1. Mardia Chemicals Case
Facts of the case:
In a notice dated July 24, 2002 to Mardia Chemicals Ltd., the Industrial Development Bank of
India (for short `the IDBI') under Section 13 of the Ordinance, then in force, required 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 intervention of the court or
Tribunal, taking recourse to all or any of the measures contained in sub-section (4) of Section 13
namely, by taking over possession and/or management of the secured assets. The petitioner was
also required not to transfer by way of sale, lease or otherwise any of the secured assets. Similar
notices were issued by other financial institutions and banks under the provisions of Section 13
of the Ordinance/Act to different parties who filed petitions in different High Courts.
This was joined with various writ petitions in various High Courts challenging the validity of the
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002
Issues involved in the case
Issue 1
Whether it is open to challenge the statute on the ground that it was not necessary to enact it in
the prevailing background particularly when another statute was already in operation
It was contended on behalf of the petitioners that the Recovery of Debts Due to Banks and
Financial Institutions Act 1993 was enough to meet the challenge posed by NPAs and the present
enactment was not necessary.
It is open to question in determining the Constitutional validity of a statute if it is at all necessary
for the Court to enter into the necessity of a statute. The Supreme Court has held in the past that
that
“The Parliament and Legislatures composed of as they are of the Representatives of the people
are supposed to be aware of the needs of the people and what are good or bad for them. The
Court cannot sit over the judgment of their wisdom…A law made by the Parliament or State
legislature can be struck down on two grounds alone (1) lack of legislative competence,(2)
violation of any Constitutional rights”1
The Court has recently held in BALCO Employees Union v Union of India 2 that the proper
forum for discussing a policy aspect is the parliament and not the Court.
1
State of Andhra Pradesh v Mcdowell AIR 1996 SC 1627 Para 45, 47A
2
AIR 2002 SC 350

2. So in view of the earlier pronouncements of the Court it is clear that the required enquiry is
whether the statute is constitutional .Any discussion as to the whether a statute is necessary
specially vis-avis another Act whose vires is not a issue in the present case was unnecessary.
Therefore the Court refused to entertain the argument.
Issue II:
Whether the terms or existing rights under the contract entered into by two private parties could
be amended by the provisions of law providing certain powers in one sided manner in favour of
one of the parties to the contract
The argument raised on behalf of many petitioners was that existing rights of private parties
under a contract cannot be interfered with, more particularly putting one party to an
advantageous position over the other. For example, in the present case, in a matter of private
contract between the borrower and the financing bank or institution through impugned legislation
rights of the borrowers have been curtailed and enforcement of secured assets has been provided
for without intervention of the court and above all depriving them the remedy available under the
law by approaching to the civil court.
The Appellants are silent on where exactly are they locating the legal validity of their argument.
It has been pointed out by the Honorable Supreme Court that unlike Art 1 s.10 of the US
Constitution there is no bar to prospective invalidation of a contract in India and hence such a
law is perfectly valid.3
Indeed the very right to property stand deleted from the Constitution as a fundamental right by
the 44th amendment and exists merely as a Constitutional right. Indeed even when the right was
existent in part III the Courts have held that absolute freedom of contract as expounded in the
doctrine of leissez fare is obsolete.4
The Appellants also cannot locate the right under4 right to Art 19(1)(g) and Art 298 .The
Supreme Court has held that these articles are subject to reasonable restrictions and that what is
reasonable is to be interpreted from the point of view of public interest no matter how harsh it is
on the interest of the person.5
In view of these case laws it is difficult to say where does the appellants locate their argument
.The counsels for the respondents however has not entered into the position of freedom of
contract or right to trade in the Constitution but has pointed out that similar argument has been
raised in a different context, namely statutes giving relief to agricultural borrowers and it has
been repeatedly rejected.
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

