Under the provisions of ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ in short), the Bank can invoke the process of recovery of money on its own without any adjudicatory process. The Banks can proceed with the enforcement of ‘security’ under the provisions of SARFAESI Act, 2002. If any borrower or any person is aggrieved with the action initiated by the Bank under the provisions of SARFAESI Act, 2002, then, he can approach the Debt Recovery Tribunal (DRT) under section 17 of the Act by paying the prescribed fee. Irrespective of the wording in section 17 with regard to the powers of the Tribunal and irrespective of the initial proposition that the DRT is only supposed to look at the procedural irregularity, in view of the subsequent judgments of the Apex Court and other High Courts, the DRT can look into all objections and provide relief to the borrower or any person aggrieved. However, in many cases, the Debt Recovery Tribunals may ask the borrower to make some deposit for asking the Bank to exercise restraint pending the disposal of the Appeal. Unless there is an apparent mistake on the part of the Bank in following the procedure, in most of the cases, the Appeals filed by the borrowers will get dismissed finally. The Appeal filed by the borrower under section 17 may be decided at the first hearing itself or it may take a maximum of one year in most of the cases. If the borrower has got any objection to the order of the DRT mandating the borrower to make some deposit, then, the option left with the borrower is to file an appeal with the DRAT or approaching High Court. If the borrower fails to comply with the order mandating him to deposit some amount, then, the Bank will proceed with the process and can even auction the property pending ‘SARFAESI Appeal’ and it means, the appeal becomes meaningless unless the DRT allows the Appeal and gives relief to the borrower taking all subsequent events also into consideration. Though there exist many technical, deeper and practical issues in filing Appeal under section 17 and getting relief, this is normally what happens if the borrower files an appeal under section 17 challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002.
It is very much possible that even before the decision on a ‘SARFAESI Appeal’ under section 17, the borrower could have deposited or paid some 20% of the outstanding amount claimed by the Bank. We should remember that the Bank can exercise lot of discretion in providing relief or relaxation to the borrower when it comes to making payments towards installments. RBI guidelines give some room for the Banks to exercise some discretion. However, in many cases, the officials concerned may hesitate to take risk and exercise discretion and it results in classifying an account as Non-Performing Asset (NPA). If the borrower fails to adhere to monthly payment conditions consecutively for three months, the Bank can classify the Account as NPA. There are other considerations for classifying an account as ‘NPA’. The point to be noted is that the borrowers have to face the proceedings under SARFAESI Act, 2002 for even minor default or negligible default which requires a sympathetic view.
While the Banks can get interest, penal interest and legal expenses incurred from the borrower, the borrower has to fight everything on his own. Supposing that the borrower looses the Appeal under section 17 of SARFAESI Act, 2002, then, section 18 of the Act provides a right of Appeal for the borrower. However, the borrower has to pay 50% of the amount claimed as a pre-deposit for maintaining an appeal and this pre-deposit amount can only be reduced to 25% for the reasons recorded in writing by the judge or the presiding officer of DRAT. It is complained that section 18 is very unreasonable and it curtails the right of the borrower to maintain an Appeal. However, the
has upheld the validity of section 18 meaning that only Apex Court can again deal with the issues
under section 18. At times, the borrower
may feel that he is forced to pay the full amount or at-least 75% of the outstanding
amount claimed by the borrower even before his appeal before DRAT gets disposed
of. As such, they complain that section 18 of SARFAESI Act, 2002 is
While the High Court entertains Writ Petitions now-a-days in appropriate cases and provide relief to the borrower, it is very difficult to straight away challenge the order of the DRT in the High Court and the High Court may not entertain such Writ Petitions as it can pave way to escape the pre-deposit condition with the DRAT.
A two member Bench headed by Hon’ble Justice Dr.D.Y.Chandrachud & Justice Mr.Anoop V.Mohta of Bombay High Court in W.P.No.4231 of 2011 reported in 2011 (4) AIR(Bom) R 763, 2011 (4) BCR 503, 2011 AIR(Bom) 132, CDJ 2011 BHC 774, was pleased to deal with the issues and scope of section 18 of SARFAESI Act, 2002 as follows:
“3. The Petitioners have challenged the constitutional validity of the provisions of the first and second provisos to section 18 of the Act on the ground that they are discriminatory. The submission is based on a comparison with the provisions of Section 21 of the Recovery of Debts due to Banks and Financial Institutions Act 1993. According to the Petitioners while the Act of 1993 confers discretion upon the Appellate Tribunal to allow a complete waiver of the pre-deposit, the discretion of the Appellate Tribunal, while entertaining an appeal under section 18 of the Securitisation Act is curtailed. By the first proviso to section 18(1) an appeal cannot be entertained unless the borrower has deposited an amount of 50% of the debt due as claimed by the secured creditor, or as determined by the Tribunal, whichever is less. By the second proviso, the Appellate Tribunal is empowered for reasons to be recorded in writing to reduce the amount to not less than 25% of the debt referred to in the second proviso.
