Case Number

Transfer Case (civil) 92-95 of 2002

Equivalent Citation

2004 (2) Mh.L.J. 1090

Bench

  • Chief Justice Vishweshwar Nath Khare
  • Justice Brijesh Kumar
  • Justice Arun Kumar

Decided On

April 8, 2004

Relevant Act/Section

  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
  • Essential Services (Maintenance) Ordinance Repeal Act, 2001
  • Transfer of Property Act, 1882

Brief Facts & Procedural History

Here, the constitutionality of SARFAESI was challenged, particularly Sections 13, 15, 17, and 34, on the grounds that they are arbitrary and unjustified.

The Industrial Development Bank of India (for short, ‘the IDBI’) issued a notice to Mardia Chemicals Ltd. on July 24, 2002, under Section 13 of the then-current Ordinance, requiring it to pay the amount of arrears indicated in the notice within 60 days, failing which the IDBI, as a secured creditor, would be entitled to enforce the security interest without the intervention of a court or Tribunal, using all or any of the measures contained in sub-section (4) of S The petitioner was also prohibited from selling, leasing, or otherwise transferring any of the secured assets.

Other financial institutions and banks issued similar notices to other parties who filed petitions in various High Courts under the terms of Section 13 of the Ordinance/Act. This was united with a number of other writ petitions filed in several High Courts contesting the constitutionality of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.

The petitioners argued that the Recovery of Debts Due to Banks and Financial Institutions Act 1993 was sufficient to address the difficulty created by NPAs and that the current statute was unnecessary. It is debatable whether the Court should delve into the necessity of a statute while considering its constitutional legitimacy. “The Parliament and Legislatures composed as they are of the Representatives of the people are supposed to be cognizant of the requirements of the people and what is good or harmful for them,” the Supreme Court has previously decided.
The Court is unable to sit in judgment of their wisdom… A law passed by Parliament or a state legislature can be overturned for two reasons:

  1. inadequacy of legislative authority
  2. infringement of any constitutional rights1

In BALCO Employees Union v Union of India2, the Supreme Court has ruled that the right place for discussing policy issues is the legislature, not the courts.

In light of the Court’s previous pronouncements, it is evident that the question to be answered is whether the legislation is constitutional. Any discussion of whether a statute is required, particularly in light of another Act whose scope is not in question in this case, was superfluous. As a result, the Court declined to hear the case.

Many petitioners argued that the existing rights of private parties under a contract cannot be interfered with, particularly by putting one party in a more advantageous position than the other. In the present case, for example, in a matter of private contract between the borrower and the financing bank or institution, the borrowers’ rights have been curtailed and enforcement of secured assets has been provided without the intervention of the court, denying them the remedy available under the law by approaching the civil court.

The Appellants are vague on where they find the legal validity of their claim. The Honourable Supreme Court has pointed out that, unlike the US Constitution, there is no bar to prospective contract invalidation in India, and hence such a statute is completely constitutional.3

Indeed, the 44th amendment removed the right to property as a basic right from the Constitution, leaving it only as a constitutional right. Indeed, even while the right existed in part III, the courts ruled that absolute contract freedom, as defined by the idea of leissez faire, was no longer valid.4

The Appellants have also been unable to locate the rights under Art 19(1)(g) and Art 298. The Supreme Court has ruled that these articles are subject to reasonable constraints and that what is acceptable is to be interpreted in the public interest, regardless of how onerous the restrictions are on the individual’s interests.5

In light of these precedents, it’s difficult to identify where the appellants’ reasoning originates. The respondents’ counsels, on the other hand, have not taken a position on the Constitution’s freedom of contract or right to trade, but have pointed out that a similar argument has been raised in a different context, namely statutes providing relief to agricultural borrowers, and has been repeatedly rejected.

It has been contended that certain facts must be determined before the power u/s.13 can be used, such as whether the person to whom notice is given is liable to pay, the magnitude of the liability, and so on. Furthermore, issues such as the law of limitation and bar under consortium agreements, set-off/counterclaim claims, creditors defaults as bailees or failure to disburse credit on time, the changeability of penal interest or compound interest, non-appropriation of funds already paid, and so on and so forth must be resolved.

So, using case law that will be covered in the main project, it was claimed that a lis exists in such a case and that the ability to resolve a lis is a judicial or quasi-judicial power, not solely an administrative function. As a result, a suitable forum must be established to resolve all such disagreements at an early stage.6

The statutory provision becomes arbitrary, procedurally, and substantively unfair if such a forum is not established. This is a false argument based on facts. S.13 does not preclude the use of any judicial venue; it just states that a judicial remedy can be sought only after the secured creditor has used his powers under s.13 (4). This is entirely correct. Many legislations provide for the use of a forum after the aggrieved party has exhausted self-help options.