3. Some case laws may be mentioned here. ., Ramaswamy Aiyengar v. Kailasa 6, Thevar and
Dahya Lala v. Rasul Mohd. Abdul Rahim 7, validity of the Madras Agriculturalist's Relief Act
and Bombay Tenancy Act, 1939 were upheld respectively .Under these two statutes relief was
given to the debtors who were agriculturists as a class, by sealing down their debts. The validity
of the Act was upheld though it affected the individual interest of creditors.
Similar provisions were upheld in Swami Motor Transports Pvt. Ltd. v. Shri Sankraswamigal
Mutt8 and Raval & Co. v. K.G. Ramachandran9, Kanshi Ram v. Lachhman10, Pathumma v. State
of Kerala11, Fatehchand Himmatlal v. State of Maharashtra12 etc.
Issue III
Whether Section 13 of the Act ultra vires of the Constitution
The first line of attack has been the Constitutionality of section 13 itself.
It has been argued that before applying the power u/s.13 certain determination of facts are
necessary, namely, whether a person to whom notice is given is under a liability to pay as also
the question of extent of the liability etc. Further the questions pertaining to law of limitation and
bar under consortium agreements, claim of set off/counter claim, creditors defaults as bailee or
its failure to disburse the credit in time, the chargeability of penal interest or compound interest
or non-appropriation of amount already paid and so on and so forth, all these questions need to
be decided. So it was argued with case laws that shall be discussed in the main project) that in
such a case a lis exists and that power to decide a lis is a judicial or quasi-judicial power and not
purely an administrative power. Therefore a suitable forum has to be provided to decide all such
disputes at an appropriate stage.13
If such a forum is not provided then the statutory provision becomes arbitrary, procedurally and
substantively unfair
This is a factually faulty argument. S.13 do not exclude any judicial forum, but merely provides
that a judicial remedy can be availed only after the secured creditor has exercised his powers
under s.13 (4). This is perfectly valid. Many statutes has provisions under which a forum can be
availed after the aggrieved party has engaged self help.
6
1951 SCR, 292 ,
7
1963(3) SCR, 1
8
1963 (Supp.)1 SCR p. 282,
9
1974(1) SCC p. 424.
10
2001(5) SCC 546
11
1978(2) SCC 1
12
1977(2) SCC p. 670
13
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).

4. It was also pointed out that the provisions under s.13 create certain practical difficulties that
might give rise to grave miscarriges of justice. For example Section 2(f) of the Act to indicate
that the definition of the word `borrower' covers even the guarantor. Under section 135 of the
Contract Act a guarantor is discharged of his obligation under certain circumstances. Now
suppose a discharged guaranteer received a notice under Section 13(2) of the Act in view of the
bar of Section 34 to file a suit in the Civil Court, it is not possible for him to approach the Court
to show and establish that he is a discharged guarantor. Hence notice under Section 13(2) is
bad 14
These concerns have been taken care of by s.35 of the Securitization Act that lays down that the
provision of the Act overrides all other laws.
Finally it was pointed out that under s.13 read with s.34 the borrower has no access to Court
before the lender exercises the powers u/s.13 (4) this exposes him to arbitrary even, fraudulent
practices by the lender. In defense of this section it was pointed out that u/s 9 of the Rules the
asset cannot be sold for 60 days, it is open to the borrower to approach the Tribunal within that
period.
The Court partially accepted the argument of the plaintiffs and added two riders to s.13
Firstly it held that the lender is under a duty to disclose the reasons for the reason for not
accepting the objections or points raised in reply to the notice served upon them before
proceeding to take measures under sub-section (4) of Section 13.
Secondly the Court drew an analogy with English mortgage and pointed out that enforcement
proceedings under an English mortgage can be challenged on the ground of fraud. Such
provisions are applicable to this section as well. 15
Another aspect the Court has ignored is that it is a general rule of statutory construction that a
statute must be read in context and pari materia.16
S.13 of the present Act is Pari materia with s.29 of the State Financial Corporation Act 1951
The Constitutional vires of this section has been repeatedly challenges Art 300A, 21, and 14 on
substantially the same grounds namely that it gives no right to appeal. Though the case has never
reached the Supreme Court a number of High Courts have deliberated on the issue. The Courts
have persistently held that the statute itself discloses a definite policy and objective and the
power conferred under s.29 is to achieve the policy namely speedy recovery of the dues. 17
14
Mafatlal Industries Ltd. and Ors. v. Union of India and Ors. 1997(5) SCC p. 536 at page 735
15
Adams v. Scott, (1859) 7 WR (Eng.) 213 (Z49)
16
This logic has been accepted by the See RS Raghunath v State of Karnataka AIR 1992 SC 81, Union of India v
Elphinstone Spinning and Weaving Co Ltd I 2001 (1) JT SC 536
17
K Surendranathan v Kerala Financial Corporation AIR 1988 Ker 330