4. Notice was issued to the Attorney General of India in view of the constitutional challenge. The learned Additional Solicitor General of India has appeared in the proceedings.
5. The constitutional challenge to the provisions of the second and third provisos of section 18 must fail. An appeal, it is well settled, is a statutory creation. A statute which confers a right of appeal can condition the exercise of that right on the observance of conditions which the legislature may consider appropriate to impose. The Securitisation Act is an act to regulate securitisation and reconstruction of financial assets and enforcement of security interests. The Statement of objects and reasons accompanying the introduction of the Bill in Parliament sets out the background in which the law was enacted as follows:
“The financial sector has been one of the key “drivers in
’s efforts to achieve success
in rapidly developing its economy. While the 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 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
nonperforming 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. These Committees, inter alia, have suggested enactment of
a new legislation for securitisation and empowering banks and financial
institutions to take possession of the securities and to sell them without the
intervention of the Court. Acting on these suggestions, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Ordinance, 2002 was promulgated on the 21 June, 2002 to regulate securitisation
and reconstruction of financial assets and enforcement of security interest and
for matters connected therewith or incidental thereto. The provisions of the
Ordinance would enable banks and financial institutions to realise long-term
assets, manage problem of liquidity, asset liability mismatches and improve
recovery by exercising powers to take possession of securities, sell them and
reduce nonperforming assets by adopting measures for recovery of
6. The second and third provisos to sub section (1) of section 18 were inserted by Amending Act 30 of 2004. The reasons for the amendment are explained in the Statement of objects and reasons. The statement adverts to the judgment of the Supreme Court inMardiaChemicals Ltd. v. Union of India (2004) 4 SCC 311which had declared as ultra vires a provision under which a deposit of 75% of the amount claimed was necessary before an appeal could be entertained. The amendment was brought about in view of the judgment of the Supreme Court and with a view to discourage borrowers from postponing the repayment of their dues and to enable secured creditors to speedily recover their debts, if required by enforcement of security or other measures specified in sub section (4) of Section 13 of the Act.
7. The constitutional validity of the provisions of section 18 (1) have been upheld by a judgment of a Division Bench of the Delhi High Court in R.V. Saxena v. Union of India AIR 2006 DELHI 96 .Chief Justice Makandeya Katju (as His Lordship then was) speaking for the Division Bench held thus :
“The right of appeal is not an inherent right “ butis a creature of the statute. The Legislature can impose conditions under which this is to be exercised. Moreover, the proviso to section 18 does not require the entire amount to be deposited, but only 50% thereof which can be reduced to a minimum of 25% of the sum. We see no illegality in this proviso. There are similar provisions in many enactments and they are being upheld by the Supreme Court. For example, in the second proviso under Section 15(1) of the Foreign Trade (Development and Regulation) Act, 1992, it is provided that the appeal against an order imposing a penalty or redemption charges shall not be entertained unless the amount of the penalty or redemption charges have been deposited by the appellant. Similarly in many other statutes, there are such similar provisions.”
8. The Division Bench of the Delhi High Court inter alia relied upon the decisions of the Supreme Court in Gujarat Agro Industries Co. Ltd. v. Municipal Corporation of the City of Ahmedabad (1999) SCC 468 , Vijay Prakash D. Mehta v. Collector of Customs (Preventive)(1988) 4 SCC 402 , AnantMills Ltd. v. State of Gujarat 1975 (2) SCC 175.andShyamKishore v. Municipal Corporation of Delhi (1993) 1 SCC 22.
9. Counsel appearing on behalf of the Petitioner, however, submitted that the object of both the Act of 1993 as well as of the Securitisation Act is the same viz. to ensure the speedy recovery of debts due to banks and financial institutions. Hence, it was urged that it would be plainly discriminatory and violative of Article 14 for Parliament to legislate, that while the Debts Recovery Appellate Tribunal, when it considers an appeal under the Act of 1993, can grant a complete waiver of predeposit, the same Tribunal is precluded from granting a waiver in the entirety, when it considers an appeal under the Securitisation Act.
10. This argument is not open to the Petitioner to urge, in any event before this Court, in view of the fact that by a recent judgment of the Supreme Court the rationale for the provisions of section 18 has been considered and determined in NarayanChandra Ghosh v. UCO Bank (2011) 4 SCC 548. A Bench of two learned Judges of the Supreme Court while construing the provisions of the second and third provisos noted that the Appellate Tribunal has the power to reduce the amount, for reasons to be recorded in writing, to not less than 25% of the debt, referred to in the second proviso. The judgment of the Supreme Court lays down that the right of appeal being a creation of statute, it was open to Parliament to condition that right subject to an order of deposit and to restrict the discretion of the Appellate Tribunal in the matter of granting a waiver. The Supreme Court held as follows:
“The language of the said proviso is clear “and admits of no ambiguity. It is well-settled that when a Statute confers a right of appeal, 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. Bearing in mind the object of the Act, the conditions hedged in the said proviso cannot be said to be onerous.”
