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

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

Section 14 provides procedure in which Chief Metropolitan Magistrate or District Magistrate may assist secured creditor in taking possession of secured asset.

Proviso (v) to sub-section (1) thereof states that any application by the secured creditor under Section 14 shall be accompanied by an affidavit duly affirmed by the authorised officer of the secured creditor, declaring that consequent upon such default in repayment of the financial assistance the account of the borrower has been classified as a non-performing asset.

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

(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 with the directions or guidelines relating to assets classifications issued by such authority or body;

(b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank.

The Petitioner submitted that the secured creditor has lost all the primary securities, which he held in the trust for the assurance given by the guarantors. Therefore, the obligation of the guarantor viz the petitioner stands dissolved and discharged.

Rejecting this contention, the division bench of Justice Alok Aradhe and Justice S Vishwajith Shetty said,

"Section 14(1)(v) of the Act provides that an application which may be submitted by the secured creditor shall be accompanied by an affidavit duly affirmed by authorized officer of the secured creditor declaring that consequent upon default of repayment of the financial assistance the account of the borrower has been classified as a Non-Performing Asset. Section 2(1)(o) of the Act defines the expression 'Non-Performing Asset'. Section 14 (1)(v) apparently is not in conflict with Section 2(1)(o) of the Act."

As regards to the submission that Section 14(1)(v) of the Act does not make a distinction between the principal borrower and the guarantor in case the primary securities are lost. The bench said, "Section 14(1)(v) of the Act only provides for requirement of a declaration by the secured creditor that the account of borrower has been classified as a Non-Performing Asset. The aforesaid submission in no way makes Section 14(1)(v) of the Act ultra vires the Constitution."

Even otherwise, it added, it is well settled in law that in case, there is a conflict between two provisions of a statute, the principle of harmonious construction has to be applied. Therefore, on this ground also the contention of the petitioner cannot be accepted. 

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