Every new economic legislation opens up a fresh front for legal battle in the courts. Magistrates’ courts are now flooded with bounced cheque cases. Last week, the validity of the relevant provision in the Negotiable Instruments Act (Section 138) itself was challenged, and the Supreme Court issued notice to the central government.
Another law that has spawned endemic litigation is the Securitisation and Reconstruction of Financial Assets and Security Interest Act, 2002 (Sarfaesi). It was intended to reduce non-performing assets (NPAs) of banks and lending institutions. Its validity was also challenged in the Supreme Court some time ago, and the law was upheld with some modifications. However, it is the second most fought-over legislation, going by law reports. Lenders and borrowers are seen in a bitter cat-and-mouse fray all along the ladder of court hierarchy.
The law has been criticised for being too harsh and even Draculian. There have been allegations of it causing suicides of poor people, since any asset above Rs 1 lakh can be taken over by the lender and auctioned. A woman may be thrown out of her matrimonial home if the husband wilfully stops paying instalments. The Act does not distinguish between such marginal people who are not “wilful defaulters” and intransigent companies that can engage clever lawyers to delay or stop repayment of loan. Lending institutions ignore corporate social responsibility and rush to auction property without resorting to alternative remedies. Even in auctions of secured assets, they are seen to manipulate price and adopt stratagems through private treaty.
Some of the recent cases show both sides in a bad light. The Madras High Court described a case decided by it, Palpap Software International vs Indian Bank, as “a classic example of misuse of the provisions of the Sarfaesi by the secured creditor, by purchasing the secured asset in the absence of bidders, after reducing and refixing the market value and upset price, notwithstanding the offer made by two bidders in the earlier auction quoting substantial amounts”.
While allowing the writ petition, the court remarked that “Sarfaesi Act gives wide powers to the bank to take action to recover the amount and for the purpose of such recovery, to take possession of the property and to sell the same, without reference to court. Therefore the bank is expected to conduct the procedure in a bona fide manner. The dealings of the bank should be fair and transparent. The attempt of the bank should be to auction the property for the maximum amount and to adjust it towards the dues and in case of any excess amount after meeting the liability, to refund the same to the borrower. By reducing the market value and the reserve price and by purchasing the property for the alleged distress value by the secured creditor themselves, the public sale has become a mockery”.
Some wilful defaulters are also adept in squeezing the rules. In one case, the mortgaged property was claimed to be agricultural land and, therefore, beyond the pale of the law. The nature of the land was changed to get exemption. The court did not buy the argument. In some cases, the debtor questioned the decision of the lender institutions that the assets were non-performing. Thus, the cases went back to the tribunal for deciding this preliminary issue.
Deposit of half of the debt claimed by the creditor before filing an appeal is mandatory. But this issue is frequently raised by borrowers to delay payment. In one case, the appellate tribunal waived the condition. The bank moved the Bombay High Court and it quashed the order. Some other questions that are made intricate are: who is an “aggrieved person” entitled to move the debt recovery tribunal (borrower, guarantor or any other person who may be affected)? Whether an additional district magistrate is competent to hear the complaint in place of a district magistrate? Whether the term debt includes a “decree debt” and a debt recovery certificate?
In one case (M Rajendran vs Corporation Bank), the dispute was whether the notice of sale was affixed on a “conspicuous part” of the immovable party of the property. The Madras High Court ruled that the place was not noticeable by the public and, therefore, the notice was invalid. The purpose of notice is not only to inform the borrower of the impending action, but also notify the public so that it can participate in the auction and fetch a better price for the borrower.
It is reported that about half of the amounts of NPAs recovered in recent times is by invoking Sarfaesi. The lenders use the power indiscriminately to show results. The Act was aimed at recalcitrant companies, but the hammer falls on the smallest people with equal vehemence. While the big fish can look after themselves, small borrowers on bikes and housewives deserve some special protection, as seen from the working of the law for a decade now.