11. The mandate of the third proviso has thus been held by the Supreme Court not to be onerous in its nature or character. These observations were undoubtedly not made in the context of a constitutional challenge. Nonetheless, they are significant because the Supreme Court in holding that the requirement is not onerous has indicated a view on the fairness and reasonableness of the provision.
12. There is a fundamental reason why the submission of the Petitioner cannot be accepted. The object and purpose of the Securitisation Act was to facilitate a recovery of the dues of the banks and financial institutions by a non-adjudicatory process. The Securitisation Act enables banks or financial institutions to enforce their security interests expeditiously without being required to move a Court or Tribunal. This was emphasized in the following observations of the Supreme Court in Transcorev.
Union of India 2007(2) Bankers’ Journal 303.
“Basically, the Securitisation Act is enacted “ toenforce the interest in the financial assets which belong to the bank / financial institution by virtue of the contract between the parties or by operation of common law principles or by law. The very object of Section 13 of Securitisation Act is recovery by non-adjudicatory process. A secured asset under Securitisation Act is an asset in which interest is created by the borrower in favour of the bank / financial institution and on that basis alone the Securitisation Act seeks to enforce the security interest by non-adjudicatory process. Essentially, the Securitisation Act deals with the rights of the secured creditor. The Securitisation Act proceeds on the basis that the debtor has failed not only to repay the debt, but he has also failed to maintain the level of margin and to maintain value of the security at a level is the other obligation of the debtor. It is this other obligation which invites applicability of Securitisation Act. It is for this reason, that Section 13(1) and 13(2) of the Securitisation Act proceed on the basis that security interest in the bank / financial institution needs to be enforced expeditiously without the intervention of the Court / Tribunal; that liability of the borrower has accrued and on account of default in repayment, the account of the borrower in the books of the bank has become nonperforming. For the above reasons, Securitisation Act states that the enforcement could take place by nonadjudicatory process and that the said Act removes all fetters under the above circumstances on the rights of the secured creditor.”
13. These observations of the Supreme Court emphasize at more than once place that the Securitisation Act allows enforcement by a non-adjudicatory process. The Act removes fetters on the rights of the secured creditor. The Securitisation Act has therefore been held to create an additional remedy. Consistent with the object of Parliament of facilitating the enforcement of security interests by a non-adjudicatory process, Parliament could conceivably impose a condition by which it could require the making of a deposit as a condition precedent to the maintainability of an appeal under section 18. Such a condition has been imposed under the second proviso to sub section (1) of section 18 by which an appeal cannot be entertained unless the borrower has deposited with the Appellate Tribunal 50% of the amount debt due as claimed by the secured creditor, or as determined by the Tribunal, whichever is less. Parliament conferred upon the Appellate Tribunal a discretion to reduce the amount required to be deposited, but while conferring that discretion on the Appellate Tribunal restricted it by stipulating that the Appellate Tribunal may reduce the amount to not less than 25% of the debt referred to in the second proviso. This is consistent with the parliamentary intent of ensuring that basically the Securitisation Act must follow an efficacious non-adjudicatory process for the enforcement of a security interest. The interposition of an adjudicatory function in the Securitisation Act must, therefore, be confined to those areas as legislated upon by Parliament and subject to the restrictions imposed by the Parliament while so legislating. Therefore, we find that there were valid reasons why Parliament made a different provision in the Securitisation Act in the matter of the discretion of the Appellate Tribunal under section 18(1) in dispensing with the requirement of pre-deposit. It was open to Parliament, while conferring discretion on the Appellate Tribunal to restrict the exercise of the discretion to reduce the quantum of deposit to not less than 25% of the debt due under the second proviso to section 18(1).”
The constitutional validity of section 18 is upheld by the
However, when the borrower is aggrieved with the order of DRAT to the request
for depositing the minimum 25% as pre-deposit in appropriate cases, such an
order can be taken to High Court and the High Court can provide relief to the
borrower or the Appellant. However, even the High Court may not be able to
direct the DRAT to accept a pre-deposit which is lesser than 25% of the
I feel that the DRAT must have been given the right to completely waive the pre-deposit condition in exceptional cases.
There can be cases where the pre-deposit condition under section 18 can appear to be very draconian while in other cases, it may be justified in the interests of the Banks or Public Financial Institutions.
Note: the views expressed are my personal.