Holding

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is constitutionally valid, but Section 17(2) is ultra vires Article 14 and is struck down.

Summary

The Supreme Court examined the constitutionality of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, enacted to facilitate speedy recovery of non‑performing assets. The Court held that the Act is valid and serves a public‑interest goal of improving liquidity, but struck down Section 17(2), which required borrowers to deposit 75% of the claimed amount before filing an appeal, as violative of Article 14. It affirmed that Section 13 provides adequate safeguards, including a 60‑day notice and a duty to consider borrower objections, and that the bar on civil courts under Section 34 is permissible except in limited English‑mortgage cases. The Court also clarified that proceedings under Section 17 are not appellate but original jurisdiction before the Debt Recovery Tribunal. Consequently, the appeal was partly allowed, striking down the offending provision while upholding the rest of the Act.

Issues considered

Whether the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is constitutionally valid.
Whether the Act was necessary despite the existence of the Recovery of Debts due to Banks and Financial Institutions Act, 1993.
Whether Sections 13 and 17 provide an adequate mechanism for borrowers to raise objections, given the bar under Section 34.
Whether the pre‑deposit requirement of 75% of the claim in Section 17(2) renders the remedy illusory.
Whether Sections 13 and 17(2) are unconstitutional under Article 14.
Whether sale of secured assets without court intervention under Section 13 is akin to an English mortgage and its effect on civil‑court jurisdiction.
Whether statutory provisions can amend the rights of parties under a private contract.
Whether the principle of lender's liability was ignored in the enactment of the Act.

Legislation cited

Companies Act, 1956s. 529A
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002s. 13, s. 13(2), s. 13(4), s. 17, s. 17(2), s. 34, s. 35
Security Interest (Enforcement) Rules, 2002s. Rule 9
Transfer of Property Act, 1882s. 58, s. 69

Subjects

securitisationnon‑performing assetsenforcement of security interestArticle 14constitutional validitydebt recovery tribunalpre‑deposit requirementborrower rightslender's liabilitycivil court jurisdiction

Judgment

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

APRIL 8, 2004

B [V.N. KHARE, CJ., BRIJESH KUMAR AND ARUN KUMAR, JJ.]

Securitisation and Reconstruction of Financial Assets and Enforcement I
of Security Interest Act, 2002: +

c Validity of the Act-Held: Act enacted for speedier recovery of dues
declared as Non performing Assets, better availability of capital liquidity and
economic growth of the country-Though some of the provisions have harsh
effect on borrowers but they get reasonable protection under the Act-Hence,
Act constitutionally valid except sub-section (2) of section 17-Constitution
D of India, I950-Artic/e 14.

Enactment of Act of 2002 for securitisation of debts and faster 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
E recommendation of expert committees to have such law, enactment of Act of
2002 not uncalled for nor superimposition of undesired law-Also legitimacy
of such Act relating to financial policy which is in public interest cannot be
tested-There is presumption of constitutionality infavour of such enactment
provided person aggrieved gets fair deal-Recovery of Debts due to Banks
and Financial Institutions Act, 1993.
F
Section 13, 13(2), (4) and 34-Enforcement of secured assets without , ,(

intervention of court 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
G
notice is to be considered with due application of mind 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.
H 982
MARDIA CHEMICALS LTD. v. U.0.1. 983
Section 17(2)-Right to appeal before tribunal-Availability of--On A
taking over the secured assets /management thereof with transferable interest
or selling the property under section 13(4) and pre deposit of 75% of amount
claimed in demand notice-Validity of-Held: Requirement of deposit under
Section 17(2) is oppressive, onerous, arbitrary and unreasonable-Hence,
Section 17(2) invalid and liable to be struck down-Constitution of India, B
1950-Article 14.

Sections I 3 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, C
since irrespective of the kind of mortgage, security interest is to be enforced
without intervention of court as per section I 3-Extent of bar 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. D
\
Section 13-Private contract between borrower and financial
institutions-Financial transactions-Unrealized dues offinancial institutions-
Curtailment of borrower's rights and enforcement of secured assets without
intervention of court by section 13-Validity of-Held: Though the transaction
is between the private parties yet transaction as a whole has impact on the E
economy of the country-In view of public interest even if individual interest
of few 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
F
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 of contract-Even in absence of any 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. G
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 institutions-
secured creditors. Financial institutions and banks issued notices to the
borrowers under Section 13 of the Securitization and Reconstruction of H
984 SUPREME COURT REPORTS [2004] 3 S.C.R.

A 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
B 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
C 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?

D (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
E 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?
F
(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
G 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

H (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? A
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 B
except sub-section (2) of Section 17 of the Act, which is declared ultra vi res
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. C
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 D
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
E
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 F
\ 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 G
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 H
'\
986 SUPREME COURT REPORTS [2004] 3 S.C.R.

A (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
B 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 sub-
section (4) of Section 13. 11036-F; 1019-E-HI

3.2. Communication of reasons not to accept the objections of the
C 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
D 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
E 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
F 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
G
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.

H 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
A

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 B
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(
c

-· 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
D
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 E
-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 F
• ~ 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
G
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
H

J
988 SUPREME COURT REPORTS [2004] 3 S.C.R.
,•
A 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
B
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
taken under section 13(4) of the Act. The position of the appeal under j

c section 17 is like that of a suit in the court of the first instance under CPC.
As a 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
D 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
E 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
F any funds to make deposit of 75% of the undetermined demand, and (vii)
power given to the tribunal under proviso to section 17(2) to waive or ..1
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
G 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 of Gujarat, 1197512 SCC 175; Seth Nandlal
v. Slate of Hat)'ana, 119801 (Supp.) SCC 574; Vijay Prakash D. Mehta and y
Anr. v. Collector ofCustoms (Preventive) Bombay, [198814 SCC 402; Shyam
H Kishore v. Municipal Corporation of Delhi, 119931 I SCC 22; Kishanchand

'ru
I
I

MARDI A CHEMICALS LTD. v. U.0.1. 989
Arora v. Commissioner of Police. 1196113 SCR 135; Chi/1/a Lingam and Ors. A
v. Government of India and Ors., 119701 3 SCC 768 and Organo Chemical
Industries and Anr. v. Union of India 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 B
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 C
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 D
all such matters which may be taken cognizance of by the DRT, apart from
\ those matters in which measures have already been taken under sub-
section (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
E
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 F
the Property Act, a secured interest can be enforced without intervention
of the 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 G
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 H
I

'\
990 SUPREME COURT REPORTS [2004) 3 S.C.R.

