003, 9658/2003, 11089/2003, 11267/2003, 11268/2003, 15566/2003, 17465/2003 and special leave petition@ CC I0728 and SLP(C) No. 6723/2003. J 2. By means of the above noted bunch of cases some of those having been transferred to this court, the validity of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) (for short 'the Act') has been challenged.

Some writ petitions were filed in different High Courts on promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Second Ordinance), 2002. However, the Act 54 of 2002 was enacted and enforced, vires of which is in question, more particularly, the provisions as contained in Sections 13, 15, 17 and 34 of the Act. Besides others, we may, ,. I, for the sake of convenience, refer to the averrnents made and documents filed in Transferred Case Nos. 92-95 of 2002 - Mis. Mardia Chemicals Ltd Etc. ~ Etc. v. Union of India and Ors. Etc. Etc. 3. It appears that a notice dated July 24, 2002 . was issued to the petitioner - Mardia Chemicals Ltd.

by the Industrial Development Bank of India (for short 'the IDBI') under Section 13 of the Ordinance, then in force, requiring it to pay the amount of arrears indicated in the notice within 60 days, failing which the IDBI as a secured creditor would be entitled to enforce the security interest without intervention of the court or Tribunal, taking recourse to all -f or any of the measures contained in sub-section (4) of Section 13 namely, by ~ taking over possession and/or management ofthe secured assets. The petitioner was also required not to transfer by way of sale, lease or otherwise any of the secured assets. Similar notices were issued by other financial institutions and banks under the provisions ofSection 13 of the Ordinance/Act to different parties who filed petitions in different High Courts. 4.

The main contention challenging the vires of certain provisions of y the Act is that the banks and the financial institutions have been vested with arbitrary powers, without any guidelines for its exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount MARDIA CHEMICALS LTD. v. U. 0. 1. [BRIJESH KUMAR, J. ) 995 of dues, sought to be recovered from the borrowers. The offending provisions as contained under the Act, are such that, it all has been made one sided affair while enforcing drastic measures of sale of the property or taking over the management or the possession of the secured assets without affording any opportunity to the borrower. Before further detailing the grounds of attack, we may peruse some of the relevant provisions of the Act. 5.

The term "borrower" has been defined in claus~ (t) of Section 2, which provides as under : "borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;" 6. "Financial Assistance" has been defined in clause (k), which reads as under: "financial assistance" means any Joan or advance granted or any debentures or bonds subscribed or any guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution;" 7.

Similarly, the term "default" is defined in clause (j), as quoted below: "default" means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor in accordance with the directions or guidelines issued by the Reserve Bank" 8. "Non Performing Asset" has been defined in clause(o) of Section 2 which means : "non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss submitted that legislature has vested the beneficiary to exercise the power without any detennination ofdisputed questions excluding the judicial remedies > till the power stands exercised. It renders the Act procedurally and substantively unfair, unreasonable and arbitrary.

Power of judicial detennination, it is submitted, is manifestation of sovereign power to determine the legal rights which cannot be vested in private bodies as foreign banks, cooperative banks or non-banking financial institutions etc. Stress has also been given upon the condition of deposit of 75% of claim before entertainment of the appeal. 22. It is next submitted that power under Section 69 of the Transfer of Property Act is hedged with various restrictions to prevent abuse of power \ including mortgagor's right to have recourse to court both before and after the sale. In this connection, he has referred to decisions of the Madras High Court reported in AIR 1955 Madras P. 135, V. Narasimhachariar v. Egmore Benefit Society, and also AIR (1955) Madras 343, V. P. Padmavati v. P. S. Swaminathan Iyer.

