MARDIA
CHEMICALS LIMITED v. UOI
JUDGEMENT DATE-
8th April, 2004
JUDGES- FORMERCJI;
BRIJESH KUMAR; ARUN KUMAR
FACTS
Soon
after the Act went into effect, ICICI & IDBI Bank sent a notice to Mardia
chemicals ltd. (dyes and pigment Industry Company). The banks requested that
money be disbursed within 60 days, failing which, lenders as secured creditors
will be entitled to enforce security interests without the intervention of the
tribunal by invoking section 13 of the SARFESI Act, taking possession of the
secured asset and transferring it by way of sale, lease, or otherwise for
realising the secured asset. Other banking institutions issued similar notices
in response to petitions filed in various high courts (Special Leave Petition
(Civil) Nos.5013/2003, 9658/2003, 11089/2003, 11267/2003, 11268/2003,
15566/2003, 17465/2003, and Special Leave Petition (Civil) Nos.CC 10728 and
SLP(C) No.6723/2003).
Mardia's
grievances were denied, and they were declared NPA, as well as notice that
they could only file an appeal after paying 75% of the claim before
appearing in DRT (Debt Recovery Tribunal), as per section 17(2) of the
Act. Mardia being insolvent filed a writ petition in the high
court for examining the irregularities and legitimacy of the SARFESI Act's
provisions. The high court concluded that few of the Act's clauses need to
be redrafted and are ambiguous. The case was transferred to the
Supreme Court when several illegalities in the SARFESI Act were discovered. The
case was decided by the Supreme Court (Transferred Case Nos.92-95 of 2002),
where number of similar petitions were clubbed together to determine
the validity of the SARFESI Act.
ISSUE
1. Is
it possible to challenge SARFAESI on the grounds that it was unnecessary to
enact, especially when legislation was already in effect?
2. Whether Section
13 of the Act is unconstitutional?
3. Whether Section
17 especially 17(2) of the Act is arbitrary, irrational and
unconstitutional?
HELD
1. The
Supreme Court underlined the Parliament's primacy in deciding the need for legislation.
The comparison between the RDB Act and SARFAESI was rejected since the latter
deals with the highly particular issue of nonperforming assets (NPAs) among
other differences such as the latter dealing only with secured creditors. As a
result, it is up to Parliament to decide whether or not legislation is
required.
2. Section
13 was found to be constitutionally valid by the Court. The secured creditor is
only exercising his entitlement since the default that led to the sec 13 action
might be considered a "second default"—NPA + 60 days extra time to
repay post warning. Prior to the 2016 Amendment, Section 13 acknowledged the
Right of Redemption in a sense. Rule 8 and 9 of the SI Rules stated that the
bank must deliver a notice confirming the sale of secured property, and that
the borrower may pay off the obligation and reclaim ownership at any point
prior to the actual sale. While the Supreme Court confirmed the
constitutionality of the clause, it pushed hard for debtors to have the right
to representation.
3. The
Supreme Court determined Section 17(2) to be arbitrary, and ordered that the
heading be altered from "appeal" to "application."
CONCLUSION
As
economies throughout the world become more integrated and industry becomes more
internationalised, our country has become a vortex of strong economic
competition. Money has begun to move at a breakneck pace, necessitating
sensible legislation to protect it against anomalies and the like. As a result,
there was a pressing need to aid banks and other financial institutions in the
recovery of loans, particularly those that had gone bad and were considered
sub-standard. As a result, these banks suffered significant loss;
therefore, SARFESI Act was enacted to regulate the securitization and
reconstruction of financial assets, as well as the enforcement of security
interests.
The
Supreme Court upheld the constitutional validity of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFESI)
Act, 2002, except for the condition of depositing 75% of the outstanding amount
before approaching the Debt Recovery Tribunal in a landmark decision Mardia
Chemicals Ltd.v.Union of India & Ors (DRT). While the borrower will have
the ability to file a complaint with the debt recovery tribunal (DRT), if the
DRT does not grant a stay order, the banker will be able to sell the assets.
When a borrower defaults (i.e., does not pay his or her debts for 90 days), the
lending bank is required to offer a 60-day notice before enforcing the secured
asset. The bank must wait another 45 days after replying to the borrowers'
question before selling the asset. Also, Section 13 now states that the bank
must evaluate all of a borrower's representations and respond within seven days
(which was later changed to 15 days). Within section 17, the term
"appeal" was substituted with "application," despite the
fact that the marginal header remained the same. In 2016, the appeal was
superseded by an application in the marginal heading. DRTs now have
jurisdiction over the rights of tenants in a secured property. In such
instances, the property is given to the person who makes the application (if he
meets the conditions). Section 18 was also somewhat changed. When filing an
appeal with the DRAT, you must deposit 50% of the total cost, which can be
lowered to 25%.
DRT
was awarded a similar waiver authority under Section 17 as well. This was later
amended in 2016, and DRT no longer has the ability to waive the deposit amount,
though it can be decreased to 25%.
PRECEDENTS
·
CIVIL APPEAL NO. OF
2004 (Arising out of SLP (C) No.11267 of 2003) M/s.Haji Abdul Hameed & Ors.
v. Central Bank of India & Ors.
·
CIVIL APPEAL NO. OF
2004 (Arising out of SLP (C) No.11268 of 2003) M/s.Etawah Sales Corporation
& Ors. v. Central Bank of India & Ors.
·
CIVIL APPEAL NO. OF
2004 (Arising out of SLP (C) No.15566 of 2003) N.C.Jain v. Bank of Baroda &
Ors.
·
CIVIL APPEAL NO. OF
2004 (Arising out of SLP (C) No.17465 of 2003) M/s.Deep Chand Sushil Kumar
& Ors. v. Central Bank of India & Anr.
·
M/s.Suneeta Wool & Readymade
Emporium v. Allahabad Bank
·
Pushpinder Kaur &
Anr. v. Punjab & Sindh Bank &
Anr.
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