It was also pointed out that the provisions of s.13 generate some practical challenges that could lead to serious legal errors. Section 2(f) of the Act, for example, specifies that the meaning of the term “borrower” includes the guarantor. A guarantor is relieved of his commitment under Section 135 of the Contract Act in certain circumstances. Now, if a discharged guarantee receives a notification under Section 13(2) of the Act, he cannot approach the Court to show and establish that he is a discharged guarantor because Section 34 prohibits him from filing an action in the Civil Court. As a result, notice under Section 13(2) is unfavourable.7

These concerns have been addressed by Section 35 of the Securitization Act, which states that the Act’s provisions have precedence over all other laws. Finally, it was pointed out that under s.13 read with s.34, the borrower has no right to go to court before the lender employs the rights granted under s.13 (4), exposing him to arbitrary and potentially fraudulent lending practises. It was argued in defence of this section that because the asset cannot be sold for 60 days under Section 9 of the Rules, the borrower has the option of approaching the Tribunal within that time frame. The Court accepted the plaintiffs’ argument in part and added two riders to s.13. To begin with, it was held that the lender had an obligation to reveal the reasons for not accepting the objections or points expressed in response to the notice issued to them before taking action under Section 13 (4). Second, the Court made a comparison to an English mortgage, pointing out that enforcement proceedings under an English mortgage can be contested on the basis of fraud. This section is also subject to such provisions.8

Another point that the Court has overlooked is that a statute must be read in context and in pari materia as a standard rule of legislative construction. The present Act’s s.13 is pari materia with the State Financial Corporation Act of 1951’s s.29. Art 300A, 21, and 14 have all been challenged on the basis of this section’s constitutional vires, specifically that it provides no right of appeal. Though the matter was never heard by the Supreme Court, it was considered by a number of High Courts. The courts have consistently ruled that the Act itself reveals a clear aim and objective and that the power granted under s.29 is intended to carry out that policy, namely, the prompt collection of dues.9

Issues before the Court

  • Is it possible to challenge the statute on the grounds that it was unnecessary to create it given the circumstances, especially when another statute was already in effect?
  • Whether the terms or existing rights under a contract entered into by two private persons could be altered by provisions of law conferring one-sided powers in favour of one of the contracting parties?
  • Whether or not Section 13 of the Act is unconstitutional?
  • Whether the requirement that 75% of the amount owing to be paid before filing an appeal with the DRT is onerous and thus Section 17 of the Act unconstitutional?

Decision of the Court

In this case, the Supreme Court held that:

a) The Parliament’s superiority in deciding the need for legislation was emphasised.
b) The connection between the RDB Act and SARFAESI was rejected since the latter deals with the highly particular issue of nonperforming assets (NPAs) (among other differences such as the latter dealing only with secured creditors).
c) As a result, it is up to Parliament to decide whether or not legislation is required.
d) Section 13 was found to be constitutionally legitimate by the Court.
e) The secured creditor is only exercising his entitlement because the default that led to the sec 13 measure might be considered a “second default”—NPA + 60 days extra time to repay following notice.
f) Prior to the 2016 Amendment, Section 13 acknowledged the Right of Redemption in a sense. Rule 8 and 9 of the SI Rules stated that the bank must serve a notice confirming the sale of secured property and that the borrower may pay off the obligation and reclaim possession at any point prior to the actual sale
g) While the Supreme Court confirmed the constitutionality of the section, it pushed hard for borrowers to have the right to representation.
h) The Supreme Court determined Section 17(2) to be arbitrary, and ordered that the heading be altered from “appeal” to “application.”

Impact of the Judgement

  1. Section 13 now states that the bank must evaluate all of a borrower’s representations and respond within seven days (which was later changed to 15 days).
  2. Within section 17, the word “appeal” was replaced by “application,” despite the fact that the marginal header remained the same (wow). In 2016, the appeal was superseded by an application in the marginal heading.
  3. DRTs now have jurisdiction over the rights of tenants in a security property. In such instances, the property is given to the person who files the application (if he meets the requirements).
  4. Section 18 was also considerably amended. When filing an appeal with the DRAT, you must deposit 50% of the total cost, which can be lowered to 25%. DRT was likewise granted a similar waiver right under Section 17.

