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2011 (3) TMI 1455 - HC - Companies LawWhether Proviso III to section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 be declared, unconstitutional, ultra vires the Constitution of India and/or null and void. Whether Provisos II & III to section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 be declared unconstitutional, ultra vires the Constitution of India and/or null and void.
Issues Involved:
1. Constitutionality of Proviso III to section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985. 2. Constitutionality of Provisos II & III to section 18 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Issue-wise Detailed Analysis: 1. Constitutionality of Proviso III to section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985: The petition challenged Proviso III to section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, asserting it was arbitrary, unreasonable, and violative of Articles 14 and 19(1)(g) of the Constitution of India. The proviso allows secured creditors, representing not less than three-fourth in value of the amount outstanding, to take measures to recover their secured debt, resulting in the abatement of any reference pending before the Board for Industrial and Financial Reconstruction (BIFR). The court examined the purpose of the 1985 Act, which was to address the ill effects of industrial sickness, such as loss of production and employment, and to ensure the timely revival and rehabilitation of potentially viable sick industrial companies. The court noted that the SARFAESI Act was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interests, aiming to facilitate faster recovery of non-performing assets (NPAs). The court found that the proviso was not without guidance or unfettered, as it required the representation of three-fourth of the secured creditors and action under section 13(4) of the SARFAESI Act. The court emphasized that economic legislation should be viewed with greater latitude and judicial deference to legislative judgment in the field of economic regulation. The court held that the proviso did not violate Article 14, as the classification based on the representation of three-fourth creditors in value was intelligible and served a public purpose. Regarding the challenge under Article 19(1)(g) and Article 21, the court held that a sick company could not claim a right to carry on trade or profession without paying back loans, and there was no substantive pleading to support the Article 21 challenge. Consequently, the court dismissed the challenge to Proviso III to section 15(1) of the 1985 Act. 2. Constitutionality of Provisos II & III to section 18 of the SARFAESI Act: The petition challenged the validity of section 18 of the SARFAESI Act, arguing it was violative of Articles 14 and 19(1)(g) of the Constitution of India. Section 18 imposes conditions for filing an appeal, including a requirement for the borrower to deposit 50% of the debt amount, which can be reduced to 25% by the Appellate Tribunal. The court referred to the Supreme Court's decision in Mardia Chemicals Ltd. v. Union of India, which upheld the constitutionality of the SARFAESI Act, except for section 17(2). The court noted that the amended section 18 provided a mechanism for adjudication, with the Debts Recovery Tribunal determining the debt amount, and the Appellate Tribunal having the power to reduce the pre-deposit requirement. The court cited various precedents, emphasizing that the right of appeal is a statutory right, and the legislature can impose conditions for its exercise. The court found that the pre-deposit requirement did not make the remedy illusory or nugatory, as it was based on the adjudicated debt amount and could be reduced to 25%. The court held that the condition of pre-deposit did not violate Articles 14 or 19(1)(g) of the Constitution. The court concluded that both Proviso III to section 15 of the 1985 Act and Provisos II & III to section 18 of the SARFAESI Act were constitutional and dismissed the writ petition.
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