A 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 of Maharashtra ltd, Puna v. Official liquidator, High Court Buildings,
AIR (1969) Mysore 280, referred to.
B
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
C 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
D 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
E 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,
F 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.
G State of Punjab, 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
H cannot be said that the petitioners cannot complain of the conduct of the
MARDIA CHEMICALS LTD. v. U.0.1. 991
4 banking companies and financial institutions for whatever goes in between A
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 B
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
c
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 D
\, 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 E
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,
\ F
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[
G
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. H
992 SUPREME COURT REPORTS (2004] 3 S.C.R.
.J
A 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
B make recovery. 11035-F-GI

R.K.Garg v. Union of India, [1981] 4 SCC 675; Bhavesh D.Parish &
Ors. v. Union of India and Anr., 120001 5 SCC 471; Srinivas Enterprises v.
..
I

Union of India, [ 19801 4 SCC 507; Jalan Trading v. Union of India, 119671

c I SCR 15 and Collector of Customs, 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
D 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 NP As 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
E
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

F CIVIL ORIGINAL JURISDICTION : Transfer Case (C) Nos. 92-95 of
,1
2002.

WITH

W.P. (C) Nos.:140/2003, 649, 673/2002, T.C.(C) No. 10/2003, W.P.(C)
G 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,
H 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/ A
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. B
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
c
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 D
).
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
E
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, F
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.
G
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 A
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 H
994 SUPREME COURT REPORTS [2004) 3 S.C.R.

A 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
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
F 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
G 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
H 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 A
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 E
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 F
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
996 SUPREME COURT REPORTS (2004) 3 S.C.R.

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
998 SUPREME COURT REPORTS (2004] 3 S.C.R.

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
D 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
E 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
F 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
G
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 D
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 E
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 F
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 G
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
1000 SUPREME COURT REPORTS [2004] 3 S.C.R.

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
B 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
C 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,
D 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
E 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
F 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
G 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 A
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 B
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
1002 SUPREME COURT REPORTS [2004] 3 S.C.R.

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.

21. Shri Ashok Desai, learned counsel appearing in one of the matters
B 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,
C 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
E 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
F 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
G 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
H 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 D
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 E
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 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
1004 SUPREME COURT REPORTS [2004) 3 S.C.R.

A 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
B 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
C 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
D 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.

E 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
F 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
G 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 E
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 F
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
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 of the key drivers in India's efforts
H
1006 SUPREME COURT REPORTS (2004) 3 S.C.R.
·-
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
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
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.

F 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

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.
H 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 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.

31. Shri A.M. Singhvi has also made similar submissions in support of D
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 E
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
1008 SUPREME COURT REPORTS (2004) 3 S.C.R.

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?

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.
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
E 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
F 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
G
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
H for such a legislation keeping in view the changing times and economic
I \

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

situation whereafter yet another expert committee was constituted then alone A
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

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
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
E
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 F
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
G
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
I'·

1010 SUPREME COURT REPORTS [2004] 3 S.C.R.

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.

36. 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
G 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
H 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 A
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 B
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
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 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
1012 SUPREME COURT REPORTS (2004) 3 S.C.R.

A 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
B climate, upgradation of technology 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 of principal remain overdue for a period
c 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
D 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
E 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
F 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
G
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
H 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.) I 013

possible. Therefore, we find no substance in the submission made on behalf A
of the petitioners that there are no guidelines for treating the debt as a non-
performing 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 B
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 C
(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 of the 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 D
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 E
the borrower. Under clause (a) of sub-section (4) the secured creditor may
take possession of the secured assets including the right to transfer the secured
assets by way of lease, assignment or sale; may take over the management
of the 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 G
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 H
1014 SUPREME COURT REPORTS [2004 j 3 S.C.R.

A 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
B 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
c 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.
D
(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."
E
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 sub-
section (2), the borrower has to deposit 75% of the amount claimed by tte
secured creditor before his appeal can be entertained.
F
41. So far jurisdiction of Civil Court is concerned we find that there is
a 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
G 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
H Institutions Act, 1993 (51 of 1993)."
MARDIA CHEMICALS LTD. v. U.0.1. [BRl.IESH KUMARJ] I 015

42. Mainly it is to be considered as to whether there is absolute bar of A
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 B
secured interest can be enforced without intervention of the 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 C
any part thereof, in default of the 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
D
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; E
(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 F
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 G
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 H
r

1016 SUPREME COURT REPOR°TS [2004 J 3 S.C.R.

A 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
B 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) ...... .

c (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
D sub-section (I) of Section 69. Clause (a) relates to English mortgage in which
a mortgaged property is permitted to be sold without intervention of the 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
E 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
F before us. Distinction between the two have also been tried to be shown and
it has been submitted that English mortgage is in fact transfer of the property
t
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
G '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
H
MARDI A CHEMICALS LTD. v. U 0.1. [BRl.IESll KUMAR. J.] I 017

property absolutely to the mortgagee, but subject to a proviso that A
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"
B
It is thus pointed out that in English mortgage, absolute transfer of the 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 of the above provision it is further submitted that if the condition
of retransfer is not invoked the mortgagee is possessed of all rights absolutely C
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 D
). 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 E
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 of the Act. Needless
to refer Section 35 of the Act, which provides as under : F
"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." G
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 H
1018 SUPREME COURT REPORTS [2004) 3 S.C.R.

A 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 I 00 years later after
the enactment of the Transfer of Property Act. In this connection it has been
B 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 of the changed situation and the relevance of the 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 :
c "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
D 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
E 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
F 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 ,,,
G 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
H banks and other financing institutions is now rightly stressed. It is
MARDI A CHEMICALS LTD. v. U.0.1. [BRl.IESll KUMAR . .1.J 1019
~
.. understandable that the legal framework is essentially conceived to A
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 of disputes, which B
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
c
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 NP As should be consider~d and
resolved by some internal mechanism. In our view, the above position suggests D
' 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 E
grievance. The purpose of serving a notice upon the borrower under sub-
section (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 G
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 H
1020 SUPREME COURT REPORTS [2004] 3 S.C.R.

