MARDIA CHEMICALS LTD. ETC. ETC. _[ v. UNION OF !NOIA AND ORS. ETC. ETC.

The Judgment of the Court was delivered by

BRIJESH KUMAR, J. I. Leave granted in Special Leave Petition B (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 c 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 D 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.

E 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 or any of the measures contained in sub-section (4) of Section 13 namely, by ~ -f

taking over possession and/or management of the 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 of Section 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. B

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 C 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;" D

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" G

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 sub- standard, doubtful or loss <isset, in accordance with the directions or H

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A under guidelines relating to asset classifications issued by the Reserve Bank". t

9. "Reconstruction co:npany" has been defined in clause(v) of Section 2 which means :

B "Reconstruction company" means a company formed and registered under the Companies Act, 1956 (I of 1956) for the purpose of asset reconstruction;

10. "Secured asset" has been defined in clause(zc) of Section 2 which means: c "Secured Asset" means the property on which security interest is created."

11. "Secured creditor" has been defined in clause(zd) of Section 2 which means : "Secured Creditor" means "any bank or financial institution D or any consortium or group of banks or financial institutions and includes -

(i) debenture trustee appointed by any bank or financial institution; or

(ii) securitization company or reconstruction company; or

E (iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;"

12. "Secured Debt" has been defined in clause(ze) of Section 2 which means: F j "Secured Debt" means a debt which is secured by any security interest."

13. "Security interest" has been defined in clause(zf) of Section 2 which means : G "Security Interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section 31."

14. Section 13, which is relevant for our present purpose, provides: H

MARDI A CHEMICALS LTD. v. U.0.1. [BRIJESH KUMAR. J.) 997 )..- "Enforcement of security interest.- (I) Notwithstanding anything A contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act. B (2) Where any borrower, who is under a li~.bil.;ty to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within c sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

(3) The notice referred to in sub-section (2) shall given details of the D \. amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of )' secured debts by the borrower.

(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take E recourse to one or more of the following measures to recover his secured debt, namely:- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing "~ the secured asset; F (b) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realize the secured asset; (c) appoint any person (hereafter referred to as the manager) to manage the secured assets the possession of which has been taken over by G the secured creditor; ..... (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to H

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A pay the secured debt.

(5) Any payment made by any person referred to in clause (d) of sub- section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower.

(6) Any transfer of secured asset after taking possession thereof or B take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditors shall vest in the , transferee all rights in, or in relation to, the secured asset transferred ~

as if the transfer had been made by the owner of such secured asset.

c (7) Where any action has been taken against a borrower under ~he provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor ~

and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests.

(8) If the dues of the secured creditor together with all costs, charges and expen·ses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.

(9) In the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured / creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors: y Provided that in the case of a company in liquidation, the amount realized from the sale of secured assets shall be distributed in accordance with the provisions of section 529 A of the Companies H Act, 1956 (I of 1956).

MARDIA CHEMICALS LTD. v. U.0.1. [BRl.IESH KUMAR. J.] 999

xxx xxx xxx A .... I

(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets, the secure<.! creditor may file an application in the form and manner as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance amount from the borrower. B (11) Without prejudice io the rights conferred on the secured creditor under or by this section, secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this Act. c Xxx xxx xxx (13) No borrower shall, after receipt of notice referred to in sub- section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor." ).

15. Mr.Kapil Sibal, learned senior counsel appearing for the petitioners )' in the Transferred Case - M/s.Mardia Chemicals Ltd. submits that there was no occasion to enact such a draconian legislation to find a short-cut to realize the dues without their ascertainment but which the secured creditor considered to be the dues and declare the same as non-performing assets (NPAs). Out of the total NPAs which are considered to be about one lac crores, about half of it is due against prio1·ity sector like agriculture etc. The dues between 10 lacs to one crore constitute only 13.90% of the total dues. By providing statistics on the point it is sought to be demonstrated that most of the dues are against those borrowers whose borrowing ranges between Rs.25000 to Rs. I 0 lacs. Besides the above, it is submitted, that there is already a special enactment providing for recovery of dues of banks and financial institutions. Therefore, it was not necessary to enact yet another legislation containing drastic steps and procedure depriving the debtors of any fair opportunity to defend themselves from the onslaught of the harsh steps as provided under the Act.

16. It is further submitted that no provision has been made to take into account the lenders liability, though at one time it was considered necessary to have an enactment relating to lenders liability and a bill was also intended H

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A to be introduced, as it was considered that it is necessary for the lenders as well to conduct themselves responsibly towards the borrowers. It is submitted that despite such a statement, as indicated above, on the floor of the House, neither any such law has been enacted so far nor any care has been taken to introduce such safeguards in the Act to protect the borrowers against their vulnerability to arbitrary or irresponsible action on the part of the lenders. On a comparative basis, in relation to other countries, it is submitted that the percentage of NP A of as against the GDP is only 6% in India which is much less as compared to China, Malasia, Thailand, Japan, South Korea and other countries. Therefore, it is evident that the resort has been taken to a drastic legislation, under mis-apprehension that other ways and means have failed to recover the dues from the borrowers.

