Mardia Chemicals Ltd.
vs Union of India
- 2004 (2) Mh.L.J. 1090
Facts:
The case revolved around the constitutionality of certain sections of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI Act), particularly Sections 13, 15, 17, and 34. The Industrial Development Bank
of India (IDBI) had issued notices to Mardia Chemicals Ltd. and other parties under Section
13 of the Act, demanding payment of arrears within 60 days, failing which enforcement of
security interests without court intervention would be initiated.
Various petitioners challenged the constitutionality of the SARFAESI Act, arguing that it was
unnecessary given the existence of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993. They also contended that the Act infringed upon contractual rights and
denied access to judicial remedies. Additionally, concerns were raised regarding procedural
fairness and potential legal errors arising from the Act's provisions.
Issues:
1. Whether the court can delve into the necessity of a statute while considering its
constitutional validity.
2. Whether the terms or existing rights under a contract entered into by two private
persons could be altered by provisions of law conferring one-sided powers in favor of
one of the contracting parties.
3. Whether Section 13 of the SARFAESI Act is constitutional.
4. Whether the requirement to pay 75% of the amount owed before filing an appeal with
the Debt Recovery Tribunal (DRT) is onerous, and thus Section 17 of the Act is
unconstitutional.
Judgement:
i. The Supreme Court emphasized the supremacy of Parliament in determining the
necessity of legislation and rejected the argument questioning the need for the
SARFAESI Act.
ii. The Court distinguished between the SARFAESI Act and the Recovery of Debts Due
to Banks and Financial Institutions Act, highlighting the specific focus of the former
on nonperforming assets (NPAs) and secured creditors. It highlighted that the object
of the SARFAESI 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.
iii. Section 13 of the SARFAESI Act was upheld as constitutionally valid by the Court.
iv. The Court recognized that the secured creditor was exercising rightful entitlements
under Section 13 due to default, considering it a subsequent default after the
classification of NPAs.
v. Prior to the 2016 Amendment, Section 13 acknowledged the Right of Redemption to
some extent.
vi. While confirming the constitutionality of Section 13, the Court emphasized the need
for borrowers to have representation.
vii. The supreme court upheld 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. Section 17(2) was deemed arbitrary, leading to the alteration of
the heading from "appeal" to "application."
Ratio:
The Court upheld the SARFAESI Act as constitutionally valid, affirming Parliament's
authority in legislating on matters of economic policy, particularly concerning NPAs and
secured creditors. The court distinguished between the SARFAESI Act and the Recovery of
Debts Due to Banks and Financial Institutions Act, highlighting the SARFAESI Act's specific
focus on addressing nonperforming assets (NPAs) and providing mechanisms for secured
creditors. This underscores that laws addressing distinct issues may coexist without one
rendering the other unnecessary. It acknowledged the importance of allowing borrowers
representation and found Section 17(2) to be arbitrary, prompting necessary changes. This
highlights the court's role in scrutinizing statutory provisions for procedural fairness and
ensuring alignment with constitutional principles.
Impact of the Judgement:
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 word “appeal” was replaced by “application,” despite the fact that the
marginal header remained the same (wow). In 2016, the appeal was superseded by an
application in the marginal heading.
DRTs now have jurisdiction over the rights of tenants in a security property. In such
instances, the property is given to the person who files the application (if he meets the
requirements).
Section 18 was also considerably amended. When filing an appeal with the DRAT, you must
deposit 50% of the total cost, which can be lowered to 25%. DRT was likewise granted a
similar waiver right under Section 17.
It was later referred in several cases like
MAHENDRA SHRIVASTAVA V. SURENDRA PRADHAN
Facts: The Appellant filed an appeal against the order dated 8.6.2010 by the District Forum,
Bhopal in CC No.863/2006. The District Forum had dismissed the Appellant's complaint,
stating that it was not maintainable based on the precedent set by the Supreme Court in
Mardia Chemicals Ltd. v. Union of India, AIR 2004 SC 2371. The case involved the purchase
of a flat by the Appellant from the Respondent in Daisy Apartment, Hawa Mahal Road,
Bhopal for Rs.3,50,000. The Appellant alleged that despite full payment, the Respondent did
not construct a house of good quality. The Respondent denied the allegations, claiming that
no consideration had been paid.
