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Journalism of Courage
Giving a green signal to mop up non productive assets (NPAs) worth over Rs 1,00,000 crore, the Supreme Court today upheld the constitutional validity of the 2002 law empowering banks and financial institutions to take over and sell assets of companies defaulting on loans. But its fine print gave defaulters some leeway as well.
Disposing of over 40 petitions challenging the legality of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, a three-judge bench headed by Chief Justice V N Khare, struck down Section 17(2) which required the defaulter to deposit 75% of his liability with the Debts Recovery Tribunal (DRT) before appealing against any action taken by the bank or financial institution.
The 108-page judgment, delivered by Justice Brijesh Kumar accepted the contention of senior advocate Kapil Sibal, representing a prominent defaulter, Mardia Chemicals, that the stipulated pre-deposit of 75% of the debt ‘‘barred a judicial remedy in a procedurally unreasonable manner.’’ Sibal had argued that often the quantum of the debt, which included penal interest, liquidated damages and other charges, was itself under dispute.
The removal of the pre-deposit barrier means that defaulters will now be able to flood DRTs with appeals within the stipulated period of 45 days and thereby stall creditors (indefinitely) from liquidating the assets taken over as security. In another major deviation from the NPA law, Justice Kumar ruled that DRTs would be empowered to provide any interim relief to the borrower pending the disposal of his appeal against the creditor’s action.
This goes far beyond Attorney General Soli Sorabjee’s written concession in the case last year that DRTs could be allowed to grant interim relief subject to the condition that it ‘‘will be
confined only to the sale of the assets.’’
Today’s judgment permits DRTs not only to stay the sale of the acquired assets but also to restrain the bank or financial institution from taking over the management of the defaulting company or leasing out its properties.
The reprieve given to borrowers—abolition of the pre-deposit for filing an appeal and conferment of an unfettered power on the DRT to grant interim relief—provides them greater opportunity to state their case.
But, in the process, the main object of the 2002 law, which is to expedite the recovery of NPAs, has come under a question mark.
If there is much in the judgment to cheer defaulting companies, banks and financial institutions can celebrate the fact that the Supreme Court upheld Sections 13(2) and 13(4), the provisions that empower the creditor to enforce securities in the event of a persistent default.
The court merely provided guidelines on how the creditor should exercise the enormous powers vested in him by these two provisions.