17. Referring to Section 13 of the Act it is submitted on behalf of the petitioners that a security interest can be enforced by the secured creditor straightaway without intervention of the court just on default in repayment of an instalment and non-compliance of a notice of 60 days in that regard, declaring the loan as non-performing asset. Under sub-section 4 of Section 13 the secured creditor is entitled to take possession of the secured assets and may transfer the same by way of lease, assignment or sale as provided under clause (a) or under clause (b) to take over the management of the secured· assets including the right to transfer any secured assets or to appoint any person as provided in clause (c) to manage the secured assets taken over by the creditor. Under clause (d) by means of a notice any person who has acquired any of the secured assets from the borrower or who has to pay to the borrower any amount which may cover the secured debt, can be asked to pay it to the secured creditor. All that is provided is that if all the dues with costs and charges and expenses incurred by the creditor is tendered before the date fixed for sale of the assets no further steps shall be taken for sale of the property. l

18. It is submitted that the mechanism provided for recovery of the debt under Section 13 indicated above does not provide for any adjudicatory forum to resolve any dispute which may arise in relation to the liability of the borrower to be treated as a defaulter or to see as to whether there has been any violation or lapse on the part of the creditor or in regard to the correctness of the amount sought to be recovered and the interest levied thereupon. On the other hand, Section 34 bars the jurisdiction of the civil ·.,.- Court to entertain any suit in respect of any matter which a Debt Recovery H Tribunal or the appellate Tribunal is empowered to determine. It also provides

MARDIA CHEMICALS LTD. v. U.0.1. (BRl.IESH KUMAR. J.] I001 that 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 Act or under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Section 35 gives an overriding effect to the provisions of the Act over the provisions contained under any other law. The submission, therefore, is that before any action is taken under Section 13, there is no forum or adjudicatory mechanism to resolve any dispute which may arise in respect of the alleged dues or the NPA .

. 19. It is further submitted that the provision of appeal as contained in Section 17 of the Act is also illusory since an appeal may be preferred within the specified time from the date on which measures under sub-section 4 of C Section 13 have been taken, is to say that the appeal would be maintainable after the possession of the property or the management of the secured assets has been taken over or the property has been sold. Further, an appeal is not entertainable unless 75% of the amount claimed in the notice is deposited by the borrower with the Debt Recovery Tribunal. It would be a matter in the discretion of the Debt Recovery Tribunal to waive the condition of pre deposit D or to reduce the amount, for reasons to be recorded therefor. It is submitted that a remedy which is available, after the damage is done and on fulfillment of such an onerous condition as deposit of 75% of the demand, is illusory and a mere farce. It is no real remedy available to a borrower before he is subjected to harsh steps as provided under sub-section (4) of Section 13. It E is further submitted that after the possession of the secured assets or its management has been taken over by the secured creditor or the property is leased out or sold to any other person, it would not be possible to raise and deposit 75% of the amount claimed by the secured creditor. It is also submitted that once the secured assets are taken over there is hardly any occasion for deposit of 75% of the claim since it is already secured and the management F and the possession of the secured assets moves into the hands of the creditor. The position thus is ihat the borrower is gagged into a helpless position where he cannot ventilate his grievance against the drastic steps taken against him. The doors of the civil court are closed for him and no adjudicatory mechanism is provided before steps are taken under sub-section (4) of Section G

13. Such a law, it is submitted, is arbitrary and suffers from the vice of unreasonableness.

'f 20. In so far it relates to Section 19 of the Act which provides, in case it is found that possession of the secured assets was wrongfully taken by the secured creditor he may be directed to return the secured assets to the borrower H

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A who may also be entitled to such compensation as may be determined by the debt recovery Tribunal or the appellate Tribunal, it is submitted that it is hardly a consolation after harsh steps as provided under sub-section 4 of section 13 have been taken.

21Copy pinpoint21. Shri Ashok Desai, learned counsel appearing in one of the matters namely, the case of Mis.Modern Terry Towel Ltd. leaving aside the questions of fact, submits that for exercise of power under Section 13, certain enquiries wou Id be necessary as to whether a person to whom notice is given is under a liability to pay as also the question of extent of the liability etc. Further the questions pertaining to law of limitation and bar under consortium agreements, claim of set off/counter claim, creditors defaults as bailee or its failure to disburse the credit in time, the chargeability of penal interest or compound interest or non-appropriation of amount already paid and so on and so forth, all these questions need to be decided. Bar of Section 22 of the Sick Industrial Companies Act (for short 'SICA) may have to be considered. But there is no adjudicatory body provided for dealing with such disputes. Relying on a D decision of this Court reported in [2002] 5 SCC p.685, Indian National Congress (I) v. Institute of Social Welfare and Ors., observations made by one of us (Chief Justice V.N. Khare) have been relied upon as quoted below:-

"Thus, where there is a lis or two contesting parties making rival ... claims and the statutory authority under the statutory provision is required to decide such a dispute, in the absence of any other attributes of a quasi-judicial authority, such a statutory authority is quasi-judicial authority.

