Delhi High Court
Creative Home Fashions Limited vs Union Of India And Others on 3 March, 2011
Equivalent citations: AIR 2011 DELHI 140, (2011) 102 CORLA 163
Author: Dipak Misra
Bench: Chief Justice, Sanjiv Khanna
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on: February 22, 2011
Judgment Delivered on: March 03, 2011
+ WP (C) No. 1147of 2011
Creative Home Fashions Limited ..... Petitioner
Through: Mr.Jayant Bhushan, Sr.Advocate
with Mr.Aditya Tiwari, Adv.
versus
Union of India and others ..... Respondents
Through: Mr.Sunil Kumar with Mr.Rajiv
Ranjan Mishra, Advs. for Resp. 1
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE SANJIV KHANNA
1. Whether reporters of the local papers be allowed to
see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
DIPAK MISRA, CJ
By this writ petition preferred under Article 226 of the Constitution of
India, though many a relief has been sought, yet in the course of hearing, we
WP (C) No.1147/2011 page 1 of 33
have made it clear that we would only address the first two prayers and it
would be open to the petitioner to seek the other reliefs by way of an
independent writ petition, if so advised. The first two prayers read as
under:-
"(i) Proviso III to Section 15 of the Sick Industries
Companies (Special Provisions) Act, 1985 be declared,
unconstitutional, ultra vires the Constitution of India and/or null
and void;
(ii) Proviso II & III to Section 18 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 be declared unconstitutional, ultra
vires the Constitution of India and/or null and void."
2. First, we shall take up the second prayer. At the very outset, we may
note with profit that in Mardia Chemicals Ltd. v. Union of India and
others, AIR 2004 SC 2371 barring Section 17(2) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (for brevity „SARFAESI Act‟), the entire Act was held to be
constitutionally valid. After the said decision was rendered certain
amendments were carried out in Sections 13, 17 and 18 of the Act.
WP (C) No.1147/2011 page 2 of 33
3. The unamended Section 18 of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 read as
follows: -
"18. Appeal to Appellate Tribunal. - (1) Any person
aggrieved by any order made by the Debts Recovery Tribunal
under section 17, may prefer an appeal to an Appellate Tribunal
within thirty days from the date of receipt of the order of Debts
Recovery Tribunal.
(2) Save as otherwise provided in this Act, the Appellate
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."
4. Rule 20 of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 deals with the procedure with regard to appeal to the
Appellate Tribunal. The said Rule reads as follows: -
"20. Appeal to the Appellate Tribunal. -
(1) Save as provided in sub-section (2), any person aggrieved
by an order made, or deemed to have been made, by a Tribunal
under this Act, may prefer an appeal to an Appellate Tribunal
having jurisdiction in the matter.
(2) No appeal shall lie to the Appellate Tribunal from an
order made by a Tribunal with the consent of the parties.
(3) Every appeal under sub-section (1) shall be filed within a
period of forty-five days from the date on which a copy of the
WP (C) No.1147/2011 page 3 of 33
order made, or deemed to have been made, by the Tribunal is
received by him and it shall be in such form and be
accompanied by such fee as may be prescribed:
Provided that the Appellate Tribunal may entertain an appeal
after the expiry of the said period of forty-five days if it is
satisfied that there was sufficient cause for not filing it with in
that period.
(4) On receipt of an appeal under sub-section (1), the
Appellate Tribunal may, after giving the parties to the appeal,
an opportunity of being heard, pass such orders thereon as it
thinks fit, confirming, modifying or setting aside the order
appealed against.
(5) The Appellate Tribunal shall send a copy of every order
made by it to the parties to the appeal and to the concerned
Tribunal.
(6) The appeal filed before the Appellate Tribunal under sub-
section (1) shall be dealt with by it as expeditiously as possible
and endeavour shall be made by it to dispose of the appeal
finally within six months from the date of receipt of the
appeal."
5. Section 18 of the SARFAESI Act after the 2004 amendment reads as
under-
"18. Appeal to Appellate Tribunal.
(1) Any person aggrieved, by any order made by the Debts
Recovery Tribunal under section 17, may prefer an appeal
along with such fee, as may be prescribed to an Appellate
Tribunal within thirty days from the date of receipt of the order
of Debts Recovery Tribunal.
WP (C) No.1147/2011 page 4 of 33
Provided that different fees may be prescribed for filing an
appeal by the borrower or by the person other than the
borrower:
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.
