Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Under the provisions of
‘Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (‘SARFAESI Act’ in short), the Bank can invoke the
process of recovery of money on its own without any adjudicatory process. The
Banks can proceed with the enforcement of ‘security’ under the provisions of
SARFAESI Act, 2002. If any borrower or any person is aggrieved with the action
initiated by the Bank under the provisions of SARFAESI Act, 2002, then, he can
approach the Debt Recovery Tribunal (DRT) under section 17 of the Act by paying
the prescribed fee. Irrespective of the wording in section 17 with regard to
the powers of the Tribunal and irrespective of the initial proposition that the
DRT is only supposed to look at the procedural irregularity, in view of the
subsequent judgments of the Apex Court and other High Courts, the DRT can look
into all objections and provide relief to the borrower or any person
aggrieved. However, in many cases, the
Debt Recovery Tribunals may ask the borrower to make some deposit for asking
the Bank to exercise restraint pending the disposal of the Appeal. Unless there
is an apparent mistake on the part of the Bank in following the procedure, in
most of the cases, the Appeals filed by the borrowers will get dismissed
finally. The Appeal filed by the borrower under section 17 may be decided at
the first hearing itself or it may take a maximum of one year in most of the
cases. If the borrower has got any objection to the order of the DRT mandating
the borrower to make some deposit, then, the option left with the borrower is
to file an appeal with the DRAT or approaching High Court. If the borrower
fails to comply with the order mandating him to deposit some amount, then, the
Bank will proceed with the process and can even auction the property pending
‘SARFAESI Appeal’ and it means, the appeal becomes meaningless unless the DRT
allows the Appeal and gives relief to the borrower taking all subsequent events
also into consideration. Though there exist many technical, deeper and
practical issues in filing Appeal under section 17 and getting relief, this is
normally what happens if the borrower files an appeal under section 17
challenging the action initiated by the Bank under the provisions of SARFAESI
Act, 2002.
It is very much possible that
even before the decision on a ‘SARFAESI Appeal’ under section 17, the borrower
could have deposited or paid some 20% of the outstanding amount claimed by the
Bank. We should remember that the Bank
can exercise lot of discretion in providing relief or relaxation to the
borrower when it comes to making payments towards installments. RBI guidelines
give some room for the Banks to exercise some discretion. However, in many
cases, the officials concerned may hesitate to take risk and exercise
discretion and it results in classifying an account as Non-Performing Asset
(NPA). If the borrower fails to adhere to monthly payment conditions
consecutively for three months, the Bank can classify the Account as NPA. There
are other considerations for classifying an account as ‘NPA’. The point to be noted is that the borrowers
have to face the proceedings under SARFAESI Act, 2002 for even minor default or
negligible default which requires a sympathetic view.
While the Banks can get interest,
penal interest and legal expenses incurred from the borrower, the borrower has
to fight everything on his own. Supposing that the borrower looses the Appeal
under section 17 of SARFAESI Act, 2002, then, section 18 of the Act provides a
right of Appeal for the borrower. However, the borrower has to pay 50% of the
amount claimed as a pre-deposit for maintaining an appeal and this pre-deposit
amount can only be reduced to 25% for the reasons recorded in writing by the
judge or the presiding officer of DRAT.
It is complained that section 18 is very unreasonable and it curtails
the right of the borrower to maintain an Appeal. However, the Apex Court has
upheld the validity of section 18 meaning that only Apex Court can again deal
with the issues under section 18. At
times, the borrower may feel that he is forced to pay the full amount or
at-least 75% of the outstanding amount claimed by the borrower even before his
appeal before DRAT gets disposed of. As such, they complain that section 18 of
SARFAESI Act, 2002 is meaningless.
While the High Court entertains
Writ Petitions now-a-days in appropriate cases and provide relief to the
borrower, it is very difficult to straight away challenge the order of the DRT
in the High Court and the High Court may not entertain such Writ Petitions as
it can pave way to escape the pre-deposit condition with the DRAT.
A two member Bench headed by
Hon’ble Justice Dr.D.Y.Chandrachud & Justice Mr.Anoop V.Mohta of Bombay
High Court in W.P.No.4231 of 2011 reported in 2011 (4) AIR(Bom) R 763, 2011 (4)
BCR 503, 2011 AIR(Bom) 132, CDJ 2011 BHC 774, was pleased to deal with the
issues and scope of section 18 of SARFAESI Act, 2002 as follows:
“3. The Petitioners have
challenged the constitutional validity of the provisions of the first and
second provisos to section 18 of the Act on the ground that they are
discriminatory. The submission is based on a comparison with the provisions of
Section 21 of the Recovery of Debts due to Banks and Financial Institutions Act
1993. According to the Petitioners while the Act of 1993 confers discretion
upon the Appellate Tribunal to allow a complete waiver of the pre-deposit, the
discretion of the Appellate Tribunal, while entertaining an appeal under
section 18 of the Securitisation Act is curtailed. By the first proviso to
section 18(1) an appeal cannot be entertained unless the borrower has deposited
an amount of 50% of the debt due as claimed by the secured creditor, or as
determined by the Tribunal, whichever is less. By the second proviso, the
Appellate Tribunal is empowered for reasons to be recorded in writing to reduce
the amount to not less than 25% of the debt referred to in the second proviso.
