SUPREME COURT CLEARS
THE SECURITISATION ACT
The anxiously awaited Supreme Court judgement on the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security
Interest Act (Securitisation Act) has been hailed by all contesting
parties, with each claiming victory over the other.
If their reaction is genuine, and not
grandiloquent, the verdict passes the main and basic test
that justice must not only be done but must be seen to be
done.
As generally anticipated, the SC has cleared the legislation
of the vice of unconstitutionality (barring the mandatory
requirement of pre-deposit of 75% of the claim amount) but
with a couple of caveats.
Briefly speaking, the SC has set its stamp
of judicial approval on all provisions of the legislation,
except two: (a) the one relating to 75% pre-deposit before
the borrower's appeal to the debt recovery tribunal (DRT)
could be entertained, vide section 17 (2); and (b) relating
to service of re-call notice by the secured creditor on the
borrower under section 13 (2).
The judgement has been called a 'pyrrhic'
victory by some. Why is not difficult to understand. When
the borrower, ignoring the numerous entreaties of the creditor
and in spite of being (made) aware of the hollowness of his
defiance, persists in continuing his defaults, the Act sought
to arm the creditor with the power to seize and sell the secured
assets by following a well-defined procedure, but without
the intervention of the court.
The borrower could challenge the action only by making a pre-deposit
of 75% of the claim. The creditor was, therefore, hopeful
of recovery of dues without much difficulty and with reasonable
dispatch.
These hopes now stand belied, if not shattered
altogether, with the SC striking down the pre-deposit requirement
as being violative of Article 14. In the SC's view, this condition
has made the borrower's basic right of approaching the adjudicating
authority illusory. Accordingly, the SC has declared section
17 (2) violative of Article 14 and hence unconstitutional.
The SC has further ruled by declaring
that any move by the creditor, prior to actually seizing the
secured assets, can be challenged by the borrower through
an appropriate civil proceeding, in spite of the bar on a
civil court's jurisdiction imposed by section 34.
No doubt, the SC has made it abundantly clear (in view of
the section 34 bar) that it is only to a very limited extent
that the jurisdiction of the civil court can be invoked.
But this SC observation is unlikely to deter a recalcitrant
borrower from challenging a creditor's action under the Act
even with the full knowledge that such a challenge would not
succeed, so long as it has the potential to delay matters
to the exasperation of the creditor.
This would result in blunting the fangs
which the Act sought to provide to creditors.
The SC has also imposed some discipline on the creditor through
its observations.
These guidelines say inter alia that if the borrower raises
any objections to the recall notice, the creditor should have
an internal mechanism to meaningfully consider such objections;
the creditor has to act in accordance with the principle of
fairness; the creditor must apprise the borrower of the reasons
for not accepting his objections; and finally the creditor
must keep the borrower informed particularly of developments
before initiating further action under section 13 (4) to seize
secured assets.
It may, however, be noted that these guidelines
create a legal duty for the creditor, which must be discharged
with proper application of mind. The communication from the
creditor rejecting the objections of the borrower could therefore
be open to challenge in a writ proceeding on the ground of
non-application of mind by the creditor.
One would undoubtedly acknowledge and greatly respect the
SC's wisdom manifest in its pronouncements.
However, one wishes the SC had acknowledged
the objective of the provision in section 17 (2) to discourage
or deter borrowers from indulging in frivolous litigation.
This objective could have been achieved had the SC read down
section 17(2) to the effect that the borrower can exercise
his right of (first) appeal to the DRT free from the condition
of pre-deposit.
However, on the basis of the prima-facie
merit of the appeal, the issue of whether the pre-deposit
requirement should be insisted upon and its exact quantum
should be decided by the DRT before entertaining the appeal.
On the whole, the verdict safeguards the interests of the
large community of borrowers and also preserves public interest
in the form of financial health of banks and financial institutions.