Issues:
1. Whether the complaint of the Appellant should be adjudicated on its merits according
to the law?
Decision: The Court set aside the impugned order of the District Forum dated 8.6.2010 and
remanded the case back to the District Forum, Bhopal for disposal on its merits according to
the law. The Court emphasized the need to afford an opportunity of hearing to both parties.
Reasoning: The Court found that the complaint of the Appellant deserved to be adjudicated
on its merits according to the law, and the dismissal of the complaint by the District Forum
was set aside. The Court emphasized the importance of affording both parties an opportunity
to be heard before reaching a decision.
Conclusion: The Court's decision to remand the case back to the District Forum for disposal
on its merits according to the law ensures that the Appellant's complaint will be reviewed and
adjudicated in a fair and just manner, in line with the principles of natural justice.
TRANSCORE V. UNION OF INDIA AND ANOTHER
Facts: In March 1999, Indian Overseas Bank (“the Bank”) filed OA No. 354 of 1999 before
DRT, Chennai to recover dues from M/s Transcore, the appellant. The claim was disputed and
an interlocutory application was filed by the Bank to bring properties to sale. On 6-1-2003, a
notice under Section 13(2) of the NPA Act was issued. The borrower contended that the
notice was merely a show-cause notice and did not constitute “action” under the proviso to
Section 19(1) of the DRT Act. The constitutional validity of the NPA Act was upheld
in Mardia Chemicals Ltd. v. Union of India 2004 4 SCC 311. By the amending act 30 of
2004, Section 19(1) of the DRT Act was recasted simultaneously with Section 13 of the NPA
Act, 2002. The appellant herein (M/s Transcore) mainly relied on the said reasons given by
this Court in Mardia Chemicals (2004) 4 SCC 311 in support of its contention that the notice
dated 6-1-2003 under Section 13(2) of the NPA Act was merely a show-cause notice and it
did not constitute “action” under the NPA Act and, therefore, the said Bank was obliged
statutorily to apply for withdrawal of OA No. 354 of 1999 before invoking the NPA Act.
Issues: Whether withdrawal of OA in terms of the first proviso to Section 19(1) of the DRT
Act, 1993 (inserted by amending Act 30 of 2004) is a condition precedent to taking recourse
to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (“the NPA Act”, for short).
Paras: Learned Senior Counsel appearing for Indian Bank, submitted that if notice under
Section 13(2) of the NPA Act was only a show-cause notice then Section 13(3-A) was not
required. He submitted that because Section 13(2) notice constituted an action taken under
the Act, Section 13(3-A) becomes necessary because it gives an opportunity to the borrower
to object to the notice. Learned counsel submitted that the NPA Act deals only with secured
assets whereas the DRT Act deals with both secured and non-secured assets. He submitted
that a secured asset is an asset which is owned by the bank/FI and, therefore, it can act
without intervention of the court. Learned counsel urged that in certain respects, the DRT Act
did not provide for the remedies, which led to the enactment of the NPA Act. In this
connection, he cited the example of takeover of management of the business of the borrower
which is provided for only in the NPA Act and not in the DRT Act. (para 54)
Decision: Held in favour of the banks/FIs (secured creditors) and, accordingly, the borrower's
appeal/IA in this Court stands dismissed whereas the appeal/IA filed by the banks/FIs stands
allowed with no order as to costs.
