Author: Arohi Jain, Renaissance Law College
TO THE POINT
The Mardia Chemicals Ltd. vs. Union of India is a landmark judgement by the Supreme Court in 2004, which significantly impacted India’s financial and banking sector. It addresses the constitutional validity of securitisation and reconstruction of financial assets, and the enforcement of the Security Interest Act, 2002. The SARFAESI Act was enacted to tackle the problem of non-performing assets and also empowered banks to enforce their security interests without the intervention of a tribunal or court. In this case, the petitioner questioned the validity of the SARFAESI Act, arguing that it violates the principles of due process of law and natural justice, as it allows banks to take measures without providing an opportunity to the borrower. It granted arbitrary powers to the banks and imposed onerous conditions for appeal. The Supreme Court upheld the power of security creditors to enforce security interests, struck down the requirement of a 75% deposit, and ensured safeguards for borrowers. This landmark case had a profound and lasting impact on the banking sector and on protecting borrowers’ rights.
USE OF LEGAL JARGON
In the Mardia Chemical Ltd. case, the company had borrowed funds from multiple financial institutions and later defaulted on repayments. This prompted the institutions to exercise their powers under sections 13(2) and 13(4) of the SARFAESI Act. The company challenged the constitutionality of the act, arguing that it grants banks and financial institutions extensive powers without judicial oversight. The petitioner highlighted a violation of fundamental rights, noting that Section 17 requires a 75% pre-deposit, which they claim infringes Article 14 (right to equality) and Article 19(1) (right to practice any profession or carry on any business). They also contested the supremacy of section 13 of the SARFAESI Act over section 69 of the Transfer of Property Act. The petitioner contended that the act compromises fairness in judicial processes and violates the principles of natural justice by allowing institutions to take possession without a proper hearing.
THE PROOF AND JUDGEMENT
The Supreme Court ruled in favour of protecting borrowers’ rights, promoting fairness and preventing arbitrary actions by financial institutions. It required banks to provide reasons when rejecting borrower appeals. The court invalidated the 75% pre-deposit clause under section 17 (2), ruling it unreasonable and in violation of Article 14 of the Constitution. However, it upheld the SARFAESI Act provision granting secured creditors the authority to enforce security interests. The judgment also clarifies the remedy under section 17, which permits an appeal to the DRT after the bank’s action under section 13.
ISSUES OF THE JUDGEMENT
1. The SARFAESI Act violate the principle of natural justice and due process of law.
2.It grants the arbitrary and unchecked power to the bank and financial institutions.
3. The act overrides the provision of the Transfer of Property Act.
THE IMPACT OF THE JUDGMENT
The judgment has a remarkable impact on the financial and banking sector. The court ensures that the bank strengthens its power to loan recovery but does not infringe on the right of borrowers, and it protects the fundamental rights of borrowers. The ruling widened the scope of amendment in the provision of the SARFAESI Act, and with the SARFASI Amendment Act 2004, the requirement of 75% of pre-deposit was removed, ensuring the opportunity of asking for a reason on rejection of the appeal under section 13. The amendment strengthens the core provision of the act and positions it as a powerful tool of the bank and financial institutions in bad loan cases.
CASE LAWS
1. The Kishan Chandra Arora vs Commissioner of police (1961)- In this case, the provisions under 17 were discussed and considered legitimate, with the limited interference of the court.
2. Bhavesh D. Parish (2000)- the court only interfered in the economic legislation with the judgment the judicial restraint unless striking down the arbitration exists.
3. Organo chemical industries vs the Union of India- This case law was used as precedent for the judgment and clarified that the appeal should not always be considered as essential rather find alternative remedies.
CONCLUSION
The landmark judgment reshaped the debt recovery and financial sector. It upheld the unnecessary provision of the SARFAESI Act for debt recovery and ensured to safeguard the rights of the borrower. The ruling led to an amendment in the act to make it align with justice and form a balance between creditors and debtors. This case remains a crucial precedent to other financial, banking and constitutional disputes.
FAQS
1. Does the SARFAESI Act override any section of the Transfer of Property Act?
Yes, Section 13 of the Act overrides Section 69 of the Transfer of Property Act (sale of the mortgage property).
2. Which of the fundamental rights was violated by the act?
The SARFAESI Act violates the fundamental and constitutional rights, such as Article 14, 19 and 21. The principle of natural justice and due process of law is affected by the act.
