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The Supreme Court upheld the constitutional validity of the security enforcement law - which allows banks to take over and dispose of secured assets of defaulters - while also retaining the borrowers' right to appeal against the lender.

In its verdict on the famous ICICI Bank versus Mardia Chemicals case, the court has given the borrower the right to question the bank's decision, which the bank will have to mandatorily respond to. While the borrower will have the right to move the debt recovery tribunal (DRT), the banker can go ahead and sell the assets if the DRT does not issue a stay order.

Significantly, the three-bench judge has held that the borrower will no longer have to deposit 75% of the outstanding loans with the DRT for making an appeal. This will make it easier for the borrower to make an appeal.

"The verdict is a great decision for ICICI Bank. For cases we have moved to take possession of the collateral, we would consider properties for sale," said Kalpana Morparia, deputy MD, ICICI Bank. Besides taking possession of the assets, the secured creditor may take over the management or appoint any person to manage the assets.
However, Rasik Mardia, the promoter of Mardia Chemicals, said that as a petitioner he has received more than what he was looking for. "Our only point of concern was section 17(2) that barred judicial remedies until a deposit of 75% of the claim amount is made,"

The Supreme Court judgement puts an end to the almost a year-old dispute between Mardia and ICICI Bank.
Mardia the former had challenged the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SRAFESI) Act, which allows lenders to attach and sell secured assets of defaulting clients.

The lenders of Mardia Chemicals had taken possession of the company's Vatva plant in Surendranagar district of Gujarat in December '02. Mardia's outstanding dues to lenders is close to Rs 1,500 crore, of which the principal amount is Rs 800 crore. Of this, the company owes around Rs 300 crore to ICICI Bank, the principal lender to the company. The principal due to ICICI Bank is around Rs 190 crore.

The court had earlier restrained banks from selling the secured assets that have been attached. Several borrowers in different courts in the country had also stalled banks and institutions from disposing off assets which were attached under the SRAFESI Act.

Once a borrower turns a defaulter (ie non-payment of dues for 90 days), the lending bank has to give a 60-day notice for enforcing the secured asset. After responding to the borrowers' query, the bank has to wait another 45 days before selling the asset. Meanwhile, if the borrower obtains a DRT stay, the sale process will be stalled.

Experts in the industry feel that the introduction of the DRT clause could delay the repayment procedure and substantially reduce the bargaining power of lenders. The new Act was framed in such a way that it gives lenders the right to attach and sell the securities pledged with them without much legal intervention. Thus, in its original form, it gave an upper hand to the lender.

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