Court dismisses petition challenging SARFAESI Act

Petitioners include Deccan Chronicle Holdings & Marg Ltd

The Madras high court has dismissed the writ petitions filed by various companies and individuals, including Deccan Chronicle Holdings and Marg Ltd, questioning the constitutionality of Section 2(1)(o) of the SARFAESI Act and the guidelines issued by the Reserve Bank of India (RBI) on the classification of assets as non-performing assets (NPAs).

The petitioners, who are debtors to various banks, sought the HC to declare the provisions of the Section as arbitrary, unconstitutional and opposed to public policy, null and void and the same being ultra vires the Constitution of India. They argued that issuing directions or guidelines relating to asset classification is essential legislative function and therefore it cannot be delegated.

They argued the guidelines issued by the RBI cannot be used for defining a “non performing asset” under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). There has to be a separate legislation, as provided under Section 38 of the Act. They also argued the circular under challenge, which defines NPA, is very vague.

However, in a Common Order issued on May 8, 2014, on more than 50 writ petitions, the court said in all the cases, the petitioners have borrowed money from the respective respondent banks and had not repaid the amounts borrowed.

“In the light of the discussion made we do not find any merit in these writ petitions. Accordingly, the writ petitions are dismissed. However, there is no order as to costs,” said the bench. It also refused to use its power of Judicial review, stating, “While dealing with a legislation pertaining to a specialised field, that too, a one like economy, the court should adopt a “dignified reluctance”.”

As per the guidelines issued by the Supreme Court of India, when an asset is treated as a NPA by the respective banks, a rigorous recovery machinery is put into action. It is this provision, which adopts the directions or guidelines relating to asset classification issued by the RBI was put to challenge before the court as unconstitutional, said the order issued by the division bench comprising of Justice N Paul Vasantha kumar and Justice M M Sundresh.

The bench added the court should be aware of the fact that the Legislature is dealing with complex problems and the economic mechanism is highly sensitive “and therefore we should constantly remind ourselves of our own limit.” “We do not like to take the role of a higher authority to review a decision made by an expert body on the materials placed before it. The said attempt is to be avoided, as neither the counsels nor the court can claim a better expertise. Such an attempt would be akin to a search by a visually impaired person to find a black cat during night time in a dark room when the cat itself is not there,” added the court.