Citations:

  1. State of Andhra Pradesh v McDowell, AIR 1996 SC 1627
  2. AIR 2002 SC 350
  3. Raghubir Dayal v Union of India, AIR 1962 SC 263
  4. YA Marmade v Authority under Minimum Wages Act, (1972) 2 SCC 108
  5. Krishan Kakkanth v Government of Kerala, (1997) 9 SCC 495
  6. Kihoto Hollohan v. Zachillhu & Ors1992 Suppl. (2) SCC p. 651 and Associated Cement Companies Ltd v. P.N. Sharma (1965(2) SCR p. 366 at pages 386-87).
  7. Mafatlal Industries Ltd. and Ors. v. Union of India and Ors., 1997(5) SCC
  8. Adams v. Scott, (1859) 7 WR (Eng.) 213 (Z49)
  9. K Surendranathan v Kerala Financial Corporation AIR 1988 Ker 330

This case analysis is done by Arryan Mohanty, a 2nd Year Student student of Symbiosis Law School.

Abstract – The historical foundations of Indian experiences and conceptions of property and wealth are considerably different from those of Western countries. The current property system, as we know it, sprang from unique events in Europe throughout the 17th and 18th centuries, and hence its lessons were not generally applicable. The concept of property rights is another economic sector where the solution is both complex and crucial. The author attempts to determine the motivation behind this unfortunate move.

INTRODUCTION

Property rights are not recognized as basic rights in the Indian Constitution. The 44th amendment, passed in 1977, made the right to acquire, keep, and dispose of property no longer a basic right. However, Article 300 (A) was added to another section of the Constitution to state that no one’s property may be taken away unless by law. As a result, the basic right to property has been replaced with a statutory right to property.

Article 19 (1) (f)
By providing an absolute basic right to property, the Indian constitution endeavored to reconcile the right to property with the right to recompense for its acquisition, balancing it with reasonable restrictions, and adding a further fundamental right of compensation if the properties are acquired by the state. Article 19(1) (f), which was balanced by Article 19(5) and the compensation article in Article 31, demonstrated this. When the state discovered that an absolute right to property and people’s ambitions were not the same, the legislature was obliged to change the constitution to make the aforementioned right to property subject to social welfare.

DOCTRINE OF EMINENT DOMAIN

This theory allows a sovereign to purchase private land for public use if the utility of the land can be shown beyond a reasonable doubt. In the current setting, this concept resurrects the age-old conflict over state authority vs. individual rights. Here comes the DID (Growth Induced Displacement), which refers to the forcible removal of communities from their homes, often from their ancestral lands, for the sake of economic development, and is considered a violation
of human rights on an international level.

Essential elements of this Doctrine:

  • A piece of property is seized for public use.
  • The seized property has been compensated.

As indicated above, the deleted Article 31 imposed two constraints on Eminent Domain power.

SUPREME COURT’S APPROACH TO THE RIGHT TO PROPERTY

The approach of the Supreme Court regarding the right to property may be separated into two phases:-

  1. The time till the right to property was a fundamental right (pre-1978)
  2. The time after the conversion of the right to property as a constitutional right (post-1978)

Right to Property as Fundamental Right
During this time, the Supreme Court went out of its way to oppose the right to property and the right to accumulate wealth, as well as to hold that, concerning Article 39, the distribution of material resources to better serve the common good and the restriction on wealth concentration, the right to property and the right to accumulate wealth were unconstitutional. The judiciary, on the other hand, is in charge of taming the socialist state’s abuses of the right to property and wealth. During the Liberalisation period, the Supreme Court endeavored to reinterpret the rules
that safeguard the right to property to make the protection genuine rather than illusory and to reduce the claim of wealth distribution.

However, this has been a piecemeal approach, and much more has to be done to restore the constitution’s original balance. This indicates that property acquisition is not just temporal but must also adhere to spiritual rules. Indian ideas understand that while the property can be enjoyed that has not been gained exactly according to the law, it cannot be termed the person’s true property.

Right to Property as Constitutional Right
The backlash against Articles 19 (1) (f) and Article 31 of the Constitution as Fundamental Rights began almost immediately after it was enacted in 1950. Thus, times have changed drastically in recent years. India is no longer viewed solely from the perspective of socialist politicians. It’s India Shining as viewed through the eyes of financial behemoths like the Tatas, Ambanis, and Mahindras, who have an inexplicable passion for capitalism, money, and markets. There’s another point of view. Industrialists and developers are vying for land across the country to establish Special Economic Zones.