It is submitted that English mortgage is in the nature of conveyance or absolute transfer of mortgage property with provision of retransfer upon discharge of mortgage and referred to AIR 1969 Mysore y p. 280, Bank of Maharashtra Ltd. , Puna v. Official Liquidator, High Court Buildings. It is submitted that the scope of Section 13 of the Act is fundamentally different from the scope of power under Section 69 of the Transfer of Property Act. 23. Shri Dholakia, learned senior counsel appearing on behalf of the guarantors of the principal borrower, refers to Section 2(t) of the Act to indicate that the definition of the word 'borrower' covers even the guarantor. He then refers to Section 135 of the Contract Act to show that in certain circumstances a guarantor is discharged of his obligation. The petitioner received a notice under Section 13(2) of the Act.

The submission is in view of the bar of Section 34 to file a suit in the Civil Court, it is not possible for him to approach the Court to show and establish that he is a discharged guarantor, hence notice under Section 13(2) is bad and refers to [I 997] 5 SCC p. 536 at page 735 Mafatlal Industries Ltd and Ors. v. Union ofIndia and Ors. He next referred to Section 31 of the Act. It is submitted that the word 'security' has not been defined under Section 2 of the Act. Then refers to Section 2(t) of the Act which defines the word 'property' which means a movable, immovable, or any right to receive payment, receivable intangible assets etc. It is submitted that the Act not to apply to the legal liens. Further refers to Laws ofHalsbury's, 4th Edition, Vol. 28, pages 510-511 and Section 48 of the Transfer of Property Act.

It is submitted that if property is subject to several charges as first charge, second charge and third charge and so on property in relation to only one of them would be NPA and not in relation to other creditors having charge over the property. It is submitted that it is not clear in s:. ich a situation how the Act will be workable. 24. He also refers to Section 44 of the Transfer of Property Act which deals with the case of transfer by one co-owner and the difficulty to work out the provisions of the Act in such cases. 25. As against the above submissions, the case of the respondents is that tinancial institutions are badly effected by non-recovery of dues and despite the existing laws like, the Recovery of Debts due to Banks and Financial Institutions Act, much could not be achieved, hence it was necessary to take further legislative steps to accelerate recovery of the heavy amount of dues.

It is submitted that after availing the facility of financial assistance quite often the borrowers hardly show interest in repayment of loan which keep on accumulating as a result ofwhich it becomes difficult for the financial institutions to continue the financial assistance to deserving parties due to heavy blockade of money stuck up with the erring borrowers. It is not good for financial institution to have heavy NPA. It has also been indicated that since after enforcement of the Act there has been marked improvement in the recovery and quite substantial amount has since been recovered. MARDIA CHEMICALS LTD. v. U. 0. 1. [BRl. IESH KUMAR. . I. ] 1005 -~ 26. Shri Soli J. Sorabjee, learned Attorney General, appearing for the Union of India submitted that the Act was enacted to curb the menace of growing non-performing assets (NPAs). It affects the banks and financial institutions which is ultimately against the public interest.

Due to non-recovery of the dues the banks also run out of the financial resources to further carry on the financial activity and to meet the need and requirement of its other depositors and clients. The figures of NPA which have been given border around one lac crores. After coming into force of the Recovery of Debts due to Banks and Financial Institutions Act and establishment of Debt Recovery j. '· Tribunals the success in recovery has not been very encouraging. Therefore, need was felt for a faster procedure empowering the secured creditors to recover their dues and for securitisation of financial assets so as to generate maximum monetary liquidity. It has been felt that after coming into force of the Act there is a marked difference in realization of dues and more borrowers are coming forward to pay up the defaulted amount and clear the dues. It is submitted that in case a defaulter wants to raise any objectio!

l it may be raised in reply to the notice which would obviously be considered by the secured creditor before it would further proceed to take recourse to sub- '"section 4 of Section I3 of the Act. It is further submitted that there will be ... ample time for a borrower to approach the Debt Recovery Tribunal to seek relief before sale ofthe secured assets. The remedy as provided under Section I7 of the Act it is adequate and the condition of deposit of 75% of the claim before the appeal could be entertained is not an unusual condition and it is to be found in other statutes also. It is then submitted that proviso to Section 17 very clearly provides that o. n an application moved in that behalf the condition of deposit of the amount can be waived or the amount can be reduced. Therefore, it would not be correct to say that condition of predeposit is harsh as it can be relaxed in deserving cases.

