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CASE NO.: Transfer Case (civil)  92-95 of 2002

PETITIONER: Mardia Chemicals Ltd. Etc. Etc.

RESPONDENT: U.O.I. & Ors. Etc. Etc.

DATE OF JUDGMENT: 08/04/2004

BENCH: CJI., Brijesh Kumar & Arun Kumar.

JUDGMENT: JUDGMENT

WITH

WRIT PETITION (CIVIL) NO.140 OF 2003

M/s.Ashok Mfg.Co.Pvt.Ltd. & Ors.                 Versus U.O.I. & Anr.                                          WRIT PETITION (CIVIL) NO.649 OF 2002

Major Mahajan Mandal  & Ors.                     Versus U.O.I.                                                   

WRIT PETITION (CIVIL) NO.673 OF 2002

Supreme Rubber Industries        Versus U.O.I. & Anr.            

TRANSFER CASE (CIVIL) NO. 10 OF 2003

Modern Terry Towels Ltd. & Ors. Versus State of Rajasthan & Ors.

WRIT PETITION (CIVIL) NO.322 OF 2003

Sohanlal Rara                                            Versus U.O.I. & Anr.                                            

TRANSFER CASE (CIVIL) NO. 46 OF 2003

J.K.Udaipur Udyog Ltd.                           Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.643 OF 2002

Shree Synthetics Ld. & Anr       Versus U.O.I. & Ors.                                    

TRANSFER CASE (CIVIL) NO. 12 OF 2003

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Sobhag Textiles Ltd.  Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.48 OF 2003

M/s.REL Industries .Ltd.                                 Versus U.O.I. & Ors.                                            

CIVIL APPEAL NO.           OF 2004

(Arising out of SLP (C) No.5013 of 2003)

M/s.Oriental Motors & Anr.                       Versus Punjab & Sindh Bank & Anr.                       

WRIT PETITION (CIVIL) NO.176 OF 2003

M/s.Mahendra Commercial Ltd. & Anr.              Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.190 OF 2003

H.R.Brothers & Ors.                                              Versus U.O.I. & Anr.                                                          WRIT PETITION (CIVIL) NO.219 OF 2003

M/s.Tirthankar Agro & Ors.                               Versus U.O.I. & Anr.                                                    

CIVIL APPEAL NO.           OF 2004

(Arising out of SLP (C) No.9658 of 2003)

Citisteel Corporation & Ors. Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.147 OF 2003

M/s.Punjab Breeders Ltd.. Versus U.O.I. & Ors.                                                    

TRANSFER PETITION (CIVIL) NO. 326 OF 2003

Bank of Rajasthan Ltd.                                   Versus Naresh Kumar Nevatia & Ors.                      

WRIT PETITION (CIVIL) NO.279 OF 2003

Euro India Biotech Ltd. & Ors.                           Versus U.O.I. & Ors.                                                    

WRIT PETITION (CIVIL) NO.231 OF 2003

Pradeep Sohawala                                                

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Versus U.O.I. & Ors.                                                    

CIVIL APPEAL NO.           OF 2004 (Arising out of SLP (C) No.11089 of 2003)

M/s.Rudra Informatics & Ors.                     Versus Prudential Co-op.Bank Ltd.& Anr.                 

WRIT PETITION (CIVIL) NO.292 OF 2003

Patheja Brothers Forgings & Stampings&Anr.       Versus U.O.I. & Anr.                                                    

CIVIL APPEAL NO.           OF 2004 (Arising out of SLP (C) No.11267 of 2003)

M/s.Haji Abdul Hameed & Ors.                     Versus 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.      Versus Central Bank of India & Ors.                     

TRANSFER PETITION (CIVIL) NO. 403 OF 2003

Bank of Rajasthan                                        Versus R.K.Garg & Sons (HUF)                            

WRIT PETITION (CIVIL) NO.379 OF 2003

M/s.Verma Cards & Posters Pvt.Ltd. & Ors.  Versus U.O.I. & Anr.                                                    

CIVIL APPEAL NO.           OF 2004 (Arising out of SLP (C) No.15566 of 2003)

N.C.Jain                                                                 Versus Bank of Baroda & Ors.                            

TRANSFER CASE (CIVIL) NO. 11 OF 2003

Soni Tourism Pvt. Ltd. & Ors.                    Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.366 OF 2003

G.V.Venkateshiah                                                 Versus State Bank of India & Ors.                              

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WRIT PETITION (CIVIL) NO.541 OF 2002

M/s.Amulet International Pvt.Ltd. & Ors.                 Versus U.O.I. & Anr.                                                    

CIVIL APPEAL NO.           OF 2004 (Arising out of SLP (C) No.17465 of 2003)

M/s.Deep Chand Sushil Kumar & Ors.               Versus Central Bank of India & Anr.                     

