MARDIA CASE AND ITS IMPLICATIONS ON SARFAESI ACT When the banks were nationalized in 1969 & 1980,

1980, the then implemented legislation put the interest of the common man above the interest of the Banks and the FIs. Thus, there were lenient terms for availing the loans and not much effective means for the Banks for their recovery. As a result, Banks & FIs faced a great distress. In these circumstances, the Recovery of Debt Due to Banks and Financial Institutions Act was passed in 1993 and then in 2002 a comprehensive act came to be enacted by the Parliament known as SARFAESI Act. Now the validity of this act was challenged through the landmark case of Mardia Chemicals Ltd v Union of India1.

FACTS
Mardia Chemicals Ltd was issued notice by the IDBI under Section 13 of the Ordinance, then in force, required 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 It claimed to take 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. Mardia chemicals challenged the vires of certain provisions of the Act through which the banks and the financial institutions had been vested with arbitrary powers, without any guidelines for its exercise and also without providing any appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand, its validity and the actual amount of dues, sought to be recovered from the borrowers.

(2004) 4 SCC 311

tHIS was joined with various writ petitions in various High Courts challenging the validity of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Issue I

Whether it is open to challenge the statute on the ground that it was not necessary to enact it when another statute was already in operation Petitioners claimed that there was already Recovery of Debts due to Banks and Financial Institutions Act, 1993 in place, so SARFAESI for the same purpose was not needed at all. Court held, the required enquiry is whether it is constitutional are not. And the challenge based on Whether there was a need or not will not stand. Thus the petitioners contention was rejected.

Issue II
Whether the existing rights under the contract entered into by two private parties could be amended by the provisions of law in one sided manner in favor of one of the parties to the contract? The court observed the petitioners were not clear on where exactly were they locating the legal validity of their argument. The court said the petitioners had not even locate their right under Art19 (1) (g) or Art 298 and the constitution itself clarifies that they are subjected to reasonable restriction. So this contention was totally rejected by the court

Issue III
Whether Section 13 of the Act ultra Vires of the Constitution? Validity of section 13 is the first line of attack in the instant case. But, The Court said that it was a factually faulty argument. S.13 does not exclude any judicial forum, but merely provides that a judicial remedy can be availed only after the secured creditor has exercised his powers under s.13 (4). This is perfectly valid. Many statutes have provisions under which a forum can be availed after the aggrieved party has engaged self help. In addition, it was pointed out that u/s 9 of the Rules the asset cannot be sold for 60 days, it is open to the borrower to approach the Tribunal within that period. Further the court held that by section 35 takes care of any residual conflicts as it provides overriding effect on all other laws. But most significant part was that the Court partially accepted the argument of the plaintiffs and added two riders to s.13 (i) It held that the lender is under a duty to disclose the reasons for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13 (ii) The Court drew an analogy with English mortgage and pointed out that enforcement proceedings under an English mortgage can be challenged on the ground of fraud. Such provisions are applicable to this section as well.2

Issue - IV
Whether the requirement of 75% of the amount due before appeal to the DRT is onerous and therefore Section 17 of the Act is ultra vires to the Constitution? The Main Grounds of Challenge of Validity of Section 17 are as follows:
2

Adams v. Scott, (1859) 7 WR (Eng.) 213 (Z49)

(i)

The remedy before the Tribunal under section 17 of the Act is illusory, as it is burdened with the onerous and oppressive condition of deposit of 75% of the amount of demand, before the Tribunal can entertain the appeal.

(ii)

That provision impedes access to the Tribunal which is meant for redressal of the grievance of a borrower.

(iii)

Where the possession of the secured assets or the management of the secured assets of the borrower, it is not at all necessary to burden the borrower doubly with deposit of 75% of the demand amount.

(iv)

It would not be possible for a borrower to raise funds to deposit the huge amount of 75% of the demand, once he is deprived of the possession/management of the secured assets.

The Court observed that the reference to the remedy provided under section 17 of the Act as an appeal is a misnomer It is the stage of initial proceeding like filing a suit. The requirement of pre-deposit at the stage of initiation of proceedings does not stand on the same footing as the requirement of pre-deposit at the stage of filing appeal.

There is an inherent right in every person to bring a suit of civil nature. A suit for its maintainability requires no authority of law and it is enough that no statute bars a suit. The position in regard to appeals is quite the opposite. An appeal for its maintainability must have the clear authority of law. The requirement of pre-deposit at the stage of initiation of proceedings impedes the inherent right of a party to approach a judicial forum for redressing his grievances.

If the law provides that an appeal can be filed only upon depositing a portion of the amount in dispute, such a law is valid as it conferred a right to appeal which was not available by any act, but the present one.

So the court held that: 1) It is imposed while approaching the adjudicating authority of the first instance, so not an appeal.

2) There is no special reason for requiring double security in respect of amount due yet to be determined and settled. 3) 75% of the amount claimed by no means would be a meager amount. 4) It would leave the borrower in a position where it would not be possible for him to raise the funds to make deposit of 75% of the undetermined demand 5) Such conditions are not only onerous and oppressive but also unreasonable and arbitrary. CONCLUSION So soon after the judgment of the Mardia Case, section 17 was amended by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Ordinance, 2004.3 The petition to the Tribunal under that Section is now being referred to as an application and not as an appeal. It is now provided4 that the Appellate Tribunal shall not entertain the appeal of the borrower unless the borrower deposits 50% of the amount of debt due from him or the amount determined by the Debts Recovery Tribunal, whichever is less.

In section 17 of the principal Act,-(a) in sub-section (1),(i) for the words "may prefer an appeal", the words "may make an application along with such fee, as may be prescribed," shall be substituted and shall be deemed to have been substituted with effect from the 21 st day of June, 2002;" 4 "Provided further that no appeal shall be entertained unless the borrower has deposited with the Appellate Tribunal fifty per cent. of the amount of debt due from him, as claimed by the secured creditors or determined by the Debts Recovery Tribunal, whichever is less: Provided also that the Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount to not less than twenty-five per cent. of debt referred to in the second proviso."