Previously, the Supreme Court had defined some basic and unchangeable parameters and features of the Indian state and constitution, such as the country’s democratic form of government, as its basic structure, which could not be changed even by constitutional amendment, in the famous Kesavanand Bharti case of 1973. However, in his decision, Justice H.R. Khanna made a brief remark to the effect that citizens’ fundamental rights may not constitute a fundamental component of the Constitution.

Flaws in the 44th Amendment Act
The amendment was passed without considering the following disadvantages:
a. The close relationship between property and other fundamental rights, which the Janata Party promised to restore;
b. The impact of this change on the legislative power to acquire and requisition property;
and
c. The relationship between state policy directive principles and fundamental rights.

Implications
a. The Right to Property would no longer be a Fundamental Right, but rather a Constitutional Right. Only the High Courts, not the Supreme Court, can now question the legislation that infringes the fundamental right to property.
b. With the repeal of Article 31, the government was no longer obligated to recompense anyone whose land had been taken under the authority of a statute enacted by Parliament.

As of now, it is beyond the scope of my research and understanding to determine whether Proposition (ii), i.e. property deprivation without compensation, is still legally tenable, especially in light of the Supreme Court’s ruling in the Maneka Gandhi case, which stated that every provision of the Constitution must be explained in a fair, just, and reasonable manner. As a result, any law that deprives a person of his property must do so in an explainable manner. It may be claimed that the only legitimate way to deprive someone of their property is to provide them with appropriate recompense. This debate, however, is not entirely relevant to the topic of this article.

CONCLUSION

Personal rights such as the ability to vote, freedom of expression, and personal liberty were once regarded to have a greater position in the hierarchy of values than the right to property. As an outcome, judges are expected to strike down legislation that infringes fundamental rights than those that infringed property rights. However, courts of law have determined that the distinction between the two is illusory and that no one appears to have given any consideration to why property rights are not personal rights. In 1972, the Supreme Court of the United States, which had priorly provided a warm welcome to the difference between property and personal rights and accorded the former a preferred status, laid to rest both the difference and the preferred status of so-called personal liberties or rights by announcing that the dichotomy between property liberties and personal rights is a false one.

Whether the property in conflict is a home, a welfare check, or a savings account, the right to enjoy property without illegal deprivation is an aspect of a personal right, just like the right to travel or the freedom to speak. In reality, the human right to liberty and the personal right to property are fundamentally intertwined. Without the other, neither could have significance.

Written by Hemant Bohra student at School of Law, Lovely Professional University, Punjab.

Introduction

Emergency marks the dark chapters of History in India.

India is the world’s largest democracy with one well-defined Constitution that provides ironclad protection of our fundamental rights, but this same protection was challenged in an unprecedented manner. On this very day, 46yrs ago in 1975, Indians woke up to hear that the elected government led by Indira Gandhi proclaimed an eternal emergency. The announcement marked an immediate suspension of Fundamental rights, civil liberties were curbed, elections suspended, and voices of the dissents silenced for a period that lasted for 21months. Opposition leaders and others were jailed, habeas corpus was suspended, and censorship was imposed on the newspapers. June 26, 2021, marked the 46th year of that announcement.

Emergency was a seminal event in the history of Independent India. President Fakhruddin Ali Ahmed declared an emergency under Article 352 of the Constitution on the recommendation of Indira Gandhi in response to widespread “internal disturbance,” and it was imposed from June 25, 1975, to March 21, 1977. On June 25, 1975, the Government declared that there was a threat of internal disturbances, and thus, it invoked Article 352 of the Constitution. Under this article, the Government could declare a state of Emergency on the grounds of external threat or a threat of internal disturbances.

The Consequences of the imposition of the Emergency

Provisions of Emergency grants the Executive certain special powers that the Government decided to put into effect and suspended the freedom of the press. Moreover, strikes were banned, and many opposition leaders were put in jail.

Press censorship was also imposed, and the newspapers were asked to get prior approval before publishing any material.

Most significantly, the fundamental rights were snatched away from the citizens, including the right to move the Court for restoring their basic rights. The provision of Preventive detention was also used extensively, and people were arrested and detained based on the ground that they may commit an offense.

The Supreme Court’s constitution bench overruled the High Courts in April 1976 and approved the Government’s plea. It meant that the Government might take away a citizen’s right to life and liberty during an emergency.