WRIT PETITION (CIVIL) NO.477 OF 2003

M/s.Rama Steel Industries  & Ors.                Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.496 OF 2003

M/s.Pahadewali Ispat Pvt.Ltd. & Anr.     Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.499 OF 2003

M/s.KPJ Tradevest Pvt.Ltd. & Anr.                Versus U.O.I. & Ors.                                            

TRANSFER PETITION (CIVIL) NO. 756 OF 2003

M/s.Vaishno Cold Storage & Ors.          Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.545 OF 2003

M/s.Madhumilan Syntex Ltd. & Anr.        Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.557 OF 2003

J.K.Jain & Ors.                                          Versus U.O.I. & Anr.                                            

CIVIL APPEAL NO.           OF 2004 (Arising out of SLP (C) No...... of 2003(CC 10728)

M/s.Suneeta Wool & Readymade Emporium  Versus Allahabad Bank, Jhansi                           

CIVIL APPEAL NO.           OF 2004 (Arising out of SLP (C) No.6723 of 2003)

Pushpinder Kaur & Anr.                   Versus Punjab & Sindh Bank  & Anr.             

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WRIT PETITION (CIVIL) NO.590 OF 2003

M/s.Nabe International & Ors.                    Versus U.O.I. & Anr.                                            

WRIT PETITION (CIVIL) NO.13 OF 2004

Kanti Devi & Anr.                                        Versus Canara Bank & Ors.                                       

AND

WRIT PETITION (CIVIL) NO.546 OF 2003

M/s.Akal Springs Ltd. Versus U.O.I. & Anr.                                            

BRIJESH KUMAR, J.

1.              Leave granted in Special Leave Petition (Civil)  Nos.5013/2003, 9658/2003, 11089/2003, 11267/2003,  11268/2003, 15566/2003, 17465/2003 and special leave  petition @ CC 10728 and SLP(C) No.6723/2003.

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 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 contained in  Sections 13, 15, 17 and 34 of the Act.  Besides others, we  may, for the sake of convenience,  refer to the averments made  and documents filed in Transferred Case Nos.92-95 of 2002 -  M/s.Mardia Chemicals Ltd. Etc. Etc. Vs. Union of India & Ors.  Etc.Etc.

3.              It appears that a notice dated July 24, 2002 was  issued to the petitioner - Mardia Chemicals Ltd. by the  Industrial Development Bank of India (for short ’the IDBI’)  under Section 13 of the Ordinance, then in force, requiring it  to pay the amount of arrears indicated in the notice within 60  days, failing which the IDBI as a secured creditor would be  entitled to enforce the security interest without intervention of  the court or Tribunal,  taking recourse to all or any of the  measures contained in sub-section (4) of Section 13 namely,  by taking over possession and/or management of the secured  assets.  The petitioner was also required not to transfer by way  of sale, lease or otherwise any of the secured assets.  Similar  notices were issued by other financial institutions and banks  under the provisions of Section 13 of the Ordinance/Act to  different parties who filed petitions in different High Courts.   

4.              The main contention challenging the vires of certain  provisions of 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

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appropriate 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 recovered from the  borrowers.  The offending provisions as contained under the  Act, are such that, it all has been made  one sided affair while  enforcing    drastic   measures of sale of the property or taking  over the  management or the possession of the secured assets  without affording any opportunity to the borrower.  Before  further detailing the grounds of attack,  we may peruse some  of the relevant provisions of the Act. 5.              The term "borrower" has been defined in clause (f) 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 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;"

6.              "Financial Assistance" has been defined in clause  (k), which reads as under: "financial assistance" means any loan or  advance granted or any debentures or bonds  subscribed or any guarantees given or letters  of credit established or any other credit facility  extended by any bank or financial institution;"

7.              Similarly, the term "default" is defined in clause (j),  as quoted below : "default" means non-payment of any principal  debt or interest thereon or any other amount  payable by a borrower to any secured creditor  consequent upon which the account of such  borrower is classified as non-performing asset  in the books of account of the secured creditor  in accordance with the directions or guidelines  issued by the Reserve Bank"

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 asset, in  accordance with the directions or under  guidelines relating to asset classifications  issued by the Reserve Bank".             

9.              "Reconstruction company" has been defined in  clause(v) of Section 2 which means :         "Reconstruction company" means a company  formed and registered under the Companies  Act, 1956 (1 of 1956) for the purpose of asset  reconstruction;

10.             "Secured asset" has been defined in clause(zc) of

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Section 2 which means :  "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 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 (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 :

"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 : "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:  "Enforcement of security interest.- (1)  Notwithstanding anything 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.

(2) Where any borrower, who is under a  liability 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 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 amount payable by

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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  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; (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 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 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 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.

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

(8) If the dues of the secured creditor together  with all costs, charges and expenses incurred  by him are tendered to the secured creditor at

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any time before the date fixed for sale or  transfer, the secured asset shall not be sold or  transferred by the secured creditor, and no  further step shall be taken by him for transfer  or sale of that secured asset.