The bar ofjurisdiction )-, of the Civil Court was thought to be necessary to avoid lengthy legal process in realizing the amount due. It is then submitted that normally there should be a presumption in favour of validity of a legislation more so in regard to the laws relating to economic and financial matters and a few instances here . , and there of any harsh results would not be a valid consideration to invalidate the law. 27. Shri Harish N. Salve, learned senior counsel appearing for the ICICI "'t" submits that the purpose of enacting the Act would be self-evident from the statement of objects and reasons for the enactment which reads as under: "The financial sector has been one ofthe key drivers in India's efforts ·to achieve success in rapidly developing its econamy.

While banking J industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our ,I existing legal framework i"elating to commercial transactions has not . J. kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions.

Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. " 28. It is submitted that the question of enactment of the Act was under consideration for long and first Narasimham Committee and then Andhyarujina ·' Committee were constituted by the central government for introducing reforms .. in the banking sector necessary for recovery of the outstanding dues of the financial institutions. The practice of securitisation of debts is in vogue all over the world. That is to say a measure of replenishing the funds by recourse to the secondary market. There are organizations who undertake exercise of securitisation. Such organizations take over the financial assets and in turn issue securities. 29. It is submitted that the funding of the debts is feasible only where ..

,( there exists an efficacious and expeditious machinery for realization of debts A for investors in such securities. It is submitted that in England a mortgagee under a legal mortgage has a right to take possession, to sell, and even appoint a receiver in relation to mortgaged properties without recourse to a court of law. It is also submitted that provisions as contained under Section ,. 9 of the Act are also valid. The securitisation is done in accordance with the guidelines framed by the Reserve Bank of India. In so far the provisions contained under Section 15 of the Act and the challenge made to it, it is submitted that it is referable to Section 9 and not to Section 13(4) (a) of the Act. 30. Shri Andhyarujina, learned senior counsel appearing for the Life I \, MARDIA CHEMICALS LTD. v. U. OJ. [BRIJESH KUMAR.

J,] 1007 Insurance Corporation of India stressed upon the background in which the impugned legislation was enacted pressed by circumstances, namely, over growing non-performing assets crippling the viability of financing by banking sector and financial institutions. It ultimately effects the process of industrialization and growth of national economy. It was difficult to get quick relief from the normal procedure of laws. The recovery through Debt Recovery Tribunals was also insignificant. Based on the recommendations of the Narasimham Committee, an expert committee recommended the legal framework concerning banking system.

It is submitted that the provisions as contained in Chapter Ill ofthe Act are in keeping with provisions as contained under Section 69 of the Transfer of Property Act regarding sale of security interest without intervention of the court like Section 29 of the State Financial Corporation Act, 1951 and Section 176 of the Contract Act It is submitted that the relationship between secured creditor and the borrower is a contractual relationship and no question of adjudication arises at the stage of Section 13(2) of the Act. 31. Shri A. M. Singhvi has also made similar submissions in support of validity of the Act. 32. As indicated earlier, arguments on the same lines were advanced by some of the counsels and others adopted the same. 33.

Taking an overall view of the rival contentions of the parties, we feel the main questions which broadly fall for consideration by us are : (i) Whether it is open to challenge the statute on the ground that it was not necessary to enact it in the prevailing back? round particularly when another statute was already in operation? (ii) Whether provisions as contained under Section 13 and I7 of the ·""~· Act provide adequate and efficacious mechanism to consider and decide the objections/disputes raised by a borrower against the recovery, particularly in view of bar to approach the civil court under Section 34 of the Act? (iii) Whether the remedy available under Section 17 of the Act is illusory for the reason it is available only after the action is taken y under Section 13(4) of the Act and the appeal would be entertainable only on deposit of 75% of the claim raised in the notice of demand?