(2) Save as otherwise provided in this Act, the Appellate
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."
6. Thus, the amended section imposes certain conditions as is
perceivable from the 2004 amendment.
7. Mr.Jayant Bhushan, learned senior counsel appearing for the
petitioner, assailing the validity of Section 18 of the SARFAESI Act has
contended that the said provision is violative of Article 14 and Article 19
(1)(g) of the Constitution of India as it has not kept in view that in the event
of an illegal and erroneous order passed by the Debts Recovery Tribunal, the
WP (C) No.1147/2011 page 5 of 33
physical possession of the factory premises is taken over by the respondent
No.1-Bank and the said factory premises is sold. It is further contended that
the second proviso imposes onerous condition and only confers power on the
appellate tribunal to reduce the amount, not less than 25% of the debt,
referred to in the second proviso thereby restricting the power of the tribunal
and making the remedy of appeal totally inefficacious and illusory.
8. In Mardia Chemicals Ltd. (supra) all the provisions of the
SARFAESI Act as it existed then were challenged. Section 17 deals with
the right of appeal. The relevant part of the original version which has been
reproduced in paragraph 40 of the decision read as under: -
"17. Right to appeal.
(1) Any person (including borrower), aggrieved by any of
the measures referred to in sub-section (4) of S. 13 taken by the
secured creditor or his authorised 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 measure 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 S. 13:
WP (C) No.1147/2011 page 6 of 33
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."
9. While dealing with the validity of the condition of pre-deposit, as
prescribed in the said provision the Apex Court, after noting the rivalised
submissions, held thus:
"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 that 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 this
Court reported in (1974) 2 SCC 393, Smt. Ganga Bai Vs. Vijay
Kumar and others, 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
WP (C) No.1147/2011 page 7 of 33
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."
Thereafter, their Lordships further proceeded to express thus:
WP (C) No.1147/2011 page 8 of 33
"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 Art. 14 of the Constitution."
[Emphasis supplied]
WP (C) No.1147/2011 page 9 of 33
10. After the said decision was rendered, the Parliament as stated earlier
amended Section 17 and also carried out certain amendments in Section 18.
We have already reproduced the amended Section 18. The second proviso to
Section 18 stipulates that no appeal shall be entertained unless the borrower
has deposited with the Appellate Tribunal 50% of the amount of debt due
from him, as claimed by the secured creditors or determined by the Debts
Recovery Tribunal, whichever is less. The third proviso adds a stipulation
that the Appellate Tribunal, for reasons to be recorded, can reduce the
amount to not less than 25% of the debt, as referred to in the second proviso.
11. On a studied scrutiny of the aforesaid two provisos, it is clear as
crystal that the appellant is required to deposit 50% of the amount due as
claimed by the secured creditors or as determined by the Debts Recovery
Tribunal. The words "whichever is less" have their own signification. If the
Debts Recovery Tribunal‟s determination is less, the same shall prevail.
Thus, there is mechanism of adjudication and that becomes the foundation of
pre-deposit. That apart, the Appellate Tribunal has been conferred the
power to reduce the amount to not less than 25% of the amount due.
WP (C) No.1147/2011 page 10 of 33
12. In this context, we may refer with profit to certain citations in the field
which pertain to conditions imposed while providing an appeal as a statutory
remedy. In Anant Mills Co. Ltd. v. State of Gujarat, (1975) 2 SCC 175, the
Apex Court has opined thus:
"......The right of appeal is the creature of a statute. Without a
statutory provision creating such a right the person aggrieved is
not entitled to file an appeal. We fail to understand as to why
the legislature while granting the right of appeal cannot impose
conditions for the exercise of such right. In the absence of any
special reasons there appears to be no legal or Constitutional
impediment to the imposition of such conditions. It is
permissible, for example, to prescribe a condition in criminal
cases that unless a convicted person is released on bail, he must
surrender to custody before his appeal against the sentence of
imprisonment would be entertained. Likewise, it is permissible
to enact a law that no appeal shall lie against an order relating
to an assessment of tax unless the tax had been paid."
