New Delhi, April 8: The Supreme Court today upheld the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act but set guidelines for recovery of debt by banks and other financial institutions (FIs) from defaulting corporate houses.
A three-judge bench consisting of Chief Justice V.N. Khare, Justices Brijesh Kumar and Arun Kumar also upheld the power vested in banks and FIs under the Act to attach and sell assets of defaulting companies but said that the power was subject to judicial verdict in individual cases.
The apex court declared section 17 (2) of the Act as unconstitutional. Under this provision, defaulting companies were required to deposit 75 per cent of the liability before filing an appeal against the order of attachment of its assets.
With this ruling the apex court today disposed over 40 writ petitions filed by companies challenging the legality and constitutional validity of the Act.
Mardia Chemicals, whose assets were attached by financial institutions and the ICICI Bank for defaulting on loan repayments, led the writ petitioners.
The apex court set general guidelines regarding attachment of properties of the defaulting companies. First, banks and FIs will have to approach the debt recovery tribunal to press for recovery of dues and will have to serve a notice on the company concerned before seeking to attach properties.
The defaulting company could prefer an appeal against the order of attachment (if passed by the tribunal) without paying the mandatory 75 per cent of the defaulting amount. Finally, till the case is disposed of, no third party interest can be created in the property through its sale. Debt recovery tribunals are also empowered to grant relief to the companies against action initiated by banks and FIs.
The judgement is expected to reduce the gross non-performing assets (NPAs) of banks and FIs by about 20 per cent from the existing level of estimated Rs 1,50,000 crore within a year. The act was challenged on the ground that it has given overriding powers to the bank and FIs to attach and sell the assets of defaulting firms irrespective of the quantum of the loan taken.
The petitioners had argued that exercise of the powers under the Act by the banks and FIs would result in closure of several companies that could have been revived through appropriate schemes.
Counsel for the Amulet International, B. Devasekhar, said, “Now the personal properties of the company owners could not be attached or occupied just like that. Necessary recovery proceedings should be initiated in the DRTs.”