5. Issue IV
Whether the requirement of 75% of the amount due before appeal to the DRT is onerous and
therefore Section 17 of the Act is ultra vires to the Constitution
Section 17 of the Act s titled right to appeal. It requires that the borrower deposit 75% of the sum
before approaching the DRT.This sum however may be waived by the DRT.
An appeal is defined by the Black’s Law Dictionary18 as “ A proceeding undertaken to have a
decision reconsidered by bringing it to a higher authority , esp the submission of a lower court
court for review and possible reversal.” The BBC English Dictionary on the other hand defines
an appeal to be “a serious and urgent request”.
The wording of section 17 is misleading because what it provides is a right to approach the Court
at first instance and not merely as an appeal so it can be said to be an appeal in only very general
sense.
Any aggrieved person including the borrower can prefer the Appeal. If it is the borrower who is
making the Appeal then he has to deposit 75% of the borrowed to amount claimed in the notice
under 13(2)before the DRT , otherwise the claim would not be entertained.
It was argued on behalf of the Appellants that the deposit of 75% of the amount makes the
provision onerous and arbitrary.
The Respondents countered by citing two sets of case laws
The first set lays down that right to Appeal is neither an absolute right nor an ingredient of
natural justice which principles are to be followed in judicial and quasi-judicial proceedings. A
right of appeal is a statutory right and it can be circumscribed by the conditions. 19 The other
cases lay down that pre-deposit of amount is perfectly constitutional and not arbitrary20
The respondents also pointed out that as per RK Garg 21 as well as in other cases 22 after that
“there is always a presumption in favour of the constitutionality of a statute .... This rule is based
on the assumption, judicially recognized and accepted, that the legislature understands and
correctly appreciates the needs of its own people, its law are directed to problems made manifest
by experience ... Every legislation particularly in economic matters is essentially empiric and it is
based on experimentation or what one may call trial and error method ... There may be crudities
18
7th edn ,p 94
19
Vijay Prakash D. Mehta and Anr. v. Collector of Customs (Preventive) Bombay 1988(4) SCC p. 402
20
Shyam Kishore & Ors. v. Municipal Corporation of Delhi, 1993(1) SCC p. 22
21
R.K. Garg v. Union of India (1981) 4 SCC p. 675
22
Bhavesh D. Parish & Ors. v. Union of India & Anr., 2000(5) SCC 471 at 486 , also seeSrinivas Enterprises v. Union
of India 1980(4) SCC p. 507 at 513-514, and Jalan Trading v. Union of India. 1967(1) SCR p. 15 at p. 36, the Collector
of Customs, Madras v. Nathella Samapathu Chetty, 1962(3) SCR p. 786 at p. 829-30,

6. and inequities in complicated experimental economic legislation but on that account alone it
cannot be struck down as invalid.”
The Court however did not accept these arguments and struck down section 17(2) as ultra-virews
to the Constitution being arbitrary.
The reasoning of the Court was the following
1. Under s.13 (2) the borrower does not get any pre decisional hearing
2. There should be no pre-supposition that the borrower is a willful defaulter.
In order to make the legislation fair the provision was held to be arbitrary and struck down.
Rest of the Act was upheld
Appraisal of the judgment
The Court upheld section 13. So it can be argued that the main structure of the statute has
survived.
The judgment however suffers from a large number of deficiencies. These can be enumerated in
terms of what the judgment does lay down and what the judgment does not discuss but should
have done.
Relationship with winding up
There is a fundamental tension between the Act and Companies Act.
Under the Companies Act all the creditors and not merely the secured creditor can file a petition
for winding up.(s.439 of the Co Act).This the creditors can do if a)the Company is indebted to a
sum of more than 1lakh rupees and it has pay the sum or secure or compound for it to the
reasonable satisfaction of the creditor within three weeks of the submission of demand ,b) if an
execution of a decree remains unsatisfied ,c) it is proved to the satisfaction of the Tribunal that
the Company is unable to pay its debts.(s.433).
However the right of the creditors to wind up a Company is limited by the case laws like Tata
Iron Steel v Micro Forge (India)23 that lays down that winding up is at the discretion of the
Tribunal and a host of factors like whether the inability is temporary, the Company has grown
consistently , there is a temporary cash crunch.etc.
23
CLC 20001669(Guj HC)

