SUPREME COURT CLEARS THE SECURITISATION ACT

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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.

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