13. The Constitution Bench in Nand Lal and another v. State of Haryana
and others, AIR 1980 SC 2097, while dealing with the conditions imposed
in preferring an appeal or revision, has ruled thus:
"It is well settled by several decisions of this Court that the
right of appeal is a creature of a statute and there is no reason
why the legislature while granting the right cannot 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 (vide the latest
decision in Anant Mills Ltd. v. State of Gujarat, AIR 1975 SC
WP (C) No.1147/2011 page 11 of 33
1234). Counsel for the appellants, however, urged that the
conditions imposed should be regarded as unreasonably
onerous especially when no discretion has been left with the
appellate or revisional authority to relax or waive the condition
or grant exemption in respect thereof in fit and proper cases
and, therefore, the fetter imposed must be regarded as
unconstitutional and struck down. It is not possible to accept
this contention for more than one reason. In the first place, the
object of imposing the condition is obviously to prevent
frivolous appeals and revision that impede the implementation
of the ceiling policy; secondly, having regard to sub-sections
(8) and (9) it is clear that the cash deposit or bank guarantee is
not by way of any exaction but in the nature of securing mesne
profits from the person who is ultimately found to be in
unlawful possession of the land; thirdly, the deposit or the
guarantee is correlated to the land holdings tax (30 times the
tax) which, we are informed, varies in the State of Haryana
around a paltry amount of Rs. 8 per acre annually; fourthly, the
deposit to be made or bank guarantee to be furnished is
confined to the land holdings tax payable in respect of the
disputed area i.e. the area or part thereof which is declared
surplus after leaving the permissible area to the appellant or
petitioner. Having regard to those aspects, particularly the
meagre rate of the annual land tax payable, the fetter imposed
on the right of appeal/revision, even in the absence of a
provision conferring discretion on the appellate/revisional
authority to relax or waive the condition, cannot be regarded as
onerous or unreasonable. The challenge to S. 18(7) must,
therefore, fail."
[Emphasis supplied]
14. In Vijay Prakash D. Mehta and another v. Collector of Customs
(Preventive), Bombay, AIR 1988 SC 2010, the Apex Court was dealing with
WP (C) No.1147/2011 page 12 of 33
the provisions contained in Section 129E of the Customs Act, 1962 wherein
the said provision provided that a person desirous of preferring an appeal
was required to deposit, with the proper officer, the duty demanded or the
penalty levied. There was also a stipulation that in any particular case, if the
Collector (Appeals) or the appellate tribunal is of the opinion that the deposit
of the duty demanded or the penalty levied would cause undue hardship to
such person, the appellate authority may dispense with such deposit, subject
to such conditions as he or it may deem fit to impose so as to safeguard the
interests of the revenue. While dealing with the said provision, their
Lordships have opined thus:
"The aforesaid Section provides a conditional right of appeal in
respect of an appeal against the duty demanded or penalty
levied. Although the Section does not expressly provide for
rejection of the appeal for non-deposit of duty or penalty, yet it
makes it obligatory on the appellant to deposit the duty or
penalty, pending the appeal, failing which the Appellate
Tribunal is fully competent to reject the appeal. See, in this
connection, the observations of this Court in respect of Section
129 prior to substitution of Chapter XV by the Finance Act,
1980 in Navin Chandra Chhotelal v. Central Board of Excise &
Customs and Ors., 1981 (8) ELT 679 (SC). The proviso,
however, gives power to the Appellate Authority to dispense
with such deposit unconditionally or subject to such conditions
in cases of undue hardships. It is a matter of judicial discretion
of the Appellate Authority."
WP (C) No.1147/2011 page 13 of 33
Thereafter, their Lordships, while dealing with the right of appeal,
have opined thus:
"Right to appeal is neither an absolute right nor an ingredient of
natural justice the principles of which must be followed in all
judicial and quasi-judicial adjudications. The right to appeal is
a statutory right and it can be circumscribed by the conditions
in the grant."
15. The submission of Mr.Jayant Bhushan, learned senior counsel, is that
the condition imposed is totally onerous and, hence, illusory. In Mardia
Chemicals Ltd. (supra), their Lordships, while drawing a distinction
between a proceeding at the first instance and an appeal, have also taken
note of the fact that 75% of the amount claimed by no means would be a
meagre amount and the same was stated in the backdrop that there was no
determination of the amount due by that stage and further the secured assets
or its management with transferable interest had already taken over and
under the control of the secured creditors.
16. At this juncture, we may refer to sub-section (3A) of Section 13 of the
SARFAESI Act which is as follows: -
"13. Enforcement of security interest.