A 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
B 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
C 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
D 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 of time unless his right to approach the Debt
Recovery Tribunal as provided under Section 17 of the Act matures on any
E 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
F 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
G 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
H secrecy and shall be conducive in building an atmosphere of confidence and
l!
·~
'

MARD!A CHEMICALS LTD. v. U.0.1. [BR I.I ESH KUMAR . .I.] I 021

healthy commercial practice. Such a duty, in the circumstances of the case A
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. B
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 c
the court unless a case is made out before the court that action of the mortgagee
is fraudulent or it is a case of the like nature. Otherwise as provided under
sub-section (3) of Section 69 a mortgagor shall only be entitled to the damages
for the wrongful or irregular sale of the property. Whereas, it is submitted,
under the Securitisation rules it is provided that before putting the property D
;. 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
it' is to be served on the borrower. In this connection, Rule 9, the relevant rule,
of the Security Interest (Enforcement) Rules, 2002 is quoted :
... "9. Time of sale, issues of sale certificate and delivery of possession, E
etc.- (I) No sale of immovabie property under these rules shall take
place before the expiry of thirty days from the date on which the
public notice of sale is published in newspapers as referred to in the
proviso to sub-rule (6) or notice of sale has been served to the
borrower.
F
(2) The sale shall be confirmed in favour of the purchaser who has
offered the highest sale price in his bid or tender or quotation or offer
to the authorized officer and shall be subject to confirmation by the
secured creditor:

xxx xxx xxx G
(3) to I 0) xxx xxx xxx"
y
Therefore, during this period which would be in all more than 60 days it
would be open for a borrower to approach the Debt Recovery Tribunal and
file a petition for any appropriate relief and if a case is so made out, he can H
1022 SUPREME COURT REPORTS [2004] 3 S.C.R.

A even get a relief of stay, in exercise of ancillary power which vest in the
Tribunal as per decisions referred and reported in (1969] 2 SCR p.65, ITO
v. Mohd.Kunhi and [1999] 6 SCC p. 755, Allahabad Bank, Ca/cut/av. Radha
Krishna Maity and Ors. Again referring to Section 19 of the Act it is pointed
out that in case in the end the Tribunal finds that the secured assets have been
wrongfully transferred or taken possession of an order for return of such
B assets can be passed and the borrower in that event shall also be entitled for
compensation.

50. It has also been submitted that an appeal is entertainable before the
Debt Recovery Tribunal only after such measures as provided in sub-section
C (4) of Section 13 are taken and Section 34 bars to entertain any proceeding
in respect of a matter which the Debt Recovery Tribunal or the appellate
Tribunal is empowered to detennine. Thus before any action or measure is
taken under sub-section (4) of Section 13, it is submitted by Mr. Salve one
of the counsels for respondents that there would be no bar to approach the
civil court. Therefore, it cannot be said no remedy is available to the borrowers.
D We, however, find that this cor.tention as advanced by Shri Salve is not
correct. A full reading of section 34 shows that the jurisdiction of the civil
court is barred in respect of matters which a 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". That
E is to say 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 sub-section (4) of Section 13. It is further to be noted
that the bar of jurisdiction is in respect of a proceeding which matter may be
taken to the Tribunal. Therefore, any matter in respect of which an action
may be taken even later on, the civil court shall have no jurisdiction to
F entertain any proceeding thereof. The bar of civil court thus applies to all f
such matters which may be taken cognizance of by the Debt Rec.overy
Tribunal, apart from those matters in which measures have already been
taken under sub-section (4) of Section 13.

51. However, to a very limited extent jurisdiction of the civil court can
G also be invoked, where for example, the action of the secured creditor is
alleged to be fraudulent or their claim may be so absurd and untenable which
may not require any probe, whatsoever or to say precisely to the extent the
scope is permissible to bring an action in tlie civil court in the cases of
English mortgages. We find such a scope having been recognized in the two
H decisions of the Madras High Court which have been relied upon heavily by
--)..

MARDI A CHEMICALS LTD. v. U.O.L ll3RIJESH KUMAR. J.] 1023
the learned Attorney General as well appearing for the Union of India, namely A
V Narasimhachariar (supra) p.135 at p.141 and 144, a judgment of the
learned single Judge where it is observed as follows in para 22:

"The remedies of a mortgagor against the mortgagee who is acting
J in violation of the rights, duties and obligations are twofold in
character. The mortgagor can come to the Court before sale with an B
injunction for staying the sale if there are materials to show that the
power of sak is being exercised in a fraudulent or improper manner
contrary to the terms of the mortgage. But the pleadings in an action
for restraining a sale by mortgagee must clearly disclose a fraud or
irregularity on the basis of which relief is sought: 'Adams v. Scott, C
(1859) 7 WR (Eng.) 213 (Z49). I need not point out that this restraint
on the exercise of the power of sale will be exercised by Courts only
under the limited circumstances mentioned above because otherwise
to grant such an injunction would be to cancel one of the clauses of
the deed to which both the parties had agreed and annul one of the
chief securities on which persons advancing moneys on mortgages D
rely. (See Rashbehary Ghose Law of Mortgages, Vol.ll, Fourth Edn.,
page 784).

52. The other decision on which reliance has been placed is A. Batcha
Saheb v. Nariman K.lrani and Anr., AIR (1955) Madras DB p.491 more
particularly on paragraph 8. E
53. We also find it appropriate to mention at this stage that in repiy to
submission made by Shri Dholakia on behalf of the guarantors that even
though a guarantor may stand discharged as envisaged under Sectio'.ls I 33
and 135 of the Indian Contracts Act eg., where any variance in terms of the F
contract has been made without his consent, then too guarantor may be
proceeded against and he will have no right to raise an objection, before
measures have been taken against him under Section 13(4) of the Act nor he
could approach the civil court. It is submitted by the respondent in such cases
civil court may have jurisdiction to entertain the case as character as a guarantor
itself is denied. G
54. In so far the argument advanced on behalf of the petitioners that by
virtue of the provisions contained under sub-section (4) of Section 13 the
borrowers lose their right of redemption of the mortgage. In reply it is
submitted that rather ;uch a right is preserved under sub-section (8) of Section
13 of the Act. Where a borrower tenders to the creditor the amount due with H
1024 SUPREME COURT REPORTS [2004] 3 S.C.R.