4. Notice was issued to the
Attorney General of India in view of the constitutional challenge. The learned
Additional Solicitor General of India has appeared in the proceedings.
5. The constitutional challenge
to the provisions of the second and third provisos of section 18 must fail. An
appeal, it is well settled, is a statutory creation. A statute which confers a
right of appeal can condition the exercise of that right on the observance of
conditions which the legislature may consider appropriate to impose. The
Securitisation Act is an act to regulate securitisation and reconstruction of
financial assets and enforcement of security interests. The Statement of
objects and reasons accompanying the introduction of the Bill in Parliament
sets out the background in which the law was enacted as follows:
“The financial sector has been
one of the key “drivers in India’s efforts to achieve success in rapidly
developing its economy. While the banking 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 existing legal
framework relating to commercial transactions has not 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
nonperforming 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. These Committees, inter
alia, have suggested enactment of a new legislation for securitisation and
empowering banks and financial institutions to take possession of the
securities and to sell them without the intervention of the Court. Acting on
these suggestions, the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21
June, 2002 to regulate securitisation and reconstruction of financial assets
and enforcement of security interest and for matters connected therewith or
incidental thereto. The provisions of the Ordinance would enable banks and
financial institutions to realise long-term assets, manage problem of liquidity,
asset liability mismatches and improve recovery by exercising powers to take
possession of securities, sell them and reduce nonperforming assets by adopting
measures for recovery of reconstruction.”
6. The second and third provisos
to sub section (1) of section 18 were inserted by Amending Act 30 of 2004. The
reasons for the amendment are explained in the Statement of objects and
reasons. The statement adverts to the judgment of the Supreme Court
inMardiaChemicals Ltd. v. Union of India (2004) 4 SCC 311which had declared as
ultra vires a provision under which a deposit of 75% of the amount claimed was
necessary before an appeal could be entertained. The amendment was brought
about in view of the judgment of the Supreme Court and with a view to discourage
borrowers from postponing the repayment of their dues and to enable secured
creditors to speedily recover their debts, if required by enforcement of
security or other measures specified in sub section (4) of Section 13 of the
Act.
7. The constitutional validity of
the provisions of section 18 (1) have been upheld by a judgment of a Division
Bench of the Delhi High Court in R.V. Saxena v. Union of India AIR 2006 DELHI
96 .Chief Justice Makandeya Katju (as His Lordship then was) speaking for the
Division Bench held thus :
“The right of appeal is not an
inherent right “ butis a creature of the statute. The Legislature can impose
conditions under which this is to be exercised. Moreover, the proviso to
section 18 does not require the entire amount to be deposited, but only 50%
thereof which can be reduced to a minimum of 25% of the sum. We see no
illegality in this proviso. There are similar provisions in many enactments and
they are being upheld by the Supreme Court. For example, in the second proviso
under Section 15(1) of the Foreign Trade (Development and Regulation) Act,
1992, it is provided that the appeal against an order imposing a penalty or
redemption charges shall not be entertained unless the amount of the penalty or
redemption charges have been deposited by the appellant. Similarly in many
other statutes, there are such similar provisions.”
8. The Division Bench of the
Delhi High Court inter alia relied upon the decisions of the Supreme Court in
Gujarat Agro Industries Co. Ltd. v. Municipal Corporation of the City of
Ahmedabad (1999) SCC 468 , Vijay Prakash D. Mehta v. Collector of Customs
(Preventive)(1988) 4 SCC 402 , AnantMills Ltd. v. State of Gujarat 1975 (2) SCC
175.andShyamKishore v. Municipal Corporation of Delhi (1993) 1 SCC 22.
9. Counsel appearing on behalf of
the Petitioner, however, submitted that the object of both the Act of 1993 as
well as of the Securitisation Act is the same viz. to ensure the speedy
recovery of debts due to banks and financial institutions. Hence, it was urged
that it would be plainly discriminatory and violative of Article 14 for
Parliament to legislate, that while the Debts Recovery Appellate Tribunal, when
it considers an appeal under the Act of 1993, can grant a complete waiver of
predeposit, the same Tribunal is precluded from granting a waiver in the
entirety, when it considers an appeal under the Securitisation Act.