(iv) Whether the tenns or existing rights under the contract entered into by two private parties could be amended by the provisions of law providing certain powers in one sided manner in favour of one of the parties to the contract? (v) Whether provision for sale of the properties without intervention of the court under Section 13 of the Act is akin to the English mortgage and its effect on the scope of the bar of the jurisdiction of the civil court? ,I (vi) Whether the provisions under Sections 13 and 17(2) of the Act "are unconstitutional on the basis of the parameters laid down in different decisions of this Court? (vii) Whether the principle of lender's liability has been absolutely ignored while enacting the Act and its effect? 34. Some facts which need be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. It is also a fact that a large sum of amount remains unrecovered.

Normal process of recovery of debts through courts is lengthy and time taken is not A suited for recovery of such dues. For financial assistance rendered to the industries by the financial institutions, financial liquidity is essential failing ~ which there is a blockade of large sums of amounts creating circumstances which retard the economic progress followed by a large number of other consequential ill effects. Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the governments in creating Debt Recovery Tribunals and appointing Presiding Officers, for a long time. Even after leaving that margin, ... A it is to be noted that things in the concerned spheres are desired to move faster.

In the present day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of the NPAs was not called for or that it was superimposition ofundesired law since one legislation was already operating in the field namely the Recovery of Debts due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly . ,.... to resort to such a legislation. It appears that a thought was given to the problems and Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic I \ MARDIA CHEMICALS LTD. v. U. 0. 1. [BRIJESH KUMAR, . I. ] l009 situation whereafter yet another expert committee was constituted then alone the impugned law was enacted.

Liquidity of finances and flow of money is essential for any ·healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. 35. As referred to above, the Narasimham Committee was constituted I. -~ in 1991 relating to the Financial System prevailing in the country. It considered wide ranging issues relevant to the economy, banking and financing etc. Under Chapter V of the Report under the heading 'Capital Adequacy, Accounting Policies and other Related Matters' it was opined that a proper system of income recognition and provisioning is fundamental to the preservation of the strength and stability of banking system.

It was also observed that the assets are required to be classified, it also takes note of the fact that the Reserve Bank of India had classified the advances of a bank, one category ofwhich was bad debts/doubtful debts. It then mentions that according )- to the international practice, an asset is treated as non-performing when the interest is overdue for at least two quarters. Income of interest is considered ... as such, only when it is received and not on the accrual basis. The Committee suggested that the same should be followed by the banks and financial institutions in India and an advance is to be shown as non-performing assets where the interest remains due for more than 180 days. It was further suggested that the Reserve Bank of India should prescribe clear and objective definitions in respect of advances which may have to be treated as doubtful, standard or sub-standard, depending upon different situations.

Apart from recommending to set up of special Tribunals to deal with the recovery of dues of the advances made by the banks the committee observed that impact of such steps would be felt by the banks only over a period of time, in the meanwhile, the Committee also suggested for reconstruction of assets saying "the Committee has looked at the mechanism emplo. yed under similar circumstances in certain other countries and recommends the setting up of, if necessary by special legislation, a separate institution by the Government of India to be known as 'Assets Reconstruction Fund (ARF) with the express purpose of taking over such assets from banks and financial institutions and subsequently following y up on the recovery of dues owed to them from the primary borrowers.

" While recommending for setting up of special Tribunals, the Committee observed : I'· "Banks and financial institutions at present face considerable difficulties in recovery of dues from the clients and enforcement of security charged to them due to the delay in the legal processes. A significant portion of the funds of banks and financial institutions is thus blocked in unproductive assets, the values of which keep deteriorating with the passage of time. Banks also incur substantial amounts of expenditure by way of legal charges which add to their overheads. The question of speeding up the process of recovery was examined in great detail by a committee set up by the Government under the Chairmanship of the late Shri Tiwari. The Tiwari Committee recommended, inter alia, the setting up of Special Tribunals which could expedite the recovery of process.... " The Committee also suggested some legislative measures to meet the situation. 36.