(9) In the case of financing of a financial asset  by more than one secured creditors or joint  financing of a financial asset by secured  creditors, no secured creditor shall be entitled  to exercise any or all of the rights conferred on  him under or pursuant to sub-section (4)  unless exercise of such right is agreed upon by  the secured creditors representing not less  than three-fourth in value of the amount  outstanding as on a record date and such  action shall be binding on all the secured  creditors:

       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 Act, 1956 (1 of 1956).  

Xxx                     xxx             xxx

(10) Where dues of the secured creditor are  not fully satisfied with the sale proceeds of the  secured assets, the secured 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.

(11) Without prejudice to 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.

Xxx                     xxx                     xxx

(13) No borrower shall, after receipt of notice  referred to in sub-section (2), transfer by way  of sale, lease or otherwise (other than in the  ordinary course of his business) any of his  secured assets referred to in the notice,  without prior written consent of the secured  creditor."

15.             Mr.Kapil Sibal, learned senior counsel appearing for  the petitioners in the Transferred Case - M/s.Mardia  Chemicals Ltd. submits that there was no occasion to enact  such a draconian legislation to find a short-cut to realize the  dues without their ascertainment but which the secured  creditor considered to be the dues and declare the same as  non-performing assets (NPAs). Out of the total NPAs which are  considered to be about one lac crores, about half of it is due  against priority sector like agriculture etc.  The dues between

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10 lacs to one crore constitute only 13.90% of the total dues.  By providing statistics on the point it is  sought to be  demonstrated that most of the dues are against those  borrowers whose borrowing ranges between Rs.25000 to Rs.10  lacs.  Besides the above, it is submitted, that there is already a  special enactment providing for recovery of dues of banks and  financial institutions. Therefore, it was not necessary to enact  yet another legislation containing drastic steps and procedure  depriving the debtors of any fair opportunity to defend  themselves from the onslaught of the harsh steps as provided  under the Act.   

16.             It is further submitted that no provision has been  made to take into account the lenders liability,  though at one  time it was considered necessary to have an enactment  relating to lenders liability and a bill was also intended to be  introduced, as it was considered that it is necessary for the  lenders as well to conduct themselves responsibly towards the  borrowers.  It is submitted that despite such a statement, as  indicated above, on the floor of the House, neither any such  law has been enacted so far nor any care has been taken to  introduce such  safeguards in the Act to protect the borrowers  against their vulnerability to  arbitrary or irresponsible action  on the part of the lenders.  On a comparative basis, in relation  to other countries, it is submitted that the percentage of NPA  of as against the GDP is only 6% in India which is much less  as compared to China, Malasia, Thailand, Japan, South Korea  and other countries.  Therefore, it is evident that the resort  has been taken to a drastic legislation, under mis- apprehension that other ways and means have failed to  recover the dues from the borrowers.   

17.             Referring to Section 13 of the Act it is submitted  on  behalf of the petitioners that a security interest can be  enforced by the secured  creditor straightaway without  intervention of the court just on default in repayment of an  instalment and  non-compliance of a notice of 60 days in that  regard,  declaring  the loan as  non-performing asset. Under  sub-section 4 of Section 13 the secured creditor is entitled to  take possession of the secured assets and may transfer the  same by way of lease, assignment or sale as provided under  clause (a) or under clause (b) to take over the management of  the secured assets including the right to transfer any secured  assets or to appoint any person as provided in clause (c) to  manage the secured assets taken over by the creditor. Under  clause (d) by means of a notice any person who has acquired  any of the secured assets from the borrower or who has to pay  to the borrower any amount which may cover the secured  debt,  can be asked to pay it to the secured creditor.  All that  is provided is that if all the dues with costs and charges and  expenses incurred by the creditor is tendered before the date  fixed for sale of the assets no further steps shall be taken for  sale of the property. 18.             It is submitted that the mechanism provided for  recovery of the debt under Section 13 indicated above does not  provide for any adjudicatory forum to resolve any dispute  which may arise in relation to the liability of the borrower to  be treated as a defaulter or to see as to whether there has  been any violation or lapse on the part of the creditor or in  regard to the correctness of the amount sought to be recovered  and the interest levied thereupon.  On the other hand, Section  34 bars the jurisdiction of the civil court to entertain any suit  in respect of any matter which a Debt Recovery Tribunal or the  appellate Tribunal is empowered to determine.  It also provides  that no injunction shall be granted by any court or other

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authority in respect of any action taken or to be taken in  pursuance of any power conferred by or under  Act or under  the Recovery of Debts due to Banks and Financial Institutions  Act, 1993.  Section 35 gives an overriding effect to  the  provisions of the Act over the provisions contained under any  other law.  The submission, therefore, is that before any action  is taken under Section 13, there is no forum or adjudicatory  mechanism to resolve any dispute which may arise in respect  of the alleged dues or the NPA.

19.             It is further submitted that the provision of appeal  as contained in Section 17 of the Act is also illusory since an  appeal may be preferred within the specified time from the  date on which measures under sub-section 4 of 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 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 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 and the possession of  the secured assets moves into the hands of the creditor. The  position thus is that 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 13.   Such a law, it is submitted, is arbitrary and suffers from the  vice of unreasonableness.   