Many new amendments to the Constitution were also enacted by Parliament. Following the Allahabad High Court’s decision in the Indira Gandhi case, an amendment was introduced stating that the Prime Minister, President, and vice President could not be challenged in Court. During the Emergency, the forty-second amendment was also passed.

Types of Emergency

  • National Emergency – When the security of India or a part of it is threatened by war, external attack, or armed insurrection, the President can proclaim a   national emergency under   Article   352.   When    a national emergency is declared on the grounds of ‘war’ or ‘external aggression,’ it is known as ‘External Emergency.’
  • State Emergency – Article 356 of the Constitution grants the President the authority to act only if he believes that a situation has developed in which the Government of a State cannot be carried on, in conformity with the Constitution’s provisions.
  • Financial Emergency– Article 360 authorizes the President to declare a Financial Emergency if he believes a situation has emerged that jeopardizes India’s financial stability or credit in any area of the country.

44th Amendment

Specific changes were made in Article 352 under the 44th Amendment, which substantially altered the emergency provisions, and some changes were also restored, which were established by the 42nd Amendment.

  • As per Article 352, the term “internal disturbance” was superseded by “armed rebellion.”
    • An emergency can be proclaimed only after receiving the confirmation of the crisis by the Prime Minister and the Cabinet.
    • The Houses must proclaim the Emergency within one month.
    • Every six months, the Houses must re-approve to continue Emergency.
    • An emergency can be bypassing resolutions to that effect by a simple majority of the houses present and voting. A resolution can be moved by a tenth of a house’s members.
    • Article 358 states that Article 19 is only suspended upon war or

external aggression and not upon armed rebellion. Furthermore, any law that breaches Article 19 must recite that it is connected to Article 358. If a law violates Article 19, it can still be contested.

  • Article 359 states that the suspension of the right to move courts for

violations of Part III won’t include Articles 20 and 21.

  • The term of Lok Sabha from 6 to 5 years was reversed back.

Case Laws

Minerva Mills and Ors vs. UOI and Ors

In Minerva Mills and Others v. Union of India and Others, the Supreme Court held that just because the Court would require to examine a political problem, it will not step back from carrying out its constitutional role. The Supreme Court, with great precision, detailed its authority to review the President’s Proclamation of Emergency.

State of Rajasthan vs. UOI (1977)

On March 24, 1977, the Janata party secured the verdict of the electorate and formed the new Government at the Centre. This was an unprecedented event since, for the first time in the history of the country, the ruling party at the Centre was not in power in any of the federating States – Bihar, Haryana, Himachal Pradesh, Madhya Pradesh, Orissa, Punjab, Rajasthan, Uttar Pradesh, and West Bengal. On the date that the Janata Party took office, Congress (R) was in power in various States. The Congress also lost its majority in the Lok Sabha as a result, which the Government at the Centre was formed by the Janata Party in coalition with the Congress for Democracy. On April 17, 1977, the Union Home Minister sent letters to the Chief Ministers of nine states asking them to advise their Governors to dissolve their respective legislatures and seek new mandates. Suits were filed by six of these nine states stating that the letter and the radio broadcast of the Law Minister constituted a clear-cut threat of dissolution of the Assemblies and disclosed grounds that are prima facie outside the purview of Article 356 of the Constitution.

According to Article 356 of the Constitution of India, the President can cease  from the Union the legislative and executive powers of any state “if he is satisfied that a situation has emerged in which the state’s administration cannot be carried out within the Constitution’s provisions.”

The Supreme Court held that one could not challenge the satisfaction of the President except because it has exercised malafide or irrelevant grounds.

Therefore the suits were upheld and dismissed by the Court.

Conclusion

The period of Emergency was the darkest phase in India’s tenure. On January 24, 1978, at a public meeting in Yavatmal, Indira Gandhi even apologized for the excesses committed during the Emergency and declared she was taking “the entire responsibility for the same.”

The Emergency ended, resulting in a defeat of the Congress in the Lok Sabha elections of 1977. The most precious lesson learned from Emergency is that the 1977 Lok Sabha elections were announced as soon as the Emergency got over. The 1977 elections became a referendum on the Emergency’s influence, at least in North India, where it was most felt. The opposition campaigned on the slogan “Save Democracy.” The people’s judgment was decisively against the Emergency. The experience of the entire period of Emergency from 1975 – 77 ended up strengthening the foundations of democracy in India.

This article is written by Shruti Bose student of Christ (Deemed to be University), Lavasa.

This article is edited by Shreya Litoria, a student of Banasthali Vidpyapith University, Jaipur.

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