In its Second Report, tlie Narasimham Committee observed that the NPAs in 1992 were uncomfortably high for most of the public sector banks. In Chapter VIII of the Second Report the Narasimham Committee deals about legal and legislative framework and observed : "8. 1 A legal framework that clearly defines the rights and liabilities of parties to contracts and provides for speedy resolution of disputes is a sine qua non for efficient trade and commerce, especially for financial intermediation. In our system, the evolution of the legal framework has not kept pace with changing commercial practice and with the financial sector reforms. As a result, the economy has not been able to reap the full benefits of the reforms process. As an illustration, we could look at the scheme of mortgage in the Transfer of Property Act, which is critical to the work of financial intermediaries..........

" One ofthe measures recommended in the circumstances was to vest the financial institutions through special statutes, the power of sale of the asset without intervention of the court and for reconstruction of the assets. It is -. thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions has been attracting the attention and the matter was considered in depth by the committees specially constituted consisting of the experts in the field. In the prevalent situation where the amount of dues are huge and hope of early recovery is less, it cannot be said that a more effective legislation for the purpose was uncalled MARDIA Cl-IEMICALS LTD. v_ U. O. L [BRLI ESH KUMAR. J. ] 1011 for or that it could not be resorted to. It is again to be noted that after the report of the Narasimham Committee, yet another committee was constituted headed by Mr. Andhyarujina for bringing about the needed steps within the legal framework.

We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Recovery of debts due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Considering the totality of circumstances the financial climate world over, if it was thought as a matter of policy, to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor it is a matter to be gone into by the courts to test the legitimacy of such measure relating to financial policy. 37. Next we come to the question as to whether it is on whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We find it not to be so.

As a matter of fact a policy has been laid down by the Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as "RBI's prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 200I. It is mentioned in the said Circular as follows : "I. I In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. " p 2. 1. Non-performing Assets: "2. I. I An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

A 'non-performing asset' (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained 'past due' for specified period oftime. The specified period was reduced in a phased --y manner as under: Year ending March 31 Specified period 1993 four quarters 1994 three quarters 1995 onwards two quarters 2. 1. 2. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, upgradation oftechnology in the banking system, etc. , it was decided to dispense with 'past due' concept, with effect from March 31, 200 I.

Accordingly, as from that date, a Non-performing Asset (NPA) shall be an advance where (i) interest and/or installment ofprincipal remain overdue for a period of more than 180 days in respect of a Term Loan, (ii) the account remains 'out of order' for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC), (iii) the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, (iv) interest and/or installment of principal remains overdue for two -I harvest seasons but for a period not exceeding two half years in ~ the case of an advance granted for agricultural purposes, and (v) any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. 4. 2. 2. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification ofNPAs, especially in respect of high value accounts.

The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point I should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. " From what is quoted above, it is quite evident that guidelines as laid down by the Reserve Bank of India which are in more details but not necessary to be reproduced here, laying down the terms and conditions and circumstances in which the debt is to be classified as non-performing asset as early as iv1ARDIA Cl-IEMICALS LTD. "- U. 0. 1. [BRl. IESH KUMAR. J. ) I013 possible.

Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a nonperforming asset. 38. We may now consider the main enforcing provision which is pivotal to the whole controversy namely, Section 13 in Chapter Ill of the Act. It provides that a secured creditor may enforce any security interest without intervention of the court or Tribunal irrespective of Section 69 or Section 69A of the Transfer of Property Act where according to sub-section (2) of Section 13, the borrower is a defaulter in repayment of the secured debt or any installment of repayment and further the debt standing against him has been classified as a non-performing asset by the secured creditor.