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 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 namely, the case of M/s.Modern Terry Towel  Ltd. leaving aside the questions of fact, submits that for  exercise of power under Section 13, certain enquiries would be  necessary as to whether a person to whom notice is given is  under a liability to pay as also the question of extent of the  liability etc.  Further the questions pertaining to law of  limitation and bar under consortium agreements,  claim of set  off/counter claim, creditors defaults as bailee or its failure to  disburse the credit in time, the chargeability of penal interest  or compound interest or non-appropriation of amount already

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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 decision of this Court reported in 2002(5) SCC  p.685, Indian National Congress (I) Vs. Institute of Social  Welfare and others, observations made by one of us (Chief  Justice V.N.Khare) have been relied upon as quoted below:-    "Thus, where there is a lis or two contesting  parties making rival claims and the statutory  authority under the statutory provision is  required to decide such a dispute, in the  absence of any other attributes of a quasi- judicial authority, such a statutory authority is  quasi-judicial authority. But there are cases where there is no lis or two  contending parties before a statutory authority  yet such a statutory authority has been held to  be quasi-judicial and decision rendered by it  as a quasi-judicial decision when such a  statutory authority is required to act judicially.   In R v. Dublic Corpn. It was held thus : "In this connection the term judicial does not  necessarily mean acts of a Judge or legal  tribunal sitting for the determination of  matters of law, but for purpose of this  question, a judicial act seems to be an act  done by competent authority upon  consideration of facts and circumstances and  imposing liability or affecting the rights.  And if  there be a body empowered by law to enquire  into facts, making estimates to impose a rate  on a district, it would seem to me that the acts  of such a body involving such consequences  would be judicial acts."

"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  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 connection  reliance has also been placed on     a case  reported in 1992  Suppl.(2) SCC p.651, Kihoto Hollohan v.    Zachillhu & 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 determination of disputed questions,   as in the existing law,   under Section 13 of the Act,  is   unconstitutional.  It is further submitted that legislature has  vested  the beneficiary to exercise the power without any  determination 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 determination, it is submitted, is

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manifestation of sovereign power to determine the legal rights  which cannot be vested in private bodies as foreign banks,  cooperative banks or non-banking financial institutions etc.   Stress has also been given upon the condition of deposit of  75% of claim before entertainment of the appeal.   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 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 vs. Egmore Benefit Society, and also  AIR 1955  Madras 343, V.P.Padmavati vs. P.S.Swaminathan  Iyer.  It is submitted that English mortgage is in the nature of  conveyance or absolute transfer of mortgage  property with  provision of retransfer upon discharge of mortgage and  referred to AIR 1969 Mysore p.280, Bank of Maharashtra  Ltd., Puna Vs. 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. 23.             Shri Dholakia, learned senior counsel appearing on  behalf of the guarantors of the principal borrower, refers to   Section 2(f) of the Act to indicate that the definition of the word  ’borrower’ covers even the guarantor.  He then refers to  Section 135 of the Contract Act to show that in certain  circumstances a guarantor is discharged of his obligation.  The  petitioner received a notice under Section 13(2) of the Act. The  submission is in view of the bar of Section 34 to file a suit in  the Civil Court, it is not possible for him to approach the Court  to show and establish that he is  a discharged guarantor,  hence notice under Section 13(2) is bad and refers to 1997(5)  SCC p.536 at page 735 Mafatlal Industries Ltd. and Ors. Vs.  Union of India and Ors. He next referred to Section 31 of the   Act.  It is submitted that the word ’security’ has not been  defined under Section 2 of the Act.  Then refers to Section 2(t)  of the Act which defines the word ’property’ which means a  movable, immovable,  or any right to receive payment,  receivable intangible assets etc.  It is submitted that the Act  not to apply to the legal liens. Further refers to Laws of  Halsbury’s, 4th Edition, Vol.28, pages 510-511 and  Section 48  of the Transfer of Property Act. It is submitted that if   property  is subject to several charge 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  such a situation how the Act will be workable.    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 financial institutions are badly effected by  non-recovery of dues and despite the existing laws like,  the  Recovery of Debts due to Banks and Financial Institutions Act,   much could not be achieved, hence it was necessary to take  further legislative steps to accelerate recovery of  the heavy  amount of dues.  It is submitted that after availing the facility  of financial assistance quite often the borrowers hardly show  interest in repayment  of loan which keep on accumulating as  a result of which it becomes  difficult for the financial  institutions to continue the financial assistance to deserving  parties due to heavy blockade of money stuck up with the  erring borrowers.  It is not good for a financial institution to

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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.