A costs and expenses incurred, no further steps for sale of the property are to
take place. ln this connection, a reference has also been made by the learned
Attorney General to a decision reported in [1977] 3 SCC p. 24 7, Naraindas
Kavsondas v. SA. Katam which provides that a mortgagor can exercise his ·-•
right of redemption any time until the final sale of the property by execution

B
of a conveyance. Sri Sibal, however, submits that it is the amount due f
according to the secured creditor which shall have to be deposited to redeem
the property. May be so, some difference regarding the amount due may be
there but it cannot be said that right of redemption of property is completely
I
lost. In cases where no such dispute is there, the right can be exercised and !

in other cases the question of difference in amount may be kept open and got
c decided before sale of property.

55. We may then turn to the arguments raised on behalf of the petitioners
that the remedy before the Debt Recovery Tribunal under Section 17 of the
Act, is illusory burdened with onerous and oppressive condition of deposit of
75% of the amount of the demand notice before an appeal can be entertained
D by the Tribunal. We feel that it would be difficult to brush aside the challenge
i
made to the condition of such a deposit. Sub-section (2) of Section 17 itself '
!(

says that no appeal shall be entertainable ·unless the borrower has deposited
the aforesaid sum of amount claimed. Much stress has been given in reply
to the proviso to sub-section (2) of Section 17, according to which the Tribunal
•
has power to waive or reduce the amount. While waiving the condition of
E
deposit the amount or reducing it, the Tribunal is required to record reasons
for the same. It is submitted for the respondents that in an appropriate case,
the DRT which is presided over by a Member of a Higher Judicial Service,
would exercise its discretion and may waive or reduce the amount required
to be deposited in deserving cases. It is, therefore, not an absolute condition
F which must in all cases and all circumstances be fulfilled irrespective of the
special features of a particular case.

56. The contention of the petitioners is that in the first place such an
oppressive provision should not have been made at all. It works as a deterrent
or as a disabling provision impeding access to a forum which is meant for
G redressal of the grievance of a borrower. It is submitted where the possession
of the secured assets has already been taken over or the management of the
secured assets of the borrower including the right to transfer the same, in that
~
event it would not at all be necessary to burden the borrower doubly with
deposit of 75% of the demand amount. In a situation where the possession
H of the secured assets have already been taken over or its management, it is
MARDI A CHEMICALS LTD. v. U.0.1. [BRl.IESH KUMAR. J.] 1025
highly unreasonable further to ask for 75% of the amount claimed before A
entertaining the grievance of the borrower.

57. Secondly, it is submitted that, it would not be possible for a borrower
to raise funds to make deposit of the huge amount of 75% of the demand,
once he is deprived of the possession/management of the property namely,
the secured assets. Therefore, the condition of deposit is a condition of B
impossibility which renders the remedy made available before the ORT as
nugatory and illusory. The learned Attorney General refutes the aforesaid
contention. It is further submitted that such a condition of pre-deposit has
been held to be valid by this Court earlier and a reference has been made to
a decisions reported in [1975] 2 SCC p.175 at p. 202, Anant Mills Co.Ltd. v. C
State of Gujarat to submit that such a provision is made to regulate the
exercise of the right of an appeal conferred upon a person. The purpose is
that right of appeal may not be abused by any recalcitrant party and there
may not be any difficulty in enforcing the order appealed against if ultimately
it is dismissed and there may be speedy recovery of the amount of tax due
to the corporation. D
58. Jn another decision relied upon reported in [ 1980] (Supp.) SCC p.
574, Seth Nandlal v. State of Haryana there was no provision for a waiver
or reduction of amount of pre-deposit, it is submitted, even that the provision
was held to be valid as the purpose was to prevent frivolous appeals and
revisions which impedes the implementation of the ceiling policy. Referring E
to yet another decision reported in [1988] 4 SCC p. 402, Vijay Prakash D.
Mehta and Anr. v. Collector of Customs (Preventive) Bombay, it is submitted
that right to appeal is neither an absolute right nor an ingredient of natural
justice which principles are to be followed in judicial and quasi-j.1dicial
proceedings. A right of appeal is a statutory right and it can be circumscribed p
by the conditions. We also find that there are further observations to the
·~ effect that the condition is for the purpose to act in torrorem to make the
people comply with the provisions of the law. [1993] I SCC' p.22, Shyam
Kishore and Ors. v. Municipal Corporation of Delhi, has been referred to
submit that a similar provision was upheld without there being any provision
for waiver of the condition. The submission is that such a provision as that G
of pre-deposit before maintaining an appeal is not unknown to law and there
are several other statutes containing similar provisions. Emphasis is on the
provision of waiver or reduction of the amount required to be paid which, it
is submitted, strikes a balance between the right of a person to appeal and the
right of the person appealed against for speedy recovery of his dues. H
1026 SUPREME COURT REPORTS [2004) 3 S.C.R.

A 59. We may like to observe that proceedings under Section 17 of the
Act, in fact are not appellate proceedings. It seems to be a misnomer. In fact
it is the initial action which is brought before a Forum as prescribed under
the Act, raising grievance against the action or measures taken by one of the
parties to the contract. It is the stage of initial proceeding like filing a suit in
civil court. As a matter of fact proceedings under Section 17 of the Act are
B in lieu of a civil suit which remedy is ordinarily available but for the bar
under Section 34 of the Act in the present case. We may refer to a decision
of this Court reported in [ 197] 2 SCC p. 393 Smt. Ganga Bai v. Vijay Kumar
and Ors. where in respect of original and appellate proceedings a distinction
J
has been drawn as follows:-
c " ........ There is a basic distinction between the right of suit and the
right of appeal. There is an inherent right in every person to bring a
suit of civil nature and unless one's choice. It is no answer to a suit,
howsoever frivolous to claim, that the law confers no such right to
sue. A suit for its maintainability requires no authority of law and it
D is enough that no statute b!U's the suit. But the position in regard to
appeals is quite the opposite. The right of appeal inheres in no one
and therefore an appeal for its maintainability must have the clear
authority of !aw. That explains why the right of appeal is described
as a creature of statute."