Sub-section (2) of Section 13 further provides that before taking any steps in direction of realizing the dues, the secured creditor must serve a notice in writing to the borrower requiring him to discharge the liabilities within a period of 60 days failing which the secured creditor would be entitled to take any ofthe measures as provided in sub-section (4) of Section 13. It may also be noted that as per sub-section (3) of Section 13 a notice given to the borrower must contain the details of the amounts payable and the secured assets against which the ) secured creditor proposes to proceed in the event of non-compliance with the notice given under sub-section (2) of Section 13. 39. Sub-section (4) provides for four measures which can be taken by the secured creditor in case of non-compliance with the notice served upon the borrower.

Under clause (a) of sub-section (4) the secured creditor may take possession ofthe secured assets including the right to transfer the secured assets by way of lease, assignment or sale; may take over the management ofthe secured assets under clause (b) including right to transfer; under clause (c) of sub-section (4) a manager may be appointed to manage the secured p assets which have been taken possession of by the secured creditor and may require any person who has acquired any secured assets from the borrower or from whom any money is due to the borrower to pay the same to him as it may be sufficient to pay the secured debtor as provided under Clause (d) of Section 3(4) of the Act. Sub-section (8) of Section 13 however, provides that if all the dues of the secured creditor including all costs, charges and expenses etc. as may be incurred are tendered to the secured creditor before • sale or transfer no further steps be taken in that direction. --y· 40.

Now coming to Section 17, it provides for filing of an appeal to the Debt Recovery Tribunal within 45 days of any action taken against the borrower under sub-section (4) of Section 13 of the Act. It reads as under: "17. Right to appeal. - (I) 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 authorized 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 such 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 cent of the amount claimed 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 (SI of 1993) and rules made thereunder. " It is thus clear that an appeal under sub-section (1) of Section 17 would lie only after some measure has been taken under sub-section (4) of Section 13 and not before the stage of taking of any such measure. According to subsection (2), the borrower has to deposit 75% of the amount claimed by tte secured creditor before his appeal can be entertained. 41. So far jurisdiction of Civil Court is concerned we find that there is bar to it as provided under Section 34 of the Act quoted below:- "34.

Civil Court not to have jurisdiction - No Civil Court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993). " MARDIA CHEMICALS LTD. v. U. 0. 1. [BRl. IESH KUMARJ] I015 42. Mainly it is to be considered as to whether there is absolute bar of any remedy to the borrower, before an action is taken under sub-section (4) of Section 13 of the Act in view of non-obstante clause under sub-section (I) of Section 13 and the bar of the jurisdiction of the civil court under Section 34 of the Act.

Sub-section (I) of Section 13 begins with "Notwithstanding anything contained" under Section 69 of the Transfer of Property Act any secured interest can be enforced without intervention ofthe court or Tribunal. Section 69 of the Transfer of Property Act provides as follows : "69. Power of sale when valid.

-( I) A mortgagee, or any person acting on his behalf, shall, subject to the provisions of this section, have power to sell or concur in selling the mortgaged property, or any part thereof, in default ofthe payment of mortgage-money, without the intervention of the Coun, in the following cases and in no others, namely - (a) where the mortgage is an English mortgage, and neither the mortgagor nor the mortgagee is a Hindu, Mohammadan or Buddhist or a member of any other race, sect, tribe or class from ) time to time specified in this behalf by the State Government, in the Official Gazette; • (b) where a power of sale without the intervention of the Court is expressly conferred on the mortgagee by the mortgage-deed, and the mortgagee is the Government; (c) where a power of sale without the intervention of the Court is expressly conferred on the mortgagee by mortgage-deed, and the mortgaged property or any part thereof was, on the date of the execution of the mortgage-deed, situate within the towns of ) Calcutta, Madras, Bombay, or in any other town or area which the State Government may, by notification in the Official Gazette, specify in this behalf.

