CONSTITUTIONAL VALIDITY OF SECTION 14 OF SARFAESI ACT
Updated: Jun 1
The constitutional validity of Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 (“SARFAESI Act”) has seldom been challenged before the Courts. The issue resurfaced last year with a petition filed before the Gujarat High Court in the case of Pinakin Plastoforming Limited v. Union of India. The Court briefly touched upon the vires of the said provision, but ultimately dismissed the petition because the petitioner had indulged in forum shopping. In this article, the author discusses why this is a contested provision and argues that the provision is perfectly constitutional. The constitutionality of the provision is analysed on two grounds- principle of audi alteram partem and the right to approach the Courts, whilst considering the object and purpose of the Act as well as the surrounding provisions under the Act.
Before the enactment of the SARFAESI Act, the creditors had to take recourse to the Civil Courts in order to recover their money, thereby making the process a tedious and lengthy one. With the object of regulating securitization and speedily enforcing security interest and recovering dues on default made by the borrower, the SARFAESI Act was enacted in the year of 2002. Section 13 of the SARFAESI Act provides for the furnishing of a notice to the defaulting borrower to discharge his liabilities within sixty days from the date of notice. If the borrower fails to do so, clause (4) of the Section comes into play which provides for the enforcement of security interest by a secured creditor, without the intervention of Courts, by various ways namely: taking possession of the secured assets, taking over the management of the business or transferring the secured assets including lease, sale, assignment or realization of the assets. In case the creditor is faced by resistance by the borrower in executing Section 13(4), Section 14 comes to his rescue. Section 14 provides for assistance to the secured creditor by the Chief Metropolitan Magistrate or District Magistrate in taking possession of the secured assets on a written application of the creditor. These provisions enable the immediate and speedy recovery of dues between the parties without any hassle of approaching a specific authority for adjudication of the dispute.
Arguments against Section 14
There are two major reasons why Section 14 has been contested time and again before the Courts.
1. Violation of Audi Alteram Partem
Firstly, it is argued that Section 14 violates the principles of natural justice. Described as “fair-play in action”, the concept of natural justice entails the principle of audi alteram partem, i.e., no person affected by a decision should be condemned unheard. The violation of principles of natural justice results in arbitrariness, as laid down in Union of India v. Tulsiram Patel. This is also in violation of the Right to Equality enshrined under Article 14, which has been expanded to include arbitrariness and unreasonableness under the ambit of discrimination.
It is argued that Section 14 of the SARFAESI Act empowers the concerned Chief Metropolitan Magistrate or District Magistrate to take into possession the secured assets without either giving any notice or any opportunity of being heard to the borrower. This is arbitrary and against the principles of natural justice, thereby amounting to a violation of the rights under Article 14.
2. Violation of Right to Approach the Court
Secondly, it is argued that Section 14 bars the jurisdiction of Courts to entertain any dispute that falls under the said section. Articles 14 and 21 of the Constitution guarantees to the citizens’ access to justice as a Fundamental Right.[i] The right to approach the Court is an integral and essential feature of the Constitution and constitutes a part of the basic structure.
It is argued that Section 14(2) provides that any act done by the Chief Metropolitan Magistrate or District Magistrate as an exercise of powers conferred under Section 14 of the SARFAESI Act cannot be challenged before any authority. It bars the aggrieved from accessing their right to approach the Court, and hence, this provision goes against the basic structure of the Constitution.
Analysing Section 14
Whether the Principles of Natural Justice are actually being violated?
It is important to note that the rule of audi alteram partem is not absolute, and can be modified, as laid down in PUCL v. Union of India. In this case, it was held that mere absence of a pre-decisional remedy would not amount to violation of audi alteram partem. The importance of the object of the Prevention of Terrorism Act, 2002 was considered and it was held that even the presence of a post-decisional remedy would amount to fulfilling the principle of audi alteram partem.
Therefore, it is important to firstly consider the object of the SARFAESI Act. In Kathikkal Tea Plantations v. State Bank of India and Union Bank of India & Anr. v. State of West Bengal & Ors., the object of the Act was taken into consideration while interpreting Section 14. It was observed that if Section 14 was read in isolation of other provisions in the SARFAESI Act, it would defeat the object of the Act itself. If the provision was read with other provisions of the Act like Sections 13, 15, 17 and 18, it would appear that the object of the Act is simply to enable the secured creditor to speedily recover secured assets, thereby, recovering his financial loss. Therefore, a pre-decisional remedy is not provided only because the object of the Act is to provide for a speedy recovery of dues to the creditor.