E 60. The requirement of pre-deposit of any amount at the first instance
of proceedings is not to be found in any of the decisions cited on behalf of
the respondent. All these cases relate to appeals. The amount of deposit of
75% of the demand, at the initial proceeding itself sounds unreasonable and
oppressive more particularly when the secured assets/the management thereof
F along with the right to transfer such interest has been taken over by the
secured creditor or in some cases property is also sold. Requirement of deposit
of such a heavy amount on basis of one sided claim alone, cannot be said to
be a reasonable condition at the first instance itself before start of adjudication
of the dispute. Merely giving power to the Tribunal to waive or reduce the
amount, does not cure the inherent infirmity leaning one-sidedly in favour of
G the party, who, so far has alone .been the party to decide the amount and the
fact of default and classifying the dues as NPAs without participation/
association of the borrower in the process. Such an onerous and oppressive
condition should r.ot be left operative in expectation of reasonable exercis.:
of discretion by the concerned authority. Placed in a situation as indicated
H above, where it may not be possible for the borrower to raise any amount to
---
MARDIA CHEMICALS LTD. v. U.0.1. [13Rl.IESH KUMAR. J.] I027
make the deposit, his secured assets having already been taken possession of A
or sold, such a rider to approach the Tribunal at the first instance of
proceedings, captioned as appeal, renders the remedy illusory and nugatory.

61. In the case of Seth Nandla/ (supra), while considering the question
of validity of pre-deposit before availing the right of appeal the Court held
" .... right of appeal is a creature of the statute and while granting the right the B
legislature can impose conditions for the exercise of such right so long as the
conditions are not so onerous as to amount to unreo.sonable restrictions
rendering the right almost illusory ....." (emphasis supplied). While making
said observation this Court referred to the decision in the case of Anant Mills
Co. ltd. (supra). In both the above noted decisions this Court had negated the C
plea raised against pre-deposit but in the case of Seth Nand/al (supra) it was
found that the condition was not so onerous since the amount sought to be
deposited was meager and that too was confined to the landholding tax payable
in respect of the disputed area i.e. the area or part thereof which is declared
surplus by the Prescribed Authority (emphasis supplied) after leaving the
permissible area to the appellant. In the above circumstances it was found D
that even in the absence of a provision conferring discretion on the appellate
authority to waive or reduce the amount of pre-deposit, it was considered to
be valid, for the two reasons indicated above. The facts of the case in hand
are just otherwise.

62. As indicated earlier, the position of the appeal under Section 17 of
E
the Act is like that of a suit in the court of the first instance under the Code
of Civil Procedure. No doubt in suits also it is permissible, in given facts and
circumstances and under the provisions of the law to attach the property
before a decree is passed or to appoint a receiver and to make a provision by
way of interim measure in respect of the property in suit. But for obtaining F
such orders a case for the same is to be made out in accordance with the
relevant provisions under the law. There is no such provision under the Act.

63. Yet another justification which has been sought to be given for the
requirement of deposit is 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. G
We find no merit in this submission too. In such an eventuality the recourse
may have to be taken to sub-section I0 of Section 13 where a petition may
have to be filed before the Tribunal for the purpose of making up of the
short-fall.
H
1028 SUPREME COURT REPORTS [20041 3 S.C.R.

A 64. The ~ondition of pre-deposit in the present case 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
B of the secured creditor (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 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. Such conditions are not alone
onerous and oppressive but also unreasonable and arbitrary. Therefore, in our
C view, sub-section (2) of Section 17 of the Act is unreasonable, arbitrary and
violative of Article 14 of the Constitution.

65. Shri Salve, learned senior counsel, appearing on behalf of the
respondents, submits that so far it relates to the provision as contained under
Section 9 of the Act, it is for the purposes of assets reconstruction. The steps
D as provided to be taken for the purpose, are different from those provided in
Chapter III relating to enforcement of security interest contained in Section
13 of the Act. Reconstruction companies are separately registered for tne
purpose according to the guidelines of the Reserve Bank of India. It is for the
purpose of proper management of the business of the borrower. It is aimed
E at continuance of the business of the company by resorting to the measure as
provided under Section 9 of the Act. It is submitted that the apprehensions
as expressed that the defaulting party may set up an asset reconstruction
company is misconceived nor there is any substance in the submission that
company in default may constitute such a company to defeat the interest cf
the creditor. A reconstruction company is required to be registered and the
F Reserve Bank of India is the authority to issue such a certificate. In the
guidelines framed by the Reserve Bank of India enough safeguards have
been provided to see that the persons setting up such a company are not
directly or indirectly in the management of the asset reconstruction of the
borrower. What is envisaged under Section 9 is, the taking over of the
G management of the business of the borrower company and the provisions as
contained under Section 15 of the Act are referable to Section 9 and not to
Section 13 of the Act. He has further submitted that the restrictions against
legal remedy is relating to measures taken under Section 13 of the Act and
not under Section 9 of the Act for reconstruction of the assets of a borrowing
company. A reconstruction company by the method of reconstruction of the
H debt, manages the affair in a manner so as to revive the company and liquidate
MARDIA CHEMICALS LTD. v. U.0.1. [BRIJESH KUMAR, J.] 1029
the debts to whomsoever they may be due. A
66. On behalf of the petitioners one of the contentions which has been
forcefully raised is that existing rights of private parties under a contract
cannot be interfered with, more particularly putting one party to an
advantageous position over the other. For example, in the present case, in a
matter of private contract between the borrower and the financing bank or B
institution through impugned legislation rights of the borrowers have been
curtailed and enforcement of secured assets has ben p:ovided for without
intervention of the court and above all depriving them the remedy available
under the law by approaching to the civil court. Such a law, it is submitted,
is not envisaged in any civilized society governed by rule of law. As discussed C
earlier as well, it may be observed that though the transaction may have a
character of 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 D
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, individual
rights may have to give way. Public interest has always been considered to
be above the private interest. Interest of an individual may, to some extent, E
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. The two aspects
are inter-twined which are difficult to be separated. There have been many
instances where existing rights of the individuals have been affected by
legislative measures taken in public interest. Certain decisions which have
been relied on behalf of the respondents, on the point are (1951] SCR p.292, F
Ramaswamy Aiyengar v. Kai/asa Thevar. In that case by enacting the Madras
Agriculturalist's Relief Act, relief was given to the debtors who were
agriculturists as a class, by sealing down their debts. The validity of the Act
was upheld though it affected the individual interest of creditors. In Dahya
Lala v. Rasul Mohd. Abdul Rahim, (1963] 3 SCR p.l, the tenants under the G
Provisions of the Bombay Tenancy Act, 1939 were given protection against
eviction and they were granted the status of protected tenant, who had
cultivated the land personally six years prior to the prescribed date. It was
found that the legislation was with the object of improving the economic
condition of the peasants and for ensuring full and efficient use of land for
agricultural purpose. By a statutory provision special benefit was conferred H
1030 SUPREME COURT REPORTS (200-1] 3 S.C.R.