(2) No such power shall be exercised unless and until - (a) notice in writing requiring payment of the principal money has been served on the mortgagor, or on one of several mortgagors, and default has been made in payment of the principal money, or of part thereof, for three months after such service; or (b) some interest under the mortgage amounting at least to five hundred rupees is in arrear and unpaid for three months after r 1016 SUPREME COURT REPOR°TS [2004J 3 S. C. R. becoming due. (3) When a sale has been made in professed exercise of such a power, the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorize the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorized, or improper, or irregular exercise of the power shall have his remedy in damages against the person exercising the power. (4) ...... . (5) ...... .

Xxx xxx xxx" It is clear that mortgaged property cannot be sold without intervention of the court except in three conditions as enumerated in clauses (a), (b) and (c) of sub-section (I) ofSection 69. Clause (a) relates to English mortgage in which mortgaged property is permitted to be sold without intervention ofthe court but in the stricto senso clause (a) would not be applicable to the present case as it contains many conditions which obviously are not fulfilled in case in . , hand. It is however, submitted that the provision for enforcing secured debt was made on the lines of the principle governing English mortgage. It is perhaps sought to be canvassed that if that kind of step namely enforcing the secured debt without intervention of the court is permissible in a case of English mortgage such a provision may legitimately be enacted in respect of mortgages like English mortgages.

We find much has been argued on the point as to whether the transactions involved in the cases before us amount to English mortgage or not though none of agreements have been placed before us. Distinction between the two have also been tried to be shown and t it has been submitted that English mortgage is in fact transfer of the property absolutely to the mortgagee with a term ofretransfer. Section 58(e) pertaining to English mortgage is quoted below : "58. 'Mortgage', 'mortgagor', 'mortgagee', 'mortgage-money' and 'mortgage-deed' defined. xxx xxx xxx (d) English mortgage - Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged MARDIA CHEMICALS LTD. v. U 0. 1. [BRl. IESll KUMAR. J. ] I017 property absolutely to the mortgagee, but subject to a proviso that he wi II retransfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.

Xxx xxx xxx" It is thus pointed out that in English mortgage, absolute transfer ofthe property already takes place. Hence the question of intervention of the court may not arise. It has a condition of retransfer. It is submitted that by no means it can be said that the transactions in question are like those as English mortgage. On the basis ofthe above provision it is further submitted that if the condition ofretransfer is not invoked the mortgagee is possessed of all rights absolutely in the property. There are different kinds of mortgages as enumerated in section 58 of the Transfer of Property Act. We feel that it would not be necessary to further go into the matter as to whether the agreements in the cases before us amount to English mortgage or not since the non-obstante clause under Section 13(I) of the Act provides that notwithstanding anything contained in Section 69 a secured interest can be enforced without intervention ). of the court.

That is to say it overrides the provision as contained under Section 69 where it is said that in no cases, other than those as enumerated in clauses (a), (b) and (c), a mortgage shall be enforced without intervention of the court. Once the said condition, as noted above, in section 69 of the Transfer of Property Act, the general law on the subject, has been overridden by the special enactment namely the Securitisation Act, it would not make much of a difference as to whether the transactions in question are akin to or amount to English mortgage or not, since irrespective of the kind of the mortgage the secured interest is liable to be enforced without intervention of the court as per the provision contained under Section 13 ofthe Act. Needless to refer Section 35 of the Act, which provides as under : "35. The provisions of this Act to override other laws.

- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. " 43. It may, however, be worthwhile to mention here as to why and in what circumstances it had been thought necessary to provide a non-obstante clause in sub-section (I) of Section 13 of the Act. In a nutshell, the position as prevailed in 1882 when the Transfer of Property Act was enacted has undergone a sea-change: What was conceived correct in the situation then prevailing may not be so in the present day situation. Functions of different institutions including the banking and financial institutions have changed and new functions have been introduced for financing the industries etc. New economic and fiscal environment is around more than I00 years later after the enactment of the Transfer of Property Act.

