A Perfectly Valid Provision Can't be 'Read Down' Just Because It Imposes Harsher Consequences: Supreme Court

Disagreeing with the observation made by the High Court, the Bench comprising CJI DY Chandrachud, Justices JB Pardiwala, and Manoj Misra, observed that the rule of 'reading down' the provision should not be applied at the first instance but should always be the last resort, i.e., only when the court finds that a particular provision, if for its plain meaning, cannot be saved from invalidation. Thus, by restricting or reading it down, the court makes it workable to salvage and save the provision from invalidation.

“Reading Down” a provision is one of the many methods the court may turn to when it finds that a particular provision, if for its plain meaning, cannot be saved from invalidation. So, by restricting or reading it down, the court makes it workable to salvage and save the provision from invalidation. The rule of “Reading Down” is only for the limited purpose of making a provision workable and its objective achievable.”

The aforementioned observation of the Supreme Court came in light of its judgment, where the court allowed the bank to forfeit the entire deposit amount of 25% when the auction purchaser failed to deposit the remaining 75% amount of the auction sale within the stipulated time of 15 days, as mandated under Rule 9(5) of the SARFAESI Rules.

The Court criticized the view adopted by the High Court of 'reading down' Rule 9(5), which, according to the High Court, imposes a harsher consequence of forfeiture of the entire earnest-money deposit irrespective of the extent of default in payment of the balance amount.

In a nutshell, the principle of "reading down" a provision refers to a legal interpretation approach where a court, while examining the validity of a statute, attempts to give a narrowed or restricted meaning to a particular provision to uphold its constitutionality. This principle is rooted in the idea that courts should make every effort to preserve the validity of legislation and should only declare a law invalid as a last resort.

“When a court encounters a provision that, if interpreted according to its plain and literal meaning, might lead to constitutional or legal issues, the court may opt to read down the provision. Reading down involves construing the language of the provision in a manner that limits its scope or application, making it consistent with constitutional or legal principles.”

“A similar view was reiterated by this Court in its decision in Calcutta Gujarati Education Society & Anr. v. Calcutta Municipal Corpn. & Ors. reported in (2003) 10 SCC 533, wherein this Court observed that the rule of “Reading Down” is only for the limited purpose of making a provision workable so as to fulfill the purpose and object of the statute.”, the court observed.

According to the court, the High Court has committed an error by 'reading down' Rule 9(5) of SARFAESI Rules because of its harsher consequences. The High Court directed the bank to forfeit only that percentage of the earnest deposit amount for which loss has been caused to the bank due to the breach of contract committed by the auction purchaser. Negating such an approach, the Supreme Court observed as follows:

“However, the harshness of a provision is no reason to read down the same if its plain meaning is unambiguous and perfectly valid. A law/rule should be beneficial in the sense that it should suppress the mischief and advance the remedy. The harsh consequence of forfeiture of the entire earnest-money deposit has been consciously incorporated by the legislature in Rule 9(5) of the SARFAESI Rules so as to sub-serve the larger object of the SARFAESI Act of timely resolving the bad debts of the country. The idea behind prescribing such a harsh consequence is not illusory; it is to attach legal sanctity to an auction process once conducted under the SARFAESI Act from ultimately getting concluded.”

The court showed concerns over 'reading down' Rule 9(5) that according to the court would frustrate the entire auction process under the SARFAESI Act and undermine the objectives of the legislation.

“Any dilution of the forfeiture provided under Rule 9(5) of the SARFAESI Rules would result in the entire auction process under the SARFAESI Act being set at naught by mischievous auction purchaser(s) through sham bids, thereby undermining the overall object of the SARFAESI Act of promoting financial stability, reducing NPAs, and fostering a more efficient and streamlined mechanism for the recovery of bad debts.”

“Thus, the High Court committed an egregious error by proceeding to read down Rule 9(5) of the SARFAESI Rules in the absence of the said provision being otherwise invalid or unworkable in terms of its plain and ordinary meaning without appreciating the purpose and object of the said provision.”, the court observed.

Also from the judgment - SARFAESI | Bank Can Forfeit Entire 25% Deposit & Not Just The Extent Of Loss Due To Default By Auction Purchaser : Supreme Court