26.             Shri Soli J.Sorabjee, learned Attorney General,  appearing for the 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 around one lac  crores.  After coming into force of the Recovery of Debts due 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  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 objection 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-section 4 of Section 13 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  17 of the Act it is adequate and the condition of deposit of 75%  of the claim before the appeal could be entertained is not an  unusual condition and it is to be found  in other statutes also.  It is then submitted that proviso to Section 17 very clearly  provides that on an application moved in that behalf the  condition of deposit of the amount can be waived or the  amount can be reduced.  Therefore, it would not be correct to  say that condition of pre-deposit is harsh as it can be relaxed  in deserving cases.  The bar of jurisdiction of the Civil Court  was thought to be necessary to avoid lengthy legal process in  realizing the amount due.  It is then submitted that normally  there should be a presumption in favour of validity of a  legislation more so in regard to the laws relating to economic  and financial matters and a few  instances here and there of  any  harsh results would not be a valid consideration to  invalidate the law. 27.             Shri Harish N.Salve, learned senior counsel  appearing for the ICICI 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 to achieve success in  rapidly developing its economy.  While banking  industry in India is progressively complying  with the international prudential norms and  accounting practices, there are certain areas in  which the banking and financial sector do not  have a level playing field as compared to other  participants in the financial markets in the  world. There is no legal provision for  facilitating securitisation of financial assets of  banks and financial institutions.  Further,  unlike international banks, the banks and  financial institutions in India do not have

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power to take possession of securities and sell  them.  Our existing legal framework relating to  commercial transactions has not kept pace  with the changing commercial practices and  financial sector reforms.  This has resulted in  slow pace of recovery of defaulting loans and  mounting levels of 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."

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 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.   

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 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 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.    

30.             Shri Andhyarujina, learned senior counsel  appearing for the Life Insurance Corporation of India stressed  upon the background in which the 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 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 III 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  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 validity of the Act.  

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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 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  background  particularly  when another statute was already in   operation? ii)     Whether provisions as contained under  Section 13 and 17 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 illusory for the reason it is  available only after the action is taken 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? iv)     Whether the terms 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 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? vi)     Whether the provisions under Sections 13 and  17(2)  of the Act are unconstitutional on the  basis of the parameters laid down in 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. 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 suited for recovery of such dues.  For financial assistance  rendered to the industries by the financial institutions,  financial liquidity is essential failing which there is a blockade  of large sums of amounts creating circumstances which retard  the economic progress followed by a large number of other  consequential ill effects.  Considering all these circumstances,  the Recovery of Debts Due to Banks and Financial Institutions  Act was enacted in 1993 but as the figures show it also did not  bring the desired results.  Though it is submitted on behalf of  the petitioners that it so happened due to inaction on the part  of the governments in creating Debt Recovery Tribunals and  appointing Presiding Officers, for a long time.  Even after  leaving that margin, it is to be noted that things in the  concerned spheres are desired to move faster.  In the present  day global economy it may be difficult to stick to old and  conventional methods of financing and recovery of dues.  

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Hence, in our view, it cannot be said that a step taken towards  securitisation of the debts and to evolve means for faster  recovery of the NPAs was not called for or that it was  superimposition of undesired law since  one legislation was  already operating in the field namely the Recovery of Debts  due to Banks and Financial Institutions Act.  It is also to be  noted that the idea has not erupted abruptly to resort to such  a legislation.  It appears that a thought was given to the  problems and  Narasimham Committee was constituted which  recommended for such a legislation keeping in view the  changing times and economic situation whereafter yet another  expert committee was constituted then alone the impugned  law was enacted.   Liquidity of finances and flow of money is  essential for any healthy and growth oriented economy.  But  certainly,  what must be kept in mind is that the law should  not be in derogation of the rights which are guaranteed to the  people under the Constitution.  The procedure should also be  fair, reasonable and valid, though it may vary looking to the  different situations needed to be tackled and object sought to  be achieved.   

35.             As referred to above, the Narasimham Committee  was constituted 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 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 to the international practice, an asset  is treated as non-performing when the interest is overdue for  at least two quarters.  Income of interest is considered as  such, only when it is received and not on the accrual basis.   The Committee suggested that the same should be followed by  the banks and financial institutions in India and an advance  is to be shown as non-performing assets where the interest  remains due for more than 180 days.  It was further suggested  that the Reserve Bank of India should prescribe clear and  objective definitions in respect of advances which may have to  be treated as doubtful,  standard or sub-standard, depending  upon different situations. Apart from recommending to set up  of special Tribunals to deal with the recovery of dues of the  advances made by the banks the committee observed that  impact of such steps would be felt by the banks only over a  period of time, in the meanwhile, the Committee also  suggested for reconstruction of assets saying "the Committee  has looked at the mechanism employed under similar  circumstances in certain other countries and recommends the  setting up of, if necessary by special legislation, a separate  institution by the Government of India to be known as ’Assets  Reconstruction Fund (ARF) with the express purpose of taking  over such assets from banks and financial institutions and  subsequently following up on the recovery of dues owed to  them from the primary borrowers."  While recommending for  setting up of special Tribunals, the Committee observed :  "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

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and financial institutions is thus blocked  in unproductive assets, the values of  which keep deteriorating with the  passage of time.  Banks also incur  substantial 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  could expedite the recovery of process...."