WP (C) No.1147/2011 page 14 of 33
(1) & (2) xxx xxx xxx
(3) xxx xxx xxx
(3A) If, on receipt of the notice under sub-section (2), the
borrower makes any representation or raises any objection, the
secured creditor shall consider such representation or objection
and if the secured creditor comes to the conclusion that such
representation or objection is not acceptable or tenable, he shall
communicate within one week of receipt of such representation
or objection the reasons for non-acceptance of the
representation or objection to the borrower:
Provided that the reasons so communicated or the likely action
of the secured creditor at the stage of communication of reasons
shall not confer any right upon the borrower to prefer an
application to the Debts Recovery Tribunal under section 17 or
the Court of District Judge under section 17A."
It is apt to note here that sub-section (3A) was inserted in the statute
book with effect from 11th November, 2004.
17. Sub-section (2) of Section 17 was substituted in place of the earlier
sub-section which imposed the condition of deposit of 75% of the amount
claimed. The substituted provision reads as follows: -
"17. Right to appeal.
(1) xxx xxx xxx
(2) The Debts Recovery Tribunal shall consider whether any
of the measures referred to in sub-section (4) of section 13
taken by the secured creditor for enforcement of security are in
WP (C) No.1147/2011 page 15 of 33
accordance with the provisions of this Act and the rules made
thereunder."
18. On a scrutiny of the anatomy of the aforesaid amended provisions, it
is luculent that there is earlier determination at various stages and thereafter,
there is provision of appeal to the Appellate Tribunal. The condition that is
imposed is 50% of the amount of debt due. The debt due comes into
existence only after determination by the Debts Recovery Tribunal. The
condition of pre-deposit is also reducible to 25%. In our considered opinion,
in the scheme of things and regard being had to the statement of objects and
reasons and the purpose of the legislation, we are inclined to think that the
condition pertaining to pre-deposit does not invite the frown either of Article
14 or Article 19(1)(g) of the Constitution of India.
19. Presently, we shall proceed to deal with the constitutionality of the
third proviso to Section 15(1) of the Sick Industrial Companies (Special
Provisions) Act, 1985 (for brevity „the 1985 Act‟). In the writ petition, the
grounds that have been urged to challenge the said provision are that the said
proviso is arbitrary and unreasonable and violative of Articles 14 and
19(1)(g) of the Constitution of India inasmuch as it confers unguided power
WP (C) No.1147/2011 page 16 of 33
on the secured creditors to deprive a sick company of its valuable rights
under the said Act without reference to the statutory authority who is under
obligation of ensuring the proper application of the provision of the said Act
to give such unilateral powers to the secured creditors merely because they
control more than 75% of the secured debt of a sick company. It is also
contended that the proviso abrogates the entire policy and the purpose of the
statute by conferring full discretion on the question of rehabilitation on one
category of stakeholders, namely, the creditors, in exclusion of all others
including the statutory authority. It is also urged that the said provision
offends Article 14 of the Constitution as there is no intelligible differentia in
the classification and the object to be achieved inasmuch as it runs counter to
the object and reasons of the Act. The further stand in the writ petition is
that by introduction of the said proviso, the protection of Section 22 of the
1985 Act is taken away which could have been adequately addressed to by
the expert body but after introduction of the said proviso, the said provision
becomes nugatory in respect of the said companies affecting the facet of
classification as well as the right to revival. It is also put forth that the
proviso (3) to Section 15 also violates Article 21 of the Constitution of India
as it takes away the livelihood of the workers of a sick company.
WP (C) No.1147/2011 page 17 of 33
20. To have a complete picture, it is apposite to reproduce Section 15(1)
which reads as follows: -
"15. Reference to Board. -
(1) When an industrial company has become a sick industrial
company, the Board of Directors of the company, shall, within
sixty days from the date of finalization of the duly audited
accounts of the company for the financial year as at the end of
which the company has become a sick industrial company,
make a reference to the Board for determination of the
measures which shall be adopted with respect to the company:
Provided that if the Board of Directors had sufficient reasons
even before such finalization to form the opinion that the
company had become a sick industrial company, the Board of
Directors shall, within sixty days after it has formed such
opinion, make a reference to the Board for the determination of
the measures which shall be adopted with respect to the
company:
Provided further that no reference shall be made to the Board
for Industrial and Financial Reconstruction after the
commencement of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
2002, where financial assets have been acquired by any
securitization company or reconstruction company under sub-
section (1) of section 5 of that Act:
Provided also that on or after the commencement of the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, where a reference
is pending before the Board for Industrial and Financial
Reconstruction, such reference shall abate if the secured
creditors, representing not less than three-fourth in value of the
amount outstanding against financial assistance disbursed to the
borrower of such secured creditors, have taken any measures to
WP (C) No.1147/2011 page 18 of 33
recover their secured debt under sub-section (4) of section 13 of
that Act."