A upon the te1ants in Madras city where they had put up a building for residential
or non-residential purposes and were saved from eviction, it did though affect
the existing rights of the landlords. See also (1963] (Supp.) I SCR p. 282,
Swami Motor Transports Pvt. Ltd v. Shri Sankraswamigal Mutt and Raval
& Co. v. K.G. Ramachandran, [1974] I SCC p. 424. Similarly it is also to
be found that in the case reported in [2001] 5 SCC p. 546 Kanshi Ram v.
B lachhman the law granting relief to the debtors protecting their prope1ty was
upheld. Also see [1978] 2 SCC I, Pathumma v. State of Kerala, [1977] 2
sec p. 670 and Fatehchand Himmat/al V. State of Maharashtra, [1962] I
SCR p. 852, Ramdhandas v. State of Punjab.

C 67. It is well known that in different states Rent Control legislations
were enacted providing safeguards to the sitting tenants as against the existing
rights of the landlords, which before coming into force of such law were
governed by contract between the private parties. Therefore, it is clear that
it has always been held to be lawful, whenever it was necessary in the public
interest to legislate irrespective of the fact that it may affect some individuals
D enjoying certain rights. In the present we find that case the unrealized dues
of banking companies and financial institutions utilizing public money for
advances were mounting and it was considered imperative in view of
recommendations of experts committees to have such law which may provide ..
speedier remedy before any major fiscal set back occurs and for improvement
E of general financial flow of money necessary for the economy of the country
that the impugned Act was enacted. Undoubtedly such a 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.

F 68. The main thrust of the petitioners as indicated in the earlier part of
this judgment to challenge the validity of the impugned enactment is that no
adjudicatory mechanism is available to the borrower to ventilate his grievance
through an independent adjudicatory authority. Access to the justice, it is
submitted, is hall-mark of our system. Section 34 of the Act bars the
jurisdiction of the civil courts to entertain a suit in matters of recovery of
G loans. The remedy of appeal available under the Act as contained in Section
17 can be availed only after measures have already been taken by the secured
creditor under sub-section (4) of Section 13 of the Act which includes sale
y
of the secured assets, taking over its management and all transferable rights
thereto. Virtually it is no remedy at all also in view of the onerous condition
H of deposit of75% of the claim of the secured creditor. Before filing an appeal
MARDIA CHEMICALS LTD. v. U.O.I. [BRl.IESl-I KUMAR. J.] 1031

under Section 17 of the Act, decision is to be taken in respect of all matters A
by the bank or financial institution itself which can hardly be said to be an
independent agency rather they are a party to the transaction having unilateral
power to initiate action under sub-section (4) of Section 13 of the Act. So far
remedy under Article 226 of the Constitution of India is concerned, the
submission is that it may not always be available since the dispute may be B
only between two private parties, the banking companies, co-operative Banks
or fin:incial institutions, foreign banks, some of them may not be authorities
within the meaning of Article 12 of the Constitutioi1 of India against whom
a writ petition could be maintainable. Thus the position that emerges is that
a 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 C
unconstitutional and cannot survive. In support of the aforesaid contentions
besides others, reliance has particularly been placed upon a case reported in
[1997) 3 SCC p. 261, L. Chandrakumar v. Union of India and Ors., [2003)
6 SCC 675 and Surya Dev Rai v. Ram Chander Rai and Ors.. A reference
has also been made to the decision of Kihoto Hallahan (supra). In the case D
).
of L. Chandra Kumar (supra) it is held, some adjudicatory process through
an independent agency is essential for determining the rights of the parties
>- more particularly when the consequences which flow from the offending Act
defeat the civil rights of a party.

69. On behalf of respondents time and again stress has been given on E
the contention that in a contractual matter between the two private parties
they are supposed to act in terms of the contract and no question of compliance
with the principles of natural justice arises nor the question of judicial review
of such actions need to be provided for. However, at the very outset, it may
be pointed that the contract between the parties asin the present cases, is no p
more as private as sought to be asserted on behalf of the respondents. If that
was so in that event parties would be at liberty to seek redressal of their
grievances on account of breach of contract or otherwise taking recourse to
the normal process of lawas available, by approaching the ordinary civil
courts. But we find that a contract which has been entered into between the
two private parties, in some respects has been superseded by the statutory G
provisions or it may be said that such contracts 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. Hence, it
cannot be pleaded that the petitioners cannot complaint of the conduct of the
banking companies and financial institutions for whatever goes in between H
1032 SUPREME COURT REPORTS [2004] 3 S.C.R.

A the two is absolutely a matter of contract between private parties, therefore, -··
no adjudication may be necessary.