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

36.             In its Second Report, the Narasimham Committee  observed that the 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 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 of Property Act,  which is critical to the work of financial  intermediaries.........."

One of the measures recommended in the circumstances was  to vest the financial institutions through special statutes, the  power of sale of the asset without intervention of the court and  for reconstruction of the assets.  It is thus to be seen that the  question of non-recoverable or delayed recovery of  debts  advanced by the banks or financial institutions has been  attracting the attention and the matter was considered in  depth by the committees specially constituted consisting of the  experts in the field.  In the prevalent situation where the  amount of dues are huge and hope of early recovery is less,  it  cannot be said that a more effective legislation for the purpose  was uncalled for or that it could not be resorted to.  It is again  to be noted that after the report of the Narasimham  Committee, yet another committee was constituted headed by  Mr.Andhyarujina for bringing about the needed steps within  the legal framework.  We are therefore, unable to find much  substance in the submission made on behalf of the petitioners  that while the Recovery of debts due to Banks and Financial  Institutions Act was in operation it was uncalled for to have  yet another legislation for the recovery of the mounting dues.   Considering the totality of circumstances the financial climate  world over, if it was thought as a matter of policy, to have yet  speedier legal method to recover the dues, such a policy  decision cannot be faulted with nor it is  a matter to be gone    into by the courts to test the legitimacy of such a measure  relating to financial policy.

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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 "RBI’s prudential norms on income recognition,  asset classification and provisioning - pertaining to advances"  through a Circular dated August 30, 2001.  It is mentioned in  the said Circular as follows : "1.1 In line with the international practices  and as per the recommendations made by the  Committee on the Financial System (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."

2.1 Non-performing Assets:

"2.1.1  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 specified period of time.  The specified  period was reduced in a phased manner as  under: Year ending March 31    Specified period 1993    four quarters 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 climate,  upgradation of technology in the banking  system, etc., it was decided to dispense with  ’past due’ concept, with effect from March 31,  2001. 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 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 case of bills  purchased and discounted, (iv)    interest and/or installment of principal  remains overdue for two 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 than 180

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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 of NPAs,  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 depending upon their respective  business levels.  The cut off point 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 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 in which the debt  is to be classified as non-performing asset as early  as  possible.  Therefore, we find no substance in the submission  made on behalf 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 III of the Act.  It provides that a secured  creditor may  enforce any security interest without 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 (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 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  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 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

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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 expenses etc. as may be incurred are  tendered to the secured creditor before sale or transfer no  further steps be taken in that direction.   

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 borrower under sub-section (4) of  Section 13 of the Act.  It reads as under : "17. Right to appeal .- (1) 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 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 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.

(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 (51  of 1993) and rules made thereunder."   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 the  secured creditor before his appeal can be entertained.

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 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 Institutions Act,  1993 (51  of 1993)."  

42.             Mainly it is to be considered as to whether there is

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absolute bar  of 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 (1) of Section 13 and  the bar of the jurisdiction of the civil court under Section 34 of  the Act.  Sub-section (1) of Section 13 begins with  "Notwithstanding anything contained" under Section 69 of the  Transfer of Property Act any 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.-(1) 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 any part thereof, in  default of the payment of mortgage-money,  without the intervention of the Court, 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  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; (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  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 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 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 exercised; but any person

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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)           . . . . . . .    (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 sub-section (1) 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 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 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 absolutely  to the mortgagee with a term of retransfer. Section 58(e)  pertaining to English mortgage is quoted below : "58. ’Mortgage’, ’mortgagor’, ’mortgagee’,  ’mortgage-money’ and ’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 property absolutely to the  mortgagee, but subject to a proviso that he  will retransfer it to the mortgagor upon  payment of the mortgage-money as agreed,  the transaction is called an English  mortgage.

Xxx                             xxx             xxx"

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 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(1) of the Act provides that  notwithstanding anything contained in Section 69 a secured

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interest can be enforced without intervention 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 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 : "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."    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 (1)  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 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 100 years later after the enactment of the  Transfer of Property Act.  In this connection  it has been  pointed out on behalf of the respondents  that Rajamannar  Committee was appointed by Government of 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 :

"The Rajamannar Committee appointed by the  Government of India gave its report in 1977  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 become  a very important instrument to facilitate  development of commercial credit.  The  Rajamannar Committee’s recommendations,  that were extracted in the Narasimham Report  (1998) 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 mofussil.  This distinction was based on the fact that in  the mofussil, it was the money lenders with  their unscrupulous methods, who were, by

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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 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 ,,, 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 banks and other  financing institutions is now rightly stressed.   It is understandable that the legal framework  is essentially conceived to 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 is a sine  qua non for efficient trade and commerce, especially for  financial 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 guidelines. It 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 NPAs should be considered and resolved by some internal  mechanism.  In our view, the above position suggests 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 indicated above, we may  consider as to what forums or remedies are available to the  borrower to ventilate his 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 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

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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 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 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 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 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/business 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 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 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  court to seek redressal but in the present case, in view of  Section 13 (1) of 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 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  secrecy and shall be conducive in building an atmosphere of  confidence and healthy commercial practice.  Such a duty, in  the circumstances of the case 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

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Recovery Tribunal under Section 17 of the Act.  Such a right  accrues only after measures are taken under sub-section (1) of  Section 13 of the Act.   

