2012 (6) TMI 550 - HC - Companies Law

Challenging the constitutional validity of Rule 8(5) of the Security Interest (Enforcement) Rules, 2002 - according to the Petitioners the authorized officer is empowered in consultation with the secured creditor to fix the reserve price, Rule 8(5) does not contemplate that the borrower should be consulted and the Rule is ultra vires - Held that - The object of giving a notice to the borrower under sub-rule(6) of Rule 8 is not only to enable the borrower to exercise the option which is conferred upon him of paying the dues of the secured creditor together with the costs, charges and expenses incurred but,on receipt of the notice can also raise objections to the valuation submitted under Rule 8(5) - upholding the constitutional validity of Rule 8(5) of the Rules of 2002 that Rule 8(6) of the Rules of 2002 protects the interest of the borrower giving thirty days clear notice to the borrower regarding the sale of the mortgaged property giving him an opportunity to redress any grievance as regards the fixation of the valuation of the property and the upset price.

Summary

Issues:
Challenge to the constitutional validity of Rule 8(5) of the Security Interest (Enforcement) Rules, 2002.

Analysis:
The petitioners challenged the constitutional validity of Rule 8(5) of the Security Interest (Enforcement) Rules, 2002, which empowers the authorized officer, in consultation with the secured creditor, to fix the reserve price of the property before its sale. The petitioners argued that the rule does not require consultation with the borrower, rendering it ultra vires.

Under Rule 8(5), the authorized officer must obtain a valuation of the property from an approved valuer and fix the reserve price in consultation with the secured creditor before selling the property. Subsequent sub-rules outline the methods of sale and the notice period to be given to the borrower before the sale.

The court highlighted that Section 13(8) of the Act allows the borrower to tender the dues to the secured creditor before the sale date, preventing the sale of the secured assets. The notice served to the borrower under Rule 8(6) enables them to not only exercise this option but also raise objections to the valuation, providing necessary safeguards.

Referring to a judgment of the Gujarat High Court, the Bombay High Court upheld the constitutional validity of Rule 8(5), emphasizing that Rule 8(6) safeguards the borrower's interests by allowing objections to the valuation within a clear notice period before the sale. The court clarified that if the actions under Rule 8(5) are arbitrary, the borrower can seek redress through appropriate forums.

Consequently, the court found no merit in the petition and dismissed it, while allowing the petitioners to seek recourse under Section 17 if aggrieved by measures taken under Section 13(4). No costs were awarded in this matter.