21. To appreciate the stand and stance put forth in the writ petition and
the submissions canvassed by Mr.Jayant Bhushan, learned senior counsel
supporting the said stand, it is appropriate to understand the purpose of the
said Act being brought into existence. The relevant part of the statement of
object and reasons of the 1985 Act reads as follows: -
"The ill effects of sickness in industrial companies such as loss
of production, loss of employment, loss of revenue to the
Central and State Governments and locking up of investible
funds of banks and financial institutions are of serious concern
to the Government and the society at large. The concern of the
Government is accentuated by the alarming increase in the
incidence of sickness in industrial companies. It has been
recognized that in order to fully utilize the productive industrial
assets, afford maximum protection of employment and optimize
the use of the funds of the banks and financial institutions, it
would be imperative to revive and rehabilitate the potentially
viable sick industrial companies as quickly as possible. It
would also be equally imperative to salvage the productive
assets and realize the amounts due to the banks and financial
institutions, to the extent possible, from the non-viable sick
industrial companies through liquidation of those companies.
It has been the experience that the existing institutional
arrangements and procedures for revival and rehabilitation of
potentially viable sick industrial companies are both inadequate
and time-consuming. A multiplicity of laws and agencies
makes the adoption of coordinated approach for dealing with
sick industrial companies difficult. A need has, therefore, been
WP (C) No.1147/2011 page 19 of 33
felt to enact in public interest a legislation to provide for timely
determination by a body of experts of the preventive,
ameliorative, remedial and other measures that would need to
be adopted with respect to such companies and for enforcement
of the measures considered appropriate with utmost practicable
dispatch."
22. The preamble of the Act states that the enactment has been brought
into force in the public interest with special provisions with a view to
securing the timely detection of sick and potentially sick industrial
companies owning an industrial undertaking and the speedy determination
by board of experts of the preventive, ameliorative, remedial and other
measures which need to be taken with respect to such companies and the
expeditious enforcement of the measures so determined and for matters
connected therewith or incidental thereto. Section 3(o), which defines sick
industrial company, reads as follows: -
"3. Definitions.
(1) and (2) xxx xxx xxx
3(a) to (n) xxx xxx xxx
3(o) "sick industrial company" means an industrial company
(being a company registered for not less than five years) which
has at the end of any financial year accumulated losses equal to
or exceeding its entire net worth.
WP (C) No.1147/2011 page 20 of 33
Explanation. - For the removal of doubts, it is hereby declared
that an industrial company existing immediately before the
commencement of the Sick Industrial Companies (Special
Provisions) Amendment Act, 1993, registered for not less than
five years and having at the end of any financial year
accumulated losses equal to or exceeding its entire net worth,
shall be deemed to be a sick industrial company."
23. Chapter III provides for references, inquiries and schemes. Section 15
deals with reference to the Board. Section 22 stipulates suspension of legal
proceedings, contracts, etc. Section 32 reads as follows:
"32. Effect of the Act on other laws. - (1) The provisions of
this Act and of any rules or schemes made thereunder shall
have effect notwithstanding anything inconsistent therewith
contained in any other law except the provisions of the Foreign
Exchange Regulation Act, 1973 (46 of 1973) and the Urban
Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the
time being in force or in the Memorandum or Articles of
Association of an industrial company or in any other instrument
having effect by virtue of any law other than this Act.
(2) Where there has been under any scheme under this Act
an amalgamation of a sick industrial company with another
company, the provisions of section 72A of the Income-tax Act,
1961 (43 of 1961), shall, subject to the modifications that the
power of the Central Government under that section may be
exercised by the Board without the Central Government under
that section may be exercised by the Board without any
recommendation by the specified authority referred to in that
section, apply in relation to such amalgamation as they apply in
relation to the amalgamation of a company owning an industrial
undertaking with another company."
WP (C) No.1147/2011 page 21 of 33
24. It is apt to note that the SARFAESI Act was enacted to regulate
securitization and reconstruction of financial assets and enforcement of
security interests or matters connected therewith or incidental thereto.
