0

Constitutional Validity Of Proviso (v) To S.14(1) SARFAESI Act Upheld: In Karnataka High Court

The constitutional validity of proviso (v) Section 14(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI Act), 2002 has been upheld by the Karnataka High Court. 

In the case of Kumaresh K and Others v Union Of India and Others (WP 5990/2022), the division bench of Honourable Justice Alok Aradhe and Justice S Vishwajith Shetty stated that Section 14 outlines the procedure by which a Chief Metropolitan Magistrate or District Magistrate can assist a secured creditor in obtaining possession of a secured asset. 

Any application by the secured creditor under Section 14 must be accompanied by an affidavit duly affirmed by the secured creditor’s authorised officer declaring that the borrower’s account has been classified as a non-performing asset as a result of the borrower’s default in repayment of the financial assistance. 

According to the facts of the case, Kumaresh K and Jagadish K had approached the court to challenge the validity of proviso (v) to Section 14(1) of the Act, as well as to have the provision declared as violative of Article 14 of the Indian Constitution in the absence of safeguards for protecting guarantor’s rights under Section 139 and 141 of the Contract Act, 1872. 

On 15.05.2015, Respondent No.2 – M/s Swarnamandir Jewel Designer Pvt Ltd – sanctioned a loan facility to the principal borrower, Respondent No.4 (M/s Swarnamandir Jewel Designer Pvt Ltd) (South Indian Bank Limited). 

The petitioner provided the guarantee as part of the loan sanctioned to the principal borrower. The principal borrower failed to repay the loan. The bank then began proceedings under the Act on April 8, 2019, and symbolically took possession of the property on January 16, 2020. 

Following that, on 16.01.2020, the First Additional Chief Metropolitan Magistrate of Bangalore issued an order under Section 14 of the Act in respect of the petitioner’s dwelling house. 

The Petitioner argued that the provision is in violation of Section 2(1)(o) of the Act, which defines a Non-Performing Asset as a borrower’s asset or account that has been classified as sub-standard, doubtful, or loss asset by a bank or financial institution,—

(a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted, or appointed by any law for the time being in force, in accordance the directions or guidelines relating to assets classifications issued by such authority or body; 

(b) in all other cases, in accordance with the Reserve Bank’s asset classification instructions or guidelines.

The secured creditor, according to the Petitioner, has lost all of the primary securities that he held in trust for the guarantors’ assurance. As a result, the guarantor’s obligation to the petitioner is dissolved and discharged. 

The court dismissed this claim, saying, “According to Section 14(1)(v) of the Act, a secured creditor’s application must be accompanied by an affidavit duly affirmed by an authorized officer of the secured creditor declaring that the borrower’s account has been classified as a Non-Performing Asset as a result of the borrower’s failure to repay the financial assistance. The term ‘Non-Performing Asset’ is defined in Section 2(1)(o) of the Act. The Act’s Section 2(1)(o) does not appear to conflict with Section 14 (1)(v).” 

In response to the argument that in the event the primary securities are lost, Section 14(1)(v) of the Act does not distinguish between the principal borrower and the guarantor, The bench remarked, “Only a declaration by the secured creditor that the borrower’s account has been classified as a Non-Performing Asset is required under Section 14(1)(v) of the Act. The foregoing argument in no way renders Section 14(1)(v) of the Act unconstitutional.” 

Even so, it was added, it is well established in law that when two provisions of a statute conflict, the principle of harmonious construction must be applied. As a result, the petitioner’s argument cannot be accepted on this ground as well. 

Click Here To View Judgement

Leave a Reply

Your email address will not be published. Required fields are marked *