7. But on the other hand u/s.13 of Securitization Act the Bank can straightaway enforce the security
interest without regards to any of these criterion. Such enforcement in all probability shall force
the Company to become insolvent.
So it seems there is a basic difference in philosophy behind the two statutes. While the Co Act
strives to put the interest of the Company, and that of the economy in perpetuation of
Corporations the other Act gives preference to the rights of the secured creditors above that of
the Company.
The conflict is more than that of principle. Enforcement of security interests can actually reduce
the value of other assets of the Company that is not with secured creditors. So the unsecured
creditors and other persons who are to receive their dues had the Company being wound up
stands to lose even more when a section 13 is brought into use. This is against the global trend
has been to pay special attention to the interest of the unsecured creditors .The Enterprises Act of
the UK engages in what is known as ring fencing that is keeping aside a certain amount of
money for the benefit of the unsecured creditors.
On the basis of this can the Act be said to be arbitrary? The answer can be only guessed because
the Court did not discuss this issue at all. This perhaps leaves a scope for the Act to be
challenged in future on this ground.
The only duty that the secured creditor has is towards the workmen. Section 13(9) of the Act lays
down that a secured creditor has the option of enforcing his security interests either under this
Act or under s.529 of the Companies Act.
Incase he chooses to go by this Act he shall have to pay the workman’s dues as under s.529A of
the Companies Act.
Then again unders.13 the secured creditor is not under a duty to pay not all the employees but
only the workmen.
Under section 17 any person who is aggrieved by the measures taken by the lender can approach
the DRT. Exactly who these aggrieved persons can be have not been defined under the Act. The
Uniform Non-Judicial Foreclosure Act of the USA defines an “aggrieved party” as a party
entitled to a remedy and includes the debtor, the secured creditor, a person having an interest in
the real property that will be affected by 16 foreclosures, and a purchaser or prospective
purchaser at a foreclosure.
It is submitted that the Indian law lacking that sort of precision leaves a space for intense and
competitive litigation. The moment the banks make use of the provisions under s.13(4) there will
be a flurry of litigation by the unsecured creditors, the workers and a host of other people with
the active blessing of the management.

8. Indeed the process of litigation can go even further. Can “measures taken under s.13 (4) “ imply
measures not taken under the said section when it should have been taken? This is not
improbable in view of the fact that the Supreme Court has entertained a petition by Common
Cause ( a NGO ) that has challenged a loan to S Kumar’s Shree Maheswar Hydro Power
Corporation (SMHPCL) in Madhya Pradesh by LIC in spite of repeated default by the said
Company.
It should be noted that the project has remained a point of contention between civil society
groups and the Company. This controversial project has seen a pitched battle between the
Narmada Bachao Andolan (NBA) and its promoters, ending with the NBA almost being gagged
by the courts. It is not to accuse the Common Cause of any oblique motive but to point out that if
somehow the Court system permits issues those are political to be settled by the Act.24
The Court can however be excused for not dealing with these issues as the Mardia Chemicals
arguably did not raise them. But less easy is to accept certain innovations to the Act that the
Court has done.
24
Fine-tuning The SARFAESI Act

9. The addition of extra-statutory requirements
It has held that the lender is supposed to furnish the borrower the reason as to why his objections
are not being acceded to and these reasons have to show an application of mind on part of the
lender. It is difficult to understand the rationale form such action. After the entire lender is
claiming the money after the fulfillment of certain conditions as a matter of right. Why an
exercise of right must be accompanied by a rider?
The Court has added that this reason given shall not endow the borrower with the right to
approach the DRT, at that stage. But can this be a ground for approaching the DRT at a later
stage?. With approaching the DRT being made easier this extra statutory requirement imported
by the Court shall only give another cause of action and more room for delay.
Wrong understanding of arbitrariness
The requirement of deposit of 75% u/s.17 of the Act was struck down because it was deemed to
be onerous and arbitrary.The author considers this a failure on part of the respondents who did
not point out why the Act should not be deemed to be arbitrary but instead harped on right to
appeal and how economic legislations can afford to be a little inequitable.
This raises the question what is arbitray? It has ot been defined anywhere but it is probably safe
to go by the definition provided by the Supreme Court in Srilekha Vidyarthi 25..arbitrary is
“something from which no discernible principle can be found.”
To see if one can find any discernible principle behind it one has to look into the provisions of
the Act.
The powers unders.13 can be exercised under the following conditions
1. Before taking action under the Act the assets shall have to be classified as NPAs This is done
under RBI guidelines.
2. Unders.s.13 (12) the aforesaid actions can be exercised only as per prescribed by the Union
Government by Rule.
3. Under s.19 the banker is liable to pay compensation for wrongful possession
4. The debtor can file a writ under ART 226 if the bank is in Public sector( most of the major
Banks are)
5. Detailed rules are laid down for giving notice, taking possession, ( the Court has also added to
it)
6. As per RBI guidelines legal actions can be taken only in case of willful default.
25
Srilekha Vidyarthi v State of Uttar Pradesh (1991) 1SCC 912