Section 2(b) defines "asset reconstruction". It means acquisition by any
securitisation company or reconstruction company of any right or interest of
any bank or financial institution in any financial assistance for the purpose
of realisation of such financial assistance. Sections 2(c), 2(d), 2(j), 2(k),
2(l), 2(m), 2(v), 2(z), 2(za), 2(zc) and 2(zf) define "bank"; "banking
company"; "default"; "financial assistance"; "financial asset"; "financial
institution"; "reconstruction company"; "securitisation"; "securitisation
company"; "secured asset" and "security interest" respectively.
25. Section 35 of the SARFAESI Act deals with the effect of the Act.
The said provision reads as follows: -
"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."
26. Section 41, which deals with amendments of certain enactments, is as
follows: -
WP (C) No.1147/2011 page 22 of 33
"41. Amendments of certain enactments - The enactments
specified in the Schedule shall be amended in the manner
specified therein."
27. In the Schedule, two provisos have been added. Thus, it is clear that
proviso (3) to Section 15 was introduced by Act 54 of 2002 with effect from
21st June, 2002.
28. In Mardia Chemicals Ltd. (supra), the Apex Court, after framing the
question to be answered, took note of the justifiability of the SARFAESI Act
being enacted. In paragraph 34, their Lordships have stated thus:
"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
WP (C) No.1147/2011 page 23 of 33
difficult to stick to old and conventional methods of financing
and recovery of dues. 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."
We have quoted the said paragraph in entirety only for the purpose
that it was thought necessary by the legislature to introduce the SARFAESI
Act to have healthy and growth oriented economy. It is also to be noted that
their Lordships have observed that the procedure has to be fair, reasonable
and valid.
29. Regard being had to the aforesaid exposition, the third proviso to
Section 15(1) of the 1985 Act has to be scrutinized to see whether the same
WP (C) No.1147/2011 page 24 of 33
invites the wrath of Article 14 or Article 19(1)(g) of the Constitution of
India. As has been stated earlier, the said proviso was amended in 2002
when the SARFAESI Act came into force. By virtue of the said proviso, a
reference, which is pending before the Board, for Industrial and Financial
Reconstruction, shall abate if the secured creditors representing not less than
three-fourth in value of the amount outstanding against financial assistance
disbursed to the borrower of such secured creditors, have taken any
measures to recover their secured debt under sub-section (4) of the Section
13 of the SARFAESI Act. The submission of Mr.Jayant Bhushan, learned
senior counsel, is that the unbridled and unfettered power has been conferred
on the secured creditors without any guidance. It is also urged that the said
proviso creates a classification between the two categories of industrial
companies, which avail the benefit of the 1985 Act and which are deprived
of such benefit.
30. In this context, we may refer with profit to Maganlal Chhaganlal (P)
Ltd. v. Municipal Corpn. of Greater Bombay, AIR 1974 SC 2009 wherein it
has been held thus:
"Where a statute providing for a more drastic procedure
different from the ordinary procedure covers the whole field
WP (C) No.1147/2011 page 25 of 33
covered by the ordinary procedure, as in Anwar Ali Sarkar‟s
case 1952 SCR 284 = (AIR 1952 SC 75) and Suraj Mall
Mohta‟s case (1955) 1 SCR 448 = (AIR 1954 SC 545) without
any guidelines as to the class of cases in which either procedure
is to be resorted to, the statute will be hit by Article 14. Even
there, as mentioned in Suraj Mall Mohta‟s case, a provision for
appeal may cure the defect. Further, in such cases it from the
preamble and surrounding circumstances, as well as the
provisions of the statute themselves explained and amplified by
affidavits, necessary guidelines could be inferred as in
Saurashtra case 1952 SCR 435 = (AIR 1952 SC 123) and Jyoti
Pershad‟s case (1962) 2 SCR 125 = (AIR 1961 SC 1602) the
statute will not be hit by Article 14. Then again where the
statute itself covers only a class of cases as in Haldar‟s case
(1960) 2 SCR 646 = (AIR 1960 SC 457) and Bajoria‟s case
1954 SCR 30 = (AIR 1953 SC 404) the statute will not be bad.
The fact that in such cases the executive will choose which
cases are to be tried under the special procedure will not be bad.
The fact that in such cases the executive will choose which
cases are to be tried under the special procedure will not affect
the validity of the statute. Therefore, the contention that the
mere availability of two procedures will vitiate one of them,
that is the special procedure, is not supported by reason of
authority.
