Headline of the Article: – Can Banks Seize Without Court orders? Mardia Chemicals Explains.
Author: – Divya khatri, B.A.LL.B., Chaudhary Devi Lal University, Sirsa, Haryana, India.
To The Point: –
Can the bank really seize your house and factory without any court permission? Such captivating questions arose when the SARFAESI Act was introduced. The SARFAESI Act grants extensive authority to banks and financial institutions to recover non-performing loans by directly seizing the secured assets, such as land, buildings, or machinery. And then these secured assets are sold so that they can recover their unpaid dues, and they can do all this work without ever going to the civil court. Before SARFAESI, banks had struggled for a long time, which made recovery a frustrating process. SARFAESI is such a law whose main intended function is recovery of money, and it reduces bad debt. Because of this, the direct seizure power that is enacted raises constitutional questions. Borrowers argue that this is a direct violation of their fundamental right to property or fair procedure because they first lose their assets and then appeal later. Its central issue is whether the bank’s right to recovery is more noteworthy than the borrower’s right to be heard? This conflict in Mardia Chemical Ltd. v. Union of India (2004) was decided in the Supreme Court which comprised of three judges. This bench comprised Chief Justice S.B. Sinha, Chief Justice V.N. Khaire and Justice Dr. Ar. Lakshmanan. Mardia Chemicals and other borrowers argued that SAEFAESI allows banks to completely bypass courts which have an unbridled power to seize assets even if the borrower has valid disputes. It was claimed that this was completely arbitrary, unreasonable, and against Articles 19(1)(g) and 14 of the Constitution. The Supreme Court upheld the validity of the act but also interpreted the law to protect the rights of the borrowers and said that borrowers can approach the Debts Recovery Tribunal and will be offered a fair chance to challenge the wrong possession. Therefore, SARFAESI does empower the banks to seize assets, but this power is not absolute. It must be exercised strictly within the limits laid down by the Supreme Court, which ensures that recovery is swift and not unfair.
Abstract: –
Mardia Chemicals Ltd. V. Union of India [(2004) 4 SCC 311, para 59] is a landmark judgement which checks the legal validity of the SARFAESI Act. The act empowers banks and financial institutions to forfeit or sell secured assets of defaulting borrowers without requiring any court decree, thereby speeding up debt recovery. My primary objective through this article is to have a structured discussion of this landmark case so that its impact on banking law can also be acknowledged. To make this topic more comprehensive, this article covers key proofs, will discuss important case laws, will analyses relevant legal jargon and will also include an FAQ section for better understanding.
Use of Legal Jargon: –
This article uses legal terms such as secured Creditor, Security Interest, Non-Performing Assets, Possession and Enforcement, Debts Recovery Tribunal, Alternative remedy, Notice and Fair Procedure, Third Party Rights, Complementary Remedies, Pledge and Lease.
SECURED CREDITOR
Banks or financial institutions hold legal rights over the borrower’s property so that he can recover his debt.
SECURITY INTEREST
This ensures that if the borrower defaults, his assets will be seized and given as leverage to recover the amount
NON-PERFORMING ASSETS
A loan or advance when the borrower stops paying interest for a certain period.
POSSESSION AND ENFORCEMENT
If the borrower does not pay within sixty days, under section thirteen clause four the creditor allows him to take physical possession of secured assets, manage, lease, sell them so that dues can be recovered without filing a civil suit.
DEBTS RECOVERY TRIBUNAL
This is a special tribunal established under RDB where borrowers can challenge the action of creditors under SARFAESI. Mardia Chemical confirms that the borrowers must use the remedy before approaching the constitutional courts.
ALTERNATIVE REMEDY
This means that before filing the case under article 226 of the constitution in the High Court, the borrower will first have to exhaust the remedy which is available under the SARFAESI act by going to the DRT.
THIRD PARTY RIGHTS
Many times, someone other than the borrower, such as tenant who is using the property or living there and has kept that thing as a security for a bank loan. In Harshad case, if a person is a genuine tenant and his rental agreement exists before the bank’s action, then the bank cannot throw him out by using the SARFAESI Act. The bank will have to follow fair legal steps and will have to respect the rights of the tenants as well.
The proof: –
The banking crisis of the late 1990s and early 2000s, when growing nonperforming assets were the biggest barrier to banks’ capacity to lend and make investments in economic development, was successfully resolved by the SARFAESI Act of 2002.Traditional civil suits were slow and ineffective, in which litigation and injunction would take years. To tackle this hurdle, the Parliament enacted the SARFAESI Act so that the secured creditors have the power to bypass the civil courts and can enforce their security interest directly against the borrowers’ assets.
How does law operate?