70. At this stage we may also take note of the arguments raised on
behalf of the petitioners that in the present day world concept of lender's
liability has also developed which cannot be ignored. We have already referred
B to certain facts in relation to this point that at one stage a statement was made
at the floor of the House that it was necessary to legislate on lender's liability.
No such Bill though seems to have been introduced. Certain decisions
'
>
pertaining to the liability of the lenders have been cited on behalf of the
petitioners and -a, few others by the learned counsel for the respondents.
C Learned counsel for the petitioners emphatically submitted that the Act is
loaded against the borrowers and no provision regarding the liability of the
lenders has been fuade in the Act. Given below are some of the cases on the
point cited by the parties:

KMC Co. v. Irving Trust Co., 757 F2d752 (6th Cir.1985) and Palisades
D Properties, Inc. v. Brunetti, 44 NJ 117, 207 A2d 522, 531 (1965).

71. Arguments have been advanced as to how far principles of lender's
liability are applicable. Whatever be the position, however, it cannot be denied "
that the financial institutions namely, the lenders owe a duty to act fairly and
E in good faith. 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. They cannot be free from it.
Irrespective of the fact as to whatever may have been held in decisions of
some American courts, in view of the facts and circumstances and the terms
of the contract and other details relating to those matter, that may or may not
F strictly apply, nonetheless even in absence of any such decisions or legislation, A
it is incumbent upon such financial institutions to act fairly and in good faith ••
complying with their part of obligations under the contract. This is also the
basic principle of concept of lender's liability. It cannot be a one-sided affair
shutting out all possible and reasonable remedies to the other party, namely
G borrowers and assume all drastic powers for speedier recovery of NPAs.
Possessing more drastic powers calls for exercise of higher degree of good
faith and fair play. The borrowers cannot be left remediless in case they have
been wronged agai~st or subjected to unfair treatment violating the terms and ~·

conditions of the contract. They can always plead in defence deficiencies on
H the part of the banks and financial institutions.
MARDIA CHEMICALS LTD. v. U.0.1. [BRIJESH KUMAR, J.] 1033
·~
72. Shri Soli J. Sorabjee, learned Attorney General submits that basically A
there is a presumption in favour of the constitutionality of an enactment and
unless it is found that a provision enacted results in palpably arbitrary
consequences, courts refrain from declaring the law invalid as legislated by
the legislature. In support of this contention, he has relied upon a decision of
this Court reported in [1981] 4 SCC p. 675, R.K. Garg v. Union of India. He
B
has particularly drawn our attention to the following passage :

~ "The first rule is that there is always a presumption in favour of the
constitutionality of a statute .... This rule is based on the assumption,
judicially recognized and accepted, that the legislature understands
and correctly appreciates the needs of its own people, its laws are c
directed to problems made manifest by experience ... Every legislation
particularly in economic matters is essentially empiric and it is based
on experimentation or what one may call trial and error method ...
There may be crudities and inequities in complicated experimental
economic legislation but on that account alone it cannot be struck
down as invalid. The courts cannot ..... be converted into tribunals for
D
)'
relief from such crudities and inequities ..... The Court must therefore
.. adjudge the constitutionality of such legislation by the generality of
its provisions and not by its crudities or inequities or by the possibilities
of abuse of any of its provisions..... The Court must defer to legislative
judgment in matters relating to social and economic policies and E
must not interference, unless the exercise of legislative judgment
appears to be palpab~v arbitrary" (emphasis supplied).

73. The following observations have also been referred as made in
Bhavesh D. Parish and Ors. v. Union of India and Anr., [2000] 5 SCC 471
.{; at 486: F

" ..... .it is necessary that while dealing with economic legislations,
this Court, while not jettisoning its jurisdiction to curb arbitrary action
or unconstitutional legislation, should interfere only in those few cases
where the view reflected in the legislation is not possible to be taken G
at alf" (emphasis supplied)

-...., 74. A reference has also been made for similar observations to the
cases reported in [1980] 4 SCC p.507 at 513-514, Srinivas Enterprises v.
Union of India, [1967] I SCR p. 15 at p.36 and Jalan Trading v. Union of
India. While referring to the observations made in a case reported in [1962] H.
1034 SUPREME COURT REPORTS [2004] 3 S.C.R.

A 3 SCR p.786 at p.829-30, the Collector of Customs, Madras v. Nathe/la
Samapathu Chetty, it is submitted that the intent of the Parliament shall not
be defeated merely for the reason that it may operate a bit harshly on a small
section of public where it may be necessary to make such provisions of
achieving the desired objectives to ensure that the nefarious activities of
B smuggling etc. had to be necessarily curbed. In Fatehchand Himmatla/ (supra)
where debts of the agriculturists were wiped of, this Court observed :

"Every cause claims its martyr and if the law, necessitated by practical I
.I.
considerations. makes generalizations which hurt a few, it cannot be
helped by the Court. Otherwise, the enforcement of the Debt Relief
C Act will turn into an enquiry into scrupulous and unscrupulous
creditors, frustrating through endless litigation, the instant relief to
the indebted which is the promise of the legislature." [See p.689 para
44]

Yet in another decision referred to reported in [ 1961] 3 SCR p. 135,
D Kishanchand Arora v. Commissioner of Police, it has been held that absence
of appeal does not necessarily render the legislation unreasonable. Provision
for appeal is not an absolute necessity. For same propositions a reference has
also been made to Chinta lingam and Ors. v. Government of India and Ors., ·•
[1970] 3 sec 768 at 772, where it has been observed that when the power
E has to be exercised by one of the highest officers the fact that no appeal has
been provided is not material. In respect of appellate provision once again
our attention has been drawn to the observations made by this Court in
(1979] 4 SCC 573 at p. 582-83, paras 15 & 16, Organn Chemical Industries
and Anr. v. Union of India and Ors., to the effect that an appeal is a desirable
F corrective but not an indispensable imperative. It is, however, further observed
in this decision that it may all depend upon the nature of the 5ubject matter,
, '
other available correctives and the possible harm flowing from the wrong
orders.