In this connection it has been pointed out on behalf of the respondents that Rajamannar Committee was appointed by Government 0f India which submitted its report in 1977 indicating the effect ofthe changed situation and the relevance ofthe provisions of the Transfer of Property Act in context thereof. Mr. Salve has drawn our attention to the Rajamannar Committee report as quoted in the Narasimham Committee Report 1998, which reads as under : "The Rajamannar Committee appointed by the Government of India gave its report in I977 pointing out the development of the law of mortgages and explaining how it had become completely anachronistic in the latter part of the 20th century where mortgages had bewme a very important instrument to facilitate development of commercial credit. The Rajamannar Committee's recommendations, that were extracted in the Narasimham Report (I 998) stated"....

thus a distinction , was made in the original schemes as regards mortgages to which Europeans were parties mortgages where the properties were situated . , in the presidency towns, and mortgages where the mortgages were of native origin and mortgages where the property was situate in the mofussil. This distinction was based on the fact that in the mofussil, it was the money lenders with their unscrupulous methods, who were, by and large, the persons lending against mortgage of immovable property ..... evidently, the situation that prevailed at the time of the enactment of the Transfer of Property Act 1882, justify the legislative action of the then Government of India in limiting the right of sale without the intervention of court ..... .... economic conditions have vastly changed since the enactment of the Transfer of Property Act in 1882.

The role of the unscrupulous money lenders dominating in the field of credit is no longer valid ,,, with our reliance on institutionalization of credit, the banks another financing institutions are the major moneylenders of credit today. In their dealings with their mortgagors, it is anachronistic to assume that they will adopt the unscrupulous moneylenders. (Paragraph 1. 2. 19). In fact in extending credit, the necessity for suitable safeguards to banks and other financing institutions is now rightly stressed. It is MARDIACHEMICALS LTD. v. U. 0. 1. [BRl. IESll KUMAR.. 1. J 1019 ~ . understandable that the legal framework is essentially conceived to deal with unscrupulous moneylenders is no longer appropriate to deal with credit given by banks and other financing institutions... ". 44.

As a matter of fact, the Narasimham Committee also advocates for a legal framework which may clearly define the rights and liabilities of the parties to the contract and provisions for speedy resolution ofdisputes, which is a sine qua non for efficient trade and commerce, especially for financial I intermediation. Even the guidelines of the Reserve Bank of India in relation .. to classifying the NPA's while stressing the need of expeditious steps in taking a decision for classifying and identification of NPA's says, a system be evolved which should ensure that the doubts in asset classification are settled through specified internal channels within the time specified in the guidelines. lt is thus clear that while recommending speedier steps for recovery of the debts it is envisaged by all concerned that within the legal framework, such provisions may be contained which may curtail the delays.

Nonetheless dues or disputes regarding classification of NPAs should be consider~d and resolved by some internal mechanism. In our view, the above position suggests the safeguards for a borrower, before a secured asset is classified as NPA. If ' there is any difficulty or any objection pointed out by the borrower by means ~ of some appropriate internal mechanism it must be expeditiously resolved. 45. In the background we have indicaied above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under subsection (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-compliance of notice within 60 days.

The creditor must apply its mind to the objections raised in p reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor.

It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act.

But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/ bu~iness of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non- acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point oftime unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act. 46.

We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non-compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (I) of f the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc. 47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act.

It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and l! ·~ ' MARD! A CHEMICALS LTD. v. U. 0. 1. [BRI. IESH KUMAR. . I. ] I021 healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act. 48. The next safeguard available to a secured borrower within the framework of the Act is to approach the Debt Recovery Tribunal under Section 17 of the Act. Such a right accrues only after measures are taken under sub-section (I) of Section 13 of the Act. 49.

On behalf of one of the respondents Shri Andhyarujina submitted ,,\ that as a matter of fact Section 13 of the Act leaves more scope and provides wider protection to the borrower as compared to in the case of English mortgage and in connection with the above submission it has been pointed out that in case of an English mortgage there is no scope of intervention of the court unless a case is made out before the court that action ofthe mortgagee is fraudulent or it is a case of the like nature. Otherwise as provided under sub-section (3) of Section 69 a mortgagor