Constitutional validity of SARFAESI Act 2002

Mardia Chemicals Ltd. Etc. Etc vs U.O.I
Citation:  (2004) 4 SCC 311
Bench: Supreme Court of India: CJI Brijesh Kumar, Arun Kumar
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed with an object of giving additional powers to the borrowers in realizing the NPAs. The said legislation was challenged before many Courts as the same is unconstitutional, arbitrary and against natural justice. Also it was stated as leaning more towards the lenders. 
The Supreme Court in Mardia Chemicals Ltd. Etc. Etc vs U.O.I. & Ors, upheld the constitutional validity of the said Act and elaborated the provisions of the enactment in detail which cleared ambiguity arose out of this enactment before. 
Why SARFAESI Act was challenged?
In the said case, the SARFAESI Act was challenged as unconstitutional and arbitrary. In this regard, the following questions were raised before the court:
  • 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,
  • Whether the remedy available under Section 17 of the Act is illusory for the reason it is available only after the action is taken under Section 13(4) of the Act and the appeal would be entertained only on deposit of 75% of the claim raised in the notice of demand?
  • Whether the terms 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?
  • 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?
  • 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?
  • Whether the principle of lender's liability has been absolutely ignored while enacting the Act and its effect?
Points of Law discussed:
The Supreme Court upheld the validity of the Act and the points of law discussed in the said case are hereunder:
  1. A specific enactment for recovery of NPAs is much needed:
  2.     When the need for a specific enactment (When there is already Recovery of Debts due to Banks and Financial Institutions Act 1993) for recovery of NPAs is questioned, the Supreme Court answered it in affirmative.
  3. Pointing out the recommendations of the Narashimman Committee, the Supreme Court emphasized the need for faster recovery process to recover the NPAs to ensure healthy and growth oriented economy.
  4. Also the Supreme Court highlighted that SARFAESI Act is much needed even in the existence of DRT Act 1993 and pointed out the failure on the part of Debt recovery Tribunals in bringing desired results in this regard.
     2. Safeguards available to the borrowers:
  • Section 13 (2) mandates that a notice shall be served upon the borrower in this regard and  a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under Section 13 (4) in case of non- compliance of notice within 60 days. 
  • The intention of this provision is that the creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such      objections raised in the reply to the notice. 
  • Once the same is done this is sufficient for ensuring principles of fairness on the part of the banks and financial institutions in dealing with their borrowers.
  •  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/business of viz. 
  • 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 (1) of Section 13 of the Act. 
    3. on precondition to deposit 75% of the claim on appeal:
Such condition to deposit was not only declared as onerous and oppressive but also held unreasonable and arbitrary. Therefore provisions of 17 (2)  of the Act relating to predeposit of claim money was declared as violative of Article 14 of the Constitution and the same was struck down.


Published in Corporate Law
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