75. In relation to the argument on behalf of the petitioners th.at they are
G entitled to be heard before a notice under sub-section (2) of Section 13 i5
issued failing which there is denial of principles of natural justice, a reference
has been made to certain decisions to submit that in every case, it is not
necessary to make a provision for providing a hearing. For example, in the ..
case of a licensing statute, see [1961] 3 SCR p.135, Kishan Chand Arora
H (supra). The other decisions referred to are: [1963] 2 SCR p. 353 Lachhman
Das v. State of Punjab, [1977] 2 SCC 256 at 262, Chairman, Board of
MARDIA CHEMICALS LTD. v. U.O.l. [BRI.IESH KUMAR. J.] I035
Mining Examination v. Ramjee and (2002] 3 SCC 496 at 504 para 7, Haryana A
Financial Corporation v. Jagdamba Oil Mills to submit that concept of natural
justice is not a straight jacket formula. It, on the other hand, depends upon
the facts of the case, nature of the enquiry, the rules under which the Tribunal
is acting and what is to be seen that no one should be hit below the belt.
Relationship between the creditor and the debtor, it is submitted, is essentially B
in the realm of a contract.

76. In regard to the submission made by the parties as indicated in
preceding paragraphs, we would like to make it clear that 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. No C
hearing can be demanded from the creditor at this stage. So far the provision
of appeal is concerned, we have already discussed in the earlier part of the
judgment that proceedings under Section 17 of the Act have been wrongly
described as appeal before the Debt Recovery Tribunal. It is in fact a forum
where proceedings are originally initiated in case of any g·rievance against
the creditor in respect of any measure taken under sub-secticn (4) of Section D
13 of the Act. Hence, the decisions on the point as to whether provision for
an appeal is essential or not are not of any assistance in the facts of the
present case.

77. It is also true that till the stage of making of the demand and notice
under Section 13(2) of the Act, no hearing can be claimed for by the borrower. E
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. So as to
demonstrate that the reply of the borrower to the notice under Section 13(2) p
of the Act has been considered applying mind to it. The reasons howsoever
briefthat may be for not accepting the objections, if raised in the reply, must
be communicated to the borrower. True, presumption is in favour 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 G
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.

78. It was sought to be argued that fairness cannot be a one way street.
The plea of absence of natural justice lies ill in the mouth of chronic defaulters H
1036 SUPREME COURT REPORTS [2004) 3 S.C.R.

A who have not paid the principal amounts admittedly due to the banks. The
said argument pre-supposes admission of the liability by the borrowers and
all of them to be chronic defaulters. It would only be pre-judging an issue.
We hope it was not meant to be said that all those who defaulted according
to the banks and financial institutions must be condemned unheard who
might not deserve any hearing to place their side of the case, unless they
B must go through the crushing pre-conditions of deposit of 75% of the amount
demanded over and above their secured assets already having been taken
possession of. We feel this can well be one example of hitting below the belt.

79. Some submissions have been made pointing out that in certain
C circumstances it would not be clear as to in what manner the provisions of
the Act would be workable. We feel the objections pointed out are not such
which render the statute invalid or unconstitutional. Such problems about
working of any particular provision of the Act in any particular factual
situation, may be considered as and when it may arise. We, therefore, do not
think it necessary to go into those questions.
D
80. Under the Act in consideration, we find that before taking action a _..
notice of 60 days is required to be given and after the measures under Section
13(4) of the Act have been taken, a mechanism has been provided under
Section Ii of the Act to approach the Debt Recovery Tribunal. The above
noted provisions are for the purposes of giving some reasonable protection
E to the borrower. Viewing the matter in the above perspective, we find what
emerges from different provisions of the Act, is as follows :-

I. Under sub-section (2) of Section 13 it is incumbent upon the secured
creditor to serve 60 Jays notice before proceeding to take any of the measures
F as provided under sub-section (4) of Section 13 of the Act. After service of
notice, if the borrower raises any objection or places facts for consideration
' .
... ,

of the secured creditor, such reply to the notice must be considered with due
application of mind and the reasons for not accepting the objections, howsoever
brief they may be, must be communicated to the borrower. In connection
with this conclusion we have already held a discussion in the earlier part of
G the judgment. The reasons so communicated shall only be for the purposes
of the information/knowledge of the borrower without giving rise to any
right to approach the Debt Recovery Tribunal under Section 17 of the Act,
at that stage.

2. As already discussed earlier, on measures having been taken under
H
MARDI A CHEMICALS LTD. v. U.0.1. [BRl.IESH KUMAR . .I.] 103 7
sub-section (4) of Section 13 and before the date of sale/auction of the property A
it would be open for the borrower to file an appeal (petition) under Section
17 of the Act before the Debt Recovery Tribunal.

3. That the Tribunal in exercise of its ancillary powers shall have
jurisdiction to pass any stay/interim order subject to the condition at it may
deem fit and proper to impose. B
4. In view of the discussion already held on this behalf, we find that
the requirement of deposit of 75% of amount claimed before entertaining an
appeal (petition) under Section 17 of the Act is an oppressive, onerous and
arbitrary condition against all the canons of reasonableness. Such a condition C
is invalid and it is liable to be struck down.

5. As discussed earlier in this judgment, we find that it will be open to
maintain a civil suit in civil court, within the narrow scope and on the limited
grounds on which they are permissible, in the matters relating to an English
mortgage enforceable without intervention of the court. D
81. In view of the discussion held in the judgment and the findings and
;. directions contained in the preceding paragraphs, we hold that 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 E
provisions of the Act cannot be sahl to be unconstitutional in view of the fact
that 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.
). F
'' 82. We, therefore, subject to what is provided in paragraph 80 above,
uphold the validity of the Act and its provisions except that of sub-section (2)
of Section 17 of the Act, which is declared ultra vires of Article 14 of the
Constitution of India.

83. Before we part with the case, we would like to observe that where G
a secured creditor has taken action under Section 13(4) of the Act, in such
cases 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 today.
H
1038 SUPREME COURT REPORTS [2004] 3 S.C.R.

A 84. The transfer cases, appeals and the petitions thus stand partly allowed ,..,
limited to the extent indicated above. For the rest of the reliefs, they stand
dish1issed. Costs easy.

N.J. Transfer cases/Appeals/Petitions partly allowed.

B

[

·'

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