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 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 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 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, etc.- (1) No sale  of immovable 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.

(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

(3) to 10) xxx                  xxx             xxx"

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 even get a relief of  stay,  in  exercise of ancillary power which vest in the Tri bunal as  per decisions referred and reported in 1969 (2) SCR p.65, ITO  vs. Mohd.Kunhi and 1999 (6) SCC p.755, Allahabad Bank,  Calcutta Vs. Radha Krishna Maity & Ors.  Again referring to  Section 19 of the Act it is pointed out that in case in the end  the Tri bunal finds that the secured assets have been  wrongfully transferred or taken possession of an order for  return of such assets can be passed and the borrower in that  even 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 (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 determine.  Thus before  any action or measure is taken under sub-section (4) of  Section 13,  it is submitted by Mr. Salve one of the counsel for  respondents that there would be no bar to approach the civil

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court.  Therefore, it cannot be said no remedy is available to  the borrowers.  We, however, find that this contention 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 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 entertain any proceeding thereof.  The bar of civil court thus  applies to all such  matters which may be taken cognizance of  by the Debt Recovery 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 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 the civil court in the  cases of English mortgages.  We find such a scope having been  recognized in the two decisions of the Madras High Court  which have been relied upon heavily by the learned Attorney  General as well appearing for the Union of India, namely  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 in violation of the  rights, duties and obligations are twofold in  character.  The mortgagor can come to the  Court before sale with an injunction for  staying the sale if there are materials to show  that the power of sale 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, (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 rely.  (See  Rashbehary Ghose Law of Mortgages, Vol.II,  Fourth Edn., page 784).

        52.             The other decision on which reliance has been  placed is A.Batcha Saheb Vs. Nariman K.Irani & Anr.,  AIR 1955 Madras DB p.491 more particularly on  paragraph 8.  

53.             We also find it appropriate to mention at this stage

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that in reply to submission made by Shri Dholakia on behalf of  the guarantors that even though a guarantor may stand  discharged as envisaged under Sections 133 and 135 of the  Indian Contracts Act eg., where any variance in terms of the  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.  

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 such 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 costs and expenses incurred, no further  steps for sale of the property are to take place.  In this  connection, a reference has also been made by the learned  Attorney General to a decision reported in 1977(3) SCC p.247,  Naraindas Kavsondas  Vs. S.A.Katam which provides that a  mortgagor can exercise his right of redemption any time until  the final sale of the property by execution of a conveyance.  Sri  Sibal, however, submits that it is the amount due according to  the secured creditor which shall have to be deposited to  redeem the property.  Maybe so, some difference regarding the  amount due may be there but it cannot be said that right of  redemption of property is completely 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 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 by the Tribunal. We feel that it would  be  difficult to brush aside the challenge 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  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 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 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

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be necessary to burden  the borrower doubly with deposit of  75% of the demand amount. In a situation where the  possession of the secured assets have already been taken over  or its management, it is highly unreasonable further to ask for  75% of the amount claimed  before 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 impossibility which renders the remedy made  available before the DRT 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. Vs. 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.     

58.             In another decision relied upon reported in 1980  (Supp.) SCC p.574, Seth Nandlal Vs. 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 to yet another decision reported in 1988(4)  SCC p.402, Vijay Prakash D.Mehta and Anr. Vs. 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-judicial proceedings.  A right of appeal is a statutory  right and it can be circumscribed 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 (1) SCC  p.22, Shyam Kishore & Ors. Vs. 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 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.  

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 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

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this Court reported in (1974) 2 SCC p. 393  Smt. Ganga Bai  Vs. Vijay Kumar and Ors.  where in respect of original and  appellate proceedings  a distinction has been drawn  as  follows:-  "........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  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."  

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 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 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 not be left operative in  expectation of reasonable exercise of discretion by  the  concerned authority.  Placed in a situation as indicated above,  where it may not be possible for the borrower to raise any  amount to make the deposit, his secured assets having  already been taken possession of 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 Nandlal (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  legislature can impose conditions for the exercise of such right  so long as the conditions are not so onerous as to amount to  unreasonable restrictions rendering the right almost illusory.  ...." (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 plea raised against pre-deposit but in the case  of Seth Nandlal (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 that even

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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 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 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.    We find no merit in this submission too.  In  such an  eventuality the 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.

64.             The condition 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 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 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 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 the 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 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 of the creditor.  A  reconstruction company is required to be registered and the  Reserve Bank of India is the authority to issue such a  certificate.  In the guidelines framed by the Reserve Bank of

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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 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 debt,  manages the affair in a manner so as to revive the company  and liquidate the debts to whomsoever they may be due.  