As per section 13(2), banks or financial institutions can issue a demand notice to defaulting borrowers, which they need to clear If the borrower fails, section 13[4] allows the creditor to take steps such as:
- taking physical possession of the secured assets.
- taking over management of the borrower’s business.
- appointing a person to manage the secured assets.
- leasing or selling the asset so that money can be recovered within sixty days.
Petitioners’ Arguments: –
Violation of Article 14: –
This article enables the creditors to unilaterally seize the assets and in this the borrower is not given a fair opportunity to contest beforehand.
Violation of Article 19(1)(g): –
This is a violation of Article 19(1)(g), which is the seizure of judicial oversight that causes the borrower’s business to be shut down overnight, which is an infringement of the right to trade and carry on business.
Unreasonable Pre-condition under section 17(2): –
The petitioners argued that this Act imposed unreasonable pre-conditions which required the borrower to make 75% deposit before the Debts Recovery Tribunal heard the appeal. This was financially impossible for most of the struggling borrowers, and it closed all doors to get the remedy.
Government Stand: –
Union of India argued that SARFAESI Act is an essential safeguard for the banking system and public money. NPAs posed that it is a systematic risk to the Indian economy. This act targeted only secured assets in which the borrowers had already pledged as collateral. The seventy-five percent deposit was intended to prevent the frivolous appeal and delay the tactics that have historically stalled recoveries for years.
The Supreme Court Detailed findings: –
The supreme court of India upheld that the act is legally valid but added some crucial safeguards: –
- Necessity of speed
- Striking down seventy-five percent pre deposit.
- Restoring the principle of natural justice.
- There should be no blanket immunity for banks.
The continuing proof [Case Laws] –
Transcore V. Union of India (2006)
This case clarified the relationship between SARFAESI ACT and RDB ACT. The Supreme Court gave its judgement that the remedies under SARFAESI ACT and RDB ACT are complementary and not exclusive.
Kanaiyalal lalchand Sachdev V state of Maharashtra (2011)
The Supreme Court has given the judgement that the borrower would first have to exhaust the remedy under SARFAESI Act by approaching the debts recovery tribunal and that too before seeking relief under article 226 of the Constitution.
Harshad Govardhan Sondagar V. international assets reconstruction co. ltd (2014)
The Supreme Court upheld that if a person is a genuine tenant and has been working on the property before taking a bank loan, then he cannot be thrown out just under the SARFAESI Act. The bank will have to follow fair legal steps and will have to respect the rights of the tenants.
United bank of India V. Satyawati Tondon (2010)
The Supreme Court has ruled that if a borrower has a proper remedy under the SARFAESI Act like going to the DRT, he cannot directly file a writ petition in the High Court. He will first have to use the legal appeal process provided under the Act.
Mathew Varghese V. M. Amritha Kumar (2014)
The Supreme Court said that if the bank sells the borrower’s property under the SARFAESI Act, then it will have to strictly follow all the legal steps like giving proper notice and giving a fair chance to repay and if the rules are not followed, the sale can also be cancelled.
Conclusion: –
Mardia Chemicals Ltd. v. Union of India is a significant case which is a cornerstone judgement that balances India’s urgent need for quick debt recovery. Although banks and financial institutions have been given strong power to seize property without any court intervention, yet the Supreme Court has ensured that powers will not be misused under any circumstances. By striking down 75 percent pre-deposit condition, the court has protected the doctrine of natural justice and fair hearing. Whatever cases have been discussed show how the powers of the creditors and safeguards of the borrower go hand in hand. This judgement is a reminder that strong recovery loans always protect constitutional rights. Today In this case also, it guides courts, lawyers and lenders and maintains a balance between recovery of bad loans and arbitrary dispossession.
FAQ : –
Can banks really seize property without any court order?
Banks can seize property under the act, but borrower has right to challenge the action before the DRT.
What did Mardia Chemicals decide for seventy five percent deposit?
The Supreme Court struck down the condition that they will not have to deposit seventy five percent of the amount before appealing because it is unfair and it makes the right to appeal meaningless.
Can banks use both SARFAESI and DRT Act at the same time?
Banks can use both SARFAESI and DRT ACT to recover their dues faster.
If I have any dispute with the bank, can I directly go to the high court?
No, A person can not directly go to the high court because firstly, he must use the proper remedy under SARFAESI and then he must approach DRT before filing the writ in the high court.
What will happen if the bank does not follow the proper procedure?
If proper notice and the procedure is not followed then, in that case, sale can be cancelled by the court.
References : –
Mardia Chemical Ltd. V. Union of India
(2004). Supreme Court Cases, 4 SCC 311
SARFAESI Act, No. 54 of 2002, India Code.