10. 7. The Court itself has empowered the borrower to approach the civil Court in case of any fraud
in sale. Any way sale of assets under s.29 of the SFC Act is guided by the rules laid down in by
the Supreme Court –s.13 of the Securitization Act is pari materia.
It is submitted that in view of all these safeguards it is highly unlikely that the powers unders.13
can be misused.
So why shall the borrower go to the DRT at all? Experience suggests that majority of the cases in
the DRT challenge the loan document itself and often simply to delay the process rather than
actually win the case. Under the Indian law the prohibition against unconscionable contracts
have been imported by the Supreme Court 26. This gives the borrower the chance to challenge the
loan document as having signed under unequal bargaining power, having irrational clauses etc
and prolong the judicial process..
There can be exceptions to this rule but then the DRT is empowered to waive the fees and if a
probable case can be suggested then the DRT is most likely to do so. The presence of dilatory
litigation is a well-known feature of the Indian legal system and it was precisely this defect that
the legislature sought to remedy.27The Court by overturning the requirement of predeposit has
more or less returned everything to square one.
Certain assumptions that the Court makes are also questionable. For example there has been a
continuous stress on making the legislation balanced.
In commercial arena there are many laws that are tilted to one party, mention may be made of the
Consumer Protection Act, Rent Legislation, Industrial Disputes Act. These Acts are not arbitrary
even when they are not equal benefit to both the parties, because there is no duty that legislation
shall have to be balanced. The scrutiny is on a) public purpose, b) objective of the Act, c)
legislative intent. The Court however was not directed to the end partly because of the faulty
strategy of the respondents who insisted on cases that said pre-deposit is not arbitrary rather that
this line of argument. This shall be elaborated in the project.
As pointed out in the cases involving s.29 of SFC Act that special privilege given to the
Corporation is not arbitrary but for the purpose of achieving the objectives of the Act”. Here the
object of the Act was very clear to avoid vexatious litigation. Striking down s.17 that object
seems to have been defeated.
26
LIC v Consumer Education Research Center (1995) 5 SCC 482
27
Even the Court System accepts the presence of delay tactics and over the years have taken a strong exception to
it.
In Mahmad Manzoor Alam V. State of Bihar & Others {PLJR 2003(2), 148} the Hon'ble High Court of Patna has
dismissed the petition with costs on the ground that the petitioner who defaulted in repayment of loan, resorted
to legal engineering to avoid the liability of repayment. The court observed that the debts, if not pad, contribute to
the deficit financing of the nation's planned economy and affects the persons also who have nothing to do with
these loans and who get lined up unconsciously for making up these bad debts by paying taxes, direct or indirect

11. Conclusion -The way forward
It now seems certain that the Securitization Act is to be amended. This is in view of the fact that
the Basel II provisions shall come into force by 2006, which would require the banks to make
hefty provisions for credit risks apart from the market and operational risks Bankers feel that the
credit risk in India is still high as per the global standards due to inadequate laws for recovery of
the NPAs and lack of information sharing data base among bankers on the risk profile of the
borrowers.
However it is not clear how the Government can go around the Supreme Court stricture on
predeposit.
The Government can take two-pronged approach.
Firstly it can amend s.17. there are several options
It can reduce the amount, to say 25% of the amount due as recommended by the Bankers 28. It
can make the debtor pay 75% of the pending amount rather than 75% of the interest rather than
the whole loan as had been suggested by the Small Industries lobby some time ago.
The other way is to amend the DRT Act that makes putting a stay order against the enforcement
of the security interest difficult, indeed impossible without the presence of a prima facie case. It
seems this is the approach the Government is rather inclined to take.29
It is submitted the second approach is the most feasible one. The reason why the Court rejected
the amount of predeposit was that the debtor may not be in a position to pay after the secured
creditor has enforced his interest’s – a 25% predeposit may be held to be just as onerous by the
Court .
The amendment should not only clear the air for the Banks but should also clear certain othyer
ambiguities in the Act that has been mentioned like the broad definition of “. “aggrieved
persons”, the locus standi of then Unions and the unsecured creditor before the DRT after the
security interest under s.13 is enforced.
The judgment in this case has taken off the pressure that the laon defaulters, but the sake of the
economy and development certain pressure has to exist .It remains to be seen how the
Government brings some teeth into the Act without compromising on the fairness to the debtor.
28
IBA seeks deterrent to combat defaulters, www.ahmedabad.com/index/viewarticle/article/14480/sect
29
Poornima Mohandas, Budget promise to amend Securitisation, DRT Acts — Banks breathe easy on NPAs,