10. This argument is not open to
the Petitioner to urge, in any event before this Court, in view of the fact
that by a recent judgment of the Supreme Court the rationale for the provisions
of section 18 has been considered and determined in NarayanChandra Ghosh v. UCO
Bank (2011) 4 SCC 548. A Bench of two learned Judges of the Supreme Court while
construing the provisions of the second and third provisos noted that the
Appellate Tribunal has the power to reduce the amount, for reasons to be
recorded in writing, to not less than 25% of the debt, referred to in the
second proviso. The judgment of the Supreme Court lays down that the right of
appeal being a creation of statute, it was open to Parliament to condition that
right subject to an order of deposit and to restrict the discretion of the
Appellate Tribunal in the matter of granting a waiver. The Supreme Court held
as follows:
“The language of the said proviso
is clear “and admits of no ambiguity. It is well-settled that when a Statute
confers a right of appeal, while granting the right, the Legislature can impose
conditions for the exercise of such right, so long as the conditions are not so
onerous as to amount to unreasonable restrictions, rendering the right almost
illusory. Bearing in mind the object of the Act, the conditions hedged in the
said proviso cannot be said to be onerous.”
11. The mandate of the third
proviso has thus been held by the Supreme Court not to be onerous in its nature
or character. These observations were undoubtedly not made in the context of a
constitutional challenge. Nonetheless, they are significant because the Supreme
Court in holding that the requirement is not onerous has indicated a view on
the fairness and reasonableness of the provision.
12. There is a fundamental reason why the
submission of the Petitioner cannot be accepted. The object and purpose of the
Securitisation Act was to facilitate a recovery of the dues of the banks and
financial institutions by a non-adjudicatory process. The Securitisation Act
enables banks or financial institutions to enforce their security interests
expeditiously without being required to move a Court or Tribunal. This was
emphasized in the following observations of the Supreme Court in Transcorev.
Union of India 2007(2) Bankers’ Journal 303.
“Basically, the Securitisation
Act is enacted “ toenforce the interest in the financial assets which belong to
the bank / financial institution by virtue of the contract between the parties
or by operation of common law principles or by law. The very object of Section
13 of Securitisation Act is recovery by non-adjudicatory process. A secured
asset under Securitisation Act is an asset in which interest is created by the
borrower in favour of the bank / financial institution and on that basis alone
the Securitisation Act seeks to enforce the security interest by
non-adjudicatory process. Essentially, the Securitisation Act deals with the
rights of the secured creditor. The Securitisation Act proceeds on the basis
that the debtor has failed not only to repay the debt, but he has also failed
to maintain the level of margin and to maintain value of the security at a
level is the other obligation of the debtor. It is this other obligation which
invites applicability of Securitisation Act. It is for this reason, that
Section 13(1) and 13(2) of the Securitisation Act proceed on the basis that
security interest in the bank / financial institution needs to be enforced
expeditiously without the intervention of the Court / Tribunal; that liability
of the borrower has accrued and on account of default in repayment, the account
of the borrower in the books of the bank has become nonperforming. For the above
reasons, Securitisation Act states that the enforcement could take place by
nonadjudicatory process and that the said Act removes all fetters under the
above circumstances on the rights of the secured creditor.”
13. These observations of the
Supreme Court emphasize at more than once place that the Securitisation Act
allows enforcement by a non-adjudicatory process. The Act removes fetters on
the rights of the secured creditor. The Securitisation Act has therefore been
held to create an additional remedy. Consistent with the object of Parliament
of facilitating the enforcement of security interests by a non-adjudicatory
process, Parliament could conceivably impose a condition by which it could
require the making of a deposit as a condition precedent to the maintainability
of an appeal under section 18. Such a condition has been imposed under the
second proviso to sub section (1) of section 18 by which an appeal cannot be
entertained unless the borrower has deposited with the Appellate Tribunal 50%
of the amount debt due as claimed by the secured creditor, or as determined by
the Tribunal, whichever is less. Parliament conferred upon the Appellate
Tribunal a discretion to reduce the amount required to be deposited, but while
conferring that discretion on the Appellate Tribunal restricted it by
stipulating that the Appellate Tribunal may reduce the amount to not less than
25% of the debt referred to in the second proviso. This is consistent with the
parliamentary intent of ensuring that basically the Securitisation Act must
follow an efficacious non-adjudicatory process for the enforcement of a
security interest. The interposition of an adjudicatory function in the
Securitisation Act must, therefore, be confined to those areas as legislated
upon by Parliament and subject to the restrictions imposed by the Parliament
while so legislating. Therefore, we find that there were valid reasons why
Parliament made a different provision in the Securitisation Act in the matter
of the discretion of the Appellate Tribunal under section 18(1) in dispensing
with the requirement of pre-deposit. It was open to Parliament, while
conferring discretion on the Appellate Tribunal to restrict the exercise of the
discretion to reduce the quantum of deposit to not less than 25% of the debt
due under the second proviso to section 18(1).”
Conclusion:
The constitutional validity of
section 18 is upheld by the Apex Court. However, when the borrower is aggrieved
with the order of DRAT to the request for depositing the minimum 25% as
pre-deposit in appropriate cases, such an order can be taken to High Court and
the High Court can provide relief to the borrower or the Appellant. However,
even the High Court may not be able to direct the DRAT to accept a pre-deposit
which is lesser than 25% of the outstanding.
There can be cases where the
pre-deposit condition under section 18 can appear to be very draconian while in
other cases, it may be justified in the interests of the Banks or Public Financial
Institutions.
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