Additionally, on a close look at the step wise procedure of recovering dues, firstly, a notice is furnished to the defaulting borrower to discharge his liabilities within sixty days from the date of notice, as provided under Section 13. During this period, the borrower can make any representation or objections regarding the notice to the secured creditor. It is only when the borrower either fails to make any objections or in case where his objections are not accepted by the creditor, does Section 14 come into play. Therefore, in essence, Section 14 does not come into play unless a notice has been furnished to the borrower earlier and the period of sixty days has elapsed during which he could have made a representation. Further, Section 14 is non-adjudicatory and merely executory in nature (Parvin Cotgin Pvt. Ltd. v Axis Bank Ltd). In other words, the purpose of Section 14 is to merely assist the secured creditor in gaining possession of the secured assets. The District Magistrate is only required to verify the factual correctness of assertions made, and not decide on the legal validity of the claim made.
For a provision to be in conformity with Article 14, it must be fair, just and reasonable. Such fairness and reasonableness can be inferred from the object of the enactment or from the surrounding circumstances that necessitated the legislation. The reasonable classification test under Article 14 also necessitates that in case of any differential treatment, the differentia must have a reasonable nexus with the object sought to be achieved by the statute in question. Therefore, as discussed above, it can be concluded that Section 14 of the SARFAESI Act has a reasonable nexus with the object of the Act and the principle of audi alteram partem has only been modified to suit the object of the SARFAESI Act. Further, sufficient safeguards such as the requirements of furnishing a notice and provision of a sixty-day period to make representation have also been provided. Such a provision cannot be said to be unreasonable or arbitrary or considered to be violative of Article 14 of the Constitution.
Whether the Right to Approach the Court is being Abridged?
The ouster of jurisdiction of Civil Courts via a statute is legally valid by virtue of Section 9 of the Code of Civil Procedure (“CPC”). Section 9 states that Civil Courts have jurisdiction to entertain civil suits unless it has been expressly barred by a statute. Section 34 of the SARFAESI Act expressly provides for the ouster of jurisdiction of Civil Courts in respect of any matter under the Act which a Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. Such bar on the jurisdiction of Civil Courts is in accordance with Section 9 of CPC.
On the inability of the executor to execute remedies available under Section 13(4), Section 14 gives the powers of assisting the creditor to the Chief Metropolitan Magistrate or District Magistrate. Further, the power to determine the validity of any action under Section 13 or 14 of the SARFAESI Act rests with the Debt Recovery Tribunal by virtue of Section 17 to the exclusion of Civil Courts. On finding that the action taken is not in accordance with the Act, the Tribunal can declare those actions as invalid and pass necessary orders like restoration of secured assets or management of the business. By virtue of Section 18, the aggrieved party can also file an appeal to the Appellate Tribunal. These matters of enforcement of security interest as under Section 13, 14, 17 and 18 confer powers of determination of a dispute on the Debts Recovery Tribunal or the Appellate Tribunal to the exclusion of Civil Courts, which is in furtherance of Section 34 of the SARFAESI Act. Such an ouster of jurisdiction of Civil Courts by virtue of Sections 13, 14, 17 and 18 of the SARFAESI Act is perfectly valid under law, as also held in the case of Bank of Baroda v. Gopal Shriram Panda.
Moreover, there is no bar on the power of the High Court and the Supreme Court under Article 226 and 32 respectively to undertake judicial review of the decisions. Therefore, given that an effective adjudicatory mechanism has been provided in the Act, the provision cannot be said to be violative of Article 14 or 21 of the Constitution, as also laid down in cases such as GP Ispat Private Limited v. Authorised Officer and Chief Manager.
The arguments against the constitutionality of Section 14 of SARFAESI Act are centred majorly on two contentions- the violation of principle of audi alteram partem and the right to approach the Court. On examining the object and surrounding circumstances in which the SARFAESI Act was enacted and on reading Section 14 along with other provisions of the SARFAESI Act, it is evident that the principle of audi alteram partem and the right to approach the Court have not been done away with but have only been modified to cater to the object of the Act and hence, Section 14 is perfectly constitutional.
Adequate consideration of the object and purpose of an Act is the sine qua non to examine the constitutionality of an Act. A provision cannot be read in isolation of its overall object or other provisions incorporated under the Act in question. Every legislation is designed differently in order to further its goals and objectives. Therefore, it is necessary that each provision be examined individually in its backdrop whilst giving adequate importance to the surrounding provisions under the Act as well as the nexus of the provisions along with the overall object of the legislation.
[i]Anita Khushwav. Pushpa Sadan, AIR 2016 SC 3506.