16. The statute itself in the two classes of cases before us
clearly lays down the purpose behind them, that is that premises
belonging to the Corporation and the Government should be
subject to speedy procedure in the matter of evicting
unauthorized persons occupying them. This is a sufficient
guidance for the authorities on whom the power has been
conferred."
31. In State of Mysore v. M.L. Nagade, AIR 1983 SC 762, the Apex
Court has opined that guidelines need not be found in the impugned
WP (C) No.1147/2011 page 26 of 33
provision. The same may be collected from the setting in which the
provision is placed, the purpose for which the Act is enacted and even the
preamble of the statute in which the provision is incorporated. A legislation
or statute is enacted to achieve some public purpose and the policy of law
and the object sought to be achieved can furnish reliable guidelines for the
exercise of discretionary power.
32. In M.J. Sivani v. State of Karnataka, AIR 1995 SC 1770, their
Lordships have held that the guidelines, even if not ex facie found, can be
gathered on wholesome reading of the statute and the rules, regulations,
orders or notifications issued thereunder.
33. There can be no dispute that the 1985 Act was brought into force to
secure the timely detection of sick and potentially sick industrial companies
owning an industrial undertaking and the speedy determination by board of
experts of the preventive, ameliorative, remedial and other measures which
need to be taken with respect to such companies. The purpose of the
enactment was expeditious enforcement of the measures so determined and
for matters connected therewith or incidental thereto. There was also the
object to fully utilize the productive industrial asset by affording maximum
WP (C) No.1147/2011 page 27 of 33
protection of employment and optimising the use of the funds of the bank
and financial institution. The purpose was to revive and rehabilitate the
potentially viable sick industrial companies as quickly as possible and to
salvage the productive assets and realize the amount due to the banks and the
financial institutions to the extent possible from the non-viable sick
industrial companies through liquidation of those companies. Protection
was granted to the said category of industrial companies under Section 22
under certain conditions. After the SARFAESI Act came into force,
especially the second proviso divests the jurisdiction of the BIFR. The
legislature in its wisdom incorporated the said condition. On a reading of
the proviso in a purposive manner, it cannot be said that this power
conferred on the secured creditors is totally unfettered or unguided. The
reference to the board was abated only if the secured creditors representing
not less than three-fourth in value of the amount outstanding against
financial assistance disbursed to the borrower of the secured creditors have
taken any measures to recover the secured debt under sub-section (4) of
Section 13 of the SARFAESI Act. The condition precedent is that the
secured creditors must have three-fourth value of the amount outstanding
against the financial assistance and must have taken action under sub-section
WP (C) No.1147/2011 page 28 of 33
(4) of Section 13 of the SARFAESI Act. If we understand the object and
reasons and the purpose of the SARFAESI Act, as has been stated by their
Lordships in Mardia Chemicals Ltd. (supra) and the conditions imposed, it
is difficult to accept the submission of the learned counsel for the petitioner
that the provision is without any guidance. While dealing with the
constitutionality of a piece of economic legislation, the court is required to
see the economic policy and the legislative judgment. In this context, we
may refer with profit to the decision rendered in Bhavesh D. Parish and
others v. Union of India and another, AIR 2000 SC 2047 wherein the Apex
Court has observed thus:
"23. It was further submitted that the amendments were
introduced after taking into account the recommendations of
successive committees, appointed by the Bank and Government
of India, which had studied the functioning of these bodies. The
question of restricting such financial activity by unincorporated
bodies, is a question of economic policy as it involves
regulation of economic activities by different constituents. In
such matters of economic policy, this Hon'ble Court does not
interfere with the decision of the expert bodies which have
examined the matter. The following observations of this
Hon'ble Court made in R. K. Garg v. Union of India 1982 (1)
SCR 947 at 969 L (AIR 1981 SC 2138 at p.2147) are
appropriate:
"Another rule of equal importance is that laws relating to
economic activities should be viewed with greater latitude than
laws touching civil rights such as freedom of speech, religion
WP (C) No.1147/2011 page 29 of 33
etc. It has been said by no less a person than Holmes, J. that the
legislature should be allowed some play in the joints, because it
has to deal with complex problems which do not admit of
solution through any doctrinaire or straight-jacket formula and
this is particularly true in case of legislation dealing with
economic matters, where, having regard to the nature of the
problems required to be dealt with greater play in the joints has
to be allowed to the legislature. The Court should feel more
inclined to give judicial deference to legislative judgment in the
field of economic regulation than in other areas where
fundamental human rights are involved. Nowhere has this
admonition been more felicitously expressed than in Morey V.
