Court clears watered down foreclosure law

Strikes down clause for 75% payments by borrowers before DRT move.

The Supreme Court today upheld the validity of the Securitisation Act but struck down a provision in the law that required borrowers to deposit 75 per cent of the amount claimed by lenders before they could file appeals with debt recovery tribunals.

Companies that had received notices from banks and financial institutions under the Securitisation Act claimed the judgment had upheld their position.

"We have got more than what we asked for. Nobody had challenged the Securitisation Act. We were only contesting some tough provisions of the Act," Rasik Lal Mardia, chairman and managing director of Mardia Chemicals, said.

Mardia Chemicals and other companies had moved court against notices sent to them by banks and financial institutions arguing that Section 17 (2) of the Act, which required them to deposit 75 per cent of the claim in order to be heard by debt recovery tribunals, was blocking their ability to take legal recourse against seizure notices.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act was passed by Parliament in 2002 to give banks and financial institutions more teeth to recover their bad assets. Today's judgment could open the floodgates for litigation against the notices sent by banks and financial institutions under the law.

Mardia, for instance, said his counter-claim of Rs 5,600 crore against ICICI Bank would now be heard by a debt recovery tribunal along with the claim of Rs 1,400 crore made by the bank on his company.

"Our legal rights have been restored," he said. The Mardia Chemicals scrip ended the day at Rs 2.24 on the Bombay Stock Exchange against its previous close of Rs 2.13.

Industry chambers welcomed the Supreme Court decision, saying it took forward reforms in India's bankruptcy laws.

The Confederation of Indian Industry said the large deposit requirement was a hurdle in the way of companies appealing against banks' claims. "If the borrower had the ability to pay 75 per cent, there would have been little likelihood of default in the first place," PHDCCI President Ravi Wig said.

Today's judgment was delivered by a Bench comprising Chief Justice V N Khare, Justice Brijesh Kumar and Justice Arun Kumar.