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 institution through impugned legislation  rights of the borrowers have been curtailed and enforcement of  secured assets has been provided 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 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 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, 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, Ramaswamy  Aiyengar Vs. Kailasa 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 Vs.  Rasul Mohd.Abdul Rahim, 1963(3) SCR p.1, the tenants  under the 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 upon the tenants in  Madras city where they had put up a building for residential or  non-residential purposes and were saved from eviction, it did

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though affect the existing rights of the landlords.  See also  1963 (Supp.)1 SCR p.282, Swami Motor Transports Pvt. Ltd.  Vs. Shri Sankraswamigal Mutt  and Raval & co. Vs.  K.G.Ramachandran, 1974 (1) SCC p.424.  Similarly it is also  to be found that in the case reported in 2001(5) SCC p.546  Kanshi Ram Vs. Lachhman the law granting relief to the  debtors protecting their property was upheld. Also  see 1978(2)  SCC 1, Pathumma Vs. State of Kerala, 1977(2) SCC p.670  Fatehchand Himmatlal  Vs. State of Maharashtra, 1962(1)  SCR p.852, Ramdhandas Vs. State of Punjab.

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 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 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.

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 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 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 of  deposit of 75% of the claim of the secured creditor.  Before  filing an appeal under Section 17 of the Act, decision is to be  taken in respect of all matters 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 only  between two private parties, the banking companies, co- operative Banks or financial institutions, foreign banks, some  of them  may not be authorities within the meaning of Article  12 of the Constitution 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 unconstitutional and cannot survive.   In support of the aforesaid contentions besides others, reliance  has particularly been placed upon a case reported in (1997) 3

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SCC p.261, L.Chandrakumar vs. Union of India & Ors. and  2003(6) SCC 675, Surya Dev Rai vs. Ram Chander Rai &  Ors..  A reference has also been made to the decision of  Kihoto Hollohan (supra).  In the case 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 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 as in the present cases, is no 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 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 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  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.  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 made in the Act. Given below are some  of the cases on the point cited by the parties:

               KMC Co. Vs. Irving Trust Co., 757 F2d752 (6th  Cir.1985),  Palisades Properties, Inc. Vs. 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 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

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matter,  that may or may not strictly apply,  nonetheless even  in absence of any such decisions or legislation, 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 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 against or  subjected to unfair treatment violating the terms and  conditions of the contract.  They can always plead in defence  deficiencies on the part of the banks and financial institutions.  

72.             Shri Soli J.Sorabjee, learned Attorney General  submits that basically 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 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 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 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 must not interference, unless the  exercise of legislative judgment appears to be  palpably arbitrary" (emphasis supplied).

73.             The following observations have also been referred  as made in Bhavesh D.Parish & Ors. v. Union of India &  Anr., 2000 (5) SCC 471 at 486 : "......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 at all" (emphasis supplied)

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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 and 1967 (1)  SCR p.15 at p.36, Jalan Trading V. Union of India.  While  referring to the observations made in a case reported in 1962  (3) SCR  p.786 at p.829-30, the Collector of Customs,  Madras V. Nathella 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 smuggling etc. had to be necessarily curbed.  In  Fatehchand Himmatlal (supra) where debts of the  agriculturists were wiped of, this Court observed : "Every cause claims its martyr and if the law,  necessitated by practical considerations,  makes generalizations which hurt a few, it  cannot be helped by the Court.  Otherwise, the  enforcement of the Debt Relief 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, Kishanchand Arora Vs. 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 & Ors. v. Government of  India & Ors., 1970 (3) SCC 768 at 772, where it has been  observed that when the power 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,  Organo Chemical Industries & Anr. Vs. Union of India &  Ors., to the effect that an appeal is a desirable corrective but  not an indispensable imperative.  It is, however, further  observed in this decision that it may all depend upon the  nature of the subject matter,  other available correctives and  the possible harm flowing from the wrong orders.

75.             In relation to the argument on behalf of the  petitioners that they are entitled to be heard before a notice  under sub-section (2) of Section 13 is 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 (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  Mining Examination v. Ramjee and 2002(3) SCC 496 at 504  para 7, Haryana 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 in the realm of a  contract.   

76.             In regard to the submission made by the parties as

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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  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  grievance against the creditor in respect of any measure taken  under sub-section (4) of Section 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. 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) of  the Act has been considered applying mind to it. The reasons  howsoever brief that 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 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 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 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 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.

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 17 of

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the Act to approach the Debt Recovery Tribunal.  The above  noted provisions are for the purposes of giving some  reasonable protection to the borrower. Viewing the matter in  the above perspective, we find what emerges from different  provisions of the Act, is as follows :- 1.      Under sub-section (2) of Section 13 it is  incumbent upon the secured creditor to serve 60  days notice before proceeding to take any of the  measures 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 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 sub-section (4) of Section 13 and  before the date of sale/auction of the property 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.  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  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.

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 provisions of  the Act cannot be said 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.

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

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Constitution of India.  

83.             Before we part with the case, we would like to  observe that where 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.  

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 dismissed. Costs easy.