Reasoning: On reading Section 13(2), which is the heart of the controversy in the present
case, one finds that if a borrower, who is under a liability to a secured creditor, makes any
default in repayment of secured debt and his account in respect of such debt is classified as
non-performing asset then the secured creditor may require the borrower by notice in writing
to discharge his liabilities within sixty days from the date of the notice failing which the
secured creditor shall be entitled to exercise all or any of the rights given in Section 13(4). On
reading Section 13(2) it is clear that the said sub-section proceeds on the basis that the
borrower is already under a liability and further that, his account in the books of the bank or
FI is classified as substandard, doubtful or a loss. The NPA Act comes into force only when
both these conditions are satisfied. Section 13(2) proceeds on the basis that the debt has
become due. It proceeds on the basis that the account of the borrower in the books of bank/FI,
which is an asset of the bank/FI, has become non-performing. Therefore, there is no scope of
any dispute regarding the liability. There is a difference between accrual of liability,
determination of liability and liquidation of liability. Section 13(2) deals with liquidation of
liability. Section 13 deals with enforcement of security interest, therefore, the remedies of
enforcement of security interest under the NPA Act and the DRT Act are complementary to
each other. There is no inherent or implied inconsistency between these two remedies under
the two different Acts. Therefore, the doctrine of election has no application in this case.
CHOKSI HERAEUS PVT. LTD. (M/S.), UDAIPUR V. STATE & ORS.
A group of writ petitions challenging orders passed by the Collector under various sections of
the Rajasthan Stamp Act, 1998, and the validity of proviso to Section 65(1) of the Act were
presented before the Division Bench. The case was consolidated due to the common legal
issue involved.
Facts: The petitioners challenged the requirement of pre-deposit as stipulated in the proviso to
Section 65(1) of the Act, arguing that it was discriminatory and confiscatory. They contended
that the provision was similar to one previously declared unconstitutional by the Supreme
Court.
The judgments in the case of Mardia Chemicals Ltd., is not applicable to the present
case, in as much as the Hon'ble Apex Court, while holding provisions of Sub-Section
(2) of Section 17 of the Act of 2002 to be unconstitutional, considered six aspects
narrated in para 64 of the judgment, however, in this case, except ground No. 5 as
mentioned in para 64, none of the grounds exists and so far as ground No. 5,
mentioned in para 64 is concerned, same narrates that condition to deposit 75% of the
amount cannot be considered to be a meagre amount. However, in view of the
judgment of the Apex Court, in the case of Anant Mills as well as Vijay Prakash D.
Mehta's case, it cannot be said that condition to deposit the amount 50% of the
recoverable amount can be said to be unconstitutional, more so, when the said
condition for maintaining revision is imposed after adjudication of amount by the
Collector after hearing the parties, therefore, not only a right of revision is provided
after hearing both the parties, but, even after determination of recoverable amount
which otherwise is missing in the case of Sub-Section (2) of Section 17 of the Act of
2002. In the case in hand, revisional authority is not approached for the first instance
and amount is determined by the Collector prior to filing of revision. The assets or its
management is not taken over or remains under the control of the authority, thus
person aggrieved can raise the funds, whereas in the case of Section 17(2) of the Act
of 2002, it is missing. Thus, the judgment of the Apex Court in Mardia Chemicals
Ltd., does not apply-to the present case.
Paras: 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 of
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 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 in Ganga bai v. Vijay
Kumar, (1974) 2 SCC 393 where in respect of original and appellate proceedings a
distinction has been drawn as follows: (SCC p. 397, para 15)
“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 the suit is barred by
statute one may, at one's peril, bring a suit of 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 is enough that no statute bars 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 law. That
explains why the right of appeal is described as a creature of statute.” (para 59)
Decision: The Division Bench held that the pre-deposit condition was arbitrary, unjust, and
contrary to Article 39-A of the Constitution. They found the amendment to Section 56(1) of
the Stamp Act, introducing the pre-deposit requirement, to be ultra vires as it lacked
presidential assent.
Legal Reasoning: The Division Bench emphasized that the right of appeal is statutory and can
be subject to conditions. They noted that the pre-deposit condition was deemed reasonable
and not onerous, burdensome, or cumbersome by the Apex Court. The Division Bench found
the proviso to Section 65(1) of the Act constitutionally valid based on prior Supreme Court
judgments upholding similar provisions.
Conclusion: The Division Bench ruled that the proviso to Section 65(1) of the Rajasthan
Stamp Act, 1998 was constitutionally valid. The writ petitions were dismissed on this ground.