Doud (1957) 354 US 457 where Frankfurter J. said in his in
imitable style:
"In the utilities, tax and economic regulation cases, there are
good reasons for judicial self-restraint if not judicial deference
to legislative judgment. The legislature after all has the
affirmative responsibility. The courts have only the power to
destroy, not to reconstruct. When these are added to the
complexity of economic regulation, the uncertainty, the liability
to error, the bewildering conflict of the experts, and the number
of times the judges have been overruled by events self-
limitation can be seen to be the path to judicial wisdom and
institutional prestige and stability."
The Court must always remember that "legislation is directed to
practical problems, that the economic mechanism is highly
sensitive and complex, that many problems are singular and
contingent, that laws are not abstract propositions and do not
relate to abstract units and are not to be measured by abstract
symmetry" that exact wisdom and nice adaptation of remedy
are not always possible and that "judgment is largely a
prophecy based on meager and uninterrupted 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 and, therefore, it cannot provide for all
possible situations or anticipate all possible abuses. There may
WP (C) No.1147/2011 page 30 of 33
be crudities and inequities in complicated experimental
economic legislation but on that account alone it cannot be
struck down as invalid".
At page 988 (of SCR): (at p.2157 of AIR) it is further held:
"That would depend upon diverse fiscal and economic
considerations based on practical necessity and administrative
expediency and would also involve a certain amount of
experimentation on which the Court would be last fitted to
pronounce. The Court would not have the necessary
competence and expertise to adjudicate upon such an economic
issue. The Court cannot possibly assess or evaluate what would
be the impact of a particular immunity or exemption and
whether it would serve the purpose in view or not."
26. The services rendered by certain informal sectors of the
Indian economy could not be belittled. However, in the path of
economic progress, if the informal system was sought to be
replaced by a more organised system, capable of better
regulation and discipline, then this was an economic philosophy
reflected by the legislation in question. Such a philosophy
might have its merits and demerits. But these were matters of
economic policy. They are best left to the wisdom of the
legislature and in policy matters the accepted principle is that
the Courts should not interfere. Moreover in the context of the
changed economic scenario the expertise of people dealing with
the subject should not be lightly interfered with. The
consequences of such interdiction can have large scale
ramifications and can put the clock back for a number of years.
The process of rationalisation of the infirmities in the economy
can be put in serious jeopardy and, therefore, 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."
WP (C) No.1147/2011 page 31 of 33
34. If the validity of the present proviso is tested on the touchstone of
aforesaid enunciation of law, it is noticed that legislature in its wisdom
legislated that the reference shall abate if a representation is made by
particular number of secured creditors. If the creditors, who are three-fourth
in value, make a representation, the reference abates. The industrial
company, if such an application is not filed, would not come under the
purview of the proviso. The contention of Mr. Jayant Bhushan as to the
discriminatory classification in our considered opinion, is unsustainable
inasmuch as there is an intelligible differentia as the representation of three-
fourth creditors in value itself qualifies to be an intelligible differentia. The
purpose behind the legislation was to remedy a situation wherein the
financial institutions and banking sector was confronted with not realizing
their amount and not being allowed a level playing field. The legislative
intention is also clear from the language employed in Section 35 of the
SARFAESI Act. To avoid inconsistency, the amendment was brought in the
1985 Act. It has a sacrosanct purpose which subserves the cause of
economic growth. That apart it serves a public purpose. Therefore, the
challenge on the bedrock of Article 14 of the Constitution is untenable.
WP (C) No.1147/2011 page 32 of 33
35. As far as the challenge on the bedrock of Article 19(1)(g) and Article
21 of the Constitution are concerned, we really fail to fathom how the said
provision really affects the right to carry out any trade or profession or
creates a dent in the right to life. If an industrial company becomes sick, it
cannot claim as a matter of right to carry on trade or profession by not
paying back the loan. Trade and scruples and the purity of the economic
principle cannot be divorced from each other. A sick company cannot claim
as a vested right that it has to carry on its trade at its own whim and fancy
despite not paying back the amount to the secured creditors. As far as the
Article 21 is concerned, there is no pleading at all except mentioning of the
Article. Hence, the said ground is bereft of any substance.
36. In view of the aforesaid analysis, we do not perceive any merit in the
writ petition and the same is, accordingly, dismissed.
CHIEF JUSTICE
MARCH 03, 2011 SANJIV KHANNA, J.
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