But there are cases where there is no lis or two contending parties a before statutory authority yet such a statutory authority has been held to be quasi-judicial and decision rendered by it as a quasi-judicial decision when such a statutory authority is required to act judicially. In R v. Dublic Corpn. It was held thus :

"In this connection the term judicial does not necessarily mean acts of a Judge or legal tribunal sitting for the determination of matters of law, but for purpose of this question, a judicial act seems to be an act done by competent authority upon consideration of facts and circumstances and imposing liability or affecting the rights. And if there be a body empowered by law to eQ.quire into facts, making estimates to impose a rate on a district;lt would seem to me that the acts of such a body involving such consequences would be judicial

MARDIA CHEMICALS LTD. v. U.0.1. [BRl.IESH KUMAR. J.] 1003

l..r acts." A "Applying the aforesaid principle, we are of the view that the presence of a lis or contest between the contending parties before a statutory authority, in the absence of any other attributes of a quasi-judicial authority is sufficient to hold that such a statutory authority is quasi- judicial authority. However, in the absence of a lis before a statutory B authority, the authority would be quasi-judicial authority if it is required to act judicially." . ~ It is submitted that power to decide a lis is a judicial or quasi-judicial power and not purely an administrative power. Therefore a suitable forum has to be provided to decide all such disputes at an appropriate stage. In that c connection reliance has also been placed on a case reported in 1992 Suppl.(2) SCC p.651, Kihoto Hallahan v. Zachillhu and Ors. and Associated Cement Companies Ltd. v. P.N. Sharma, [1965] 2 SCR p. 366 at pages 386-87. It is submitted any power which is exercised by a party to enforce security by way of sale etc. without any detennination of disputed questions, as in the existing law, under Section 13 of the Act, is unconstitutional. It is further > submitted that legislature has vested the beneficiary to exercise the power without any detennination of disputed 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.

22Copy pinpoint22. 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 F \ 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 G 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. H

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23Copy pinpoint23. 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 of India 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.

24Copy pinpoint24. 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.

25Copy pinpoint25. 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 of which 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 a 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. H

1 MARDIA CHEMICALS LTD. v. U.0.1. [BRl.IESH KUMAR . .I.] 1005 -~ 26. Shri Soli J.Sorabjee, learned Attorney General, appearing for the A 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 B around one lac crores. After coming into force of the Recovery of Debts due '· j. to Banks and Financial Institutions Act and establishment of Debt Recovery 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 c 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- D section 4 of Section I 3 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 of the secured assets. The remedy as provided under Section I 7 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 pre- deposit is harsh as it can be relaxed in deserving cases. The bar of jurisdiction )-, 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. G

27Copy pinpoint27. 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 of the key drivers in India's efforts H

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·- A 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 B 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 c 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." D

28Copy pinpoint28. 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 E 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.

29Copy pinpoint29. 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

G 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.

30Copy pinpoint30. Shri Andhyarujina, learned senior counsel appearing for the Life

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Insurance Corporation of India stressed upon the background in which the A 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 B 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 of the 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 C 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.

31Copy pinpoint31. Shri A.M. Singhvi has also made similar submissions in support of validity of the Act.

32Copy pinpoint32. As indicated earlier, arguments on the same lines were advanced by some of the counsels and others adopted the same.

33Copy pinpoint33. 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? F ·" ~· (ii) Whether provisions as contained under Section 13 and I 7 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 G 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? H

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A (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 B 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 c different decisions of this Court? (vii) Whether the principle of lender's liability has been absolutely ignored while enacting the Act and its effect?

34Copy pinpoint34. Some facts which need be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. D 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, ... it is to be noted that things in the concerned spheres are desired to move A

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

MARDI A CHEMICALS LTD. v. U.0.1. [BRIJESH KUMAR, .I.] l 009

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. B

35Copy pinpoint35. 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 c 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 of which was bad debts/doubtful debts. It then mentions that according D )- 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 : H

p. 1010 Copy page pinpoint

A "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 B 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 c could expedite the recovery of process .... "

The Committee also suggested some legislative measures to meet the situation.

36Copy pinpoint36. In its Second Report, tlie Narasimham Committee observed that the D 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 E 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 F of Property Act, which is critical to the work of financial intermediaries .......... "

One of the 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

MARDI A Cl-IEMICALS LTD. v_ U.O.L [BR LI 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 a measure relating to financial policy. C

37Copy pinpoint37. 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 D "RBI' s prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 200 I. 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 E (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 a G specified period of time. The specified period was reduced in a phased --y manner as under:

Year ending March 31 Specified period 1993 four quarters H

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