The Hindu : Business : Banks can attach properties of defaulters

Online edition of India's National Newspaper
Friday, Apr 09, 2004

Business

Business

Banks can attach properties of defaulters

By J. Venkatesan

NEW DELHI, APRIL 8. The Supreme Court on Thursday upheld the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act under which banks and financial institutions were empowered to attach, sell, create third party interests and take over defaulting companies.

A three-judge bench of Chief Justice, V. N. Khare, Justice Brijesh Kumar and Justice Arun Kumar, however, provided a major relief to the defaulting companies by quashing Section 17(2) of the Act as unconstitutional.

The provision made it mandatory for the companies to deposit 75 per cent of the defaulting amount with the court, if they preferred an appeal against the order attaching their assets under the Act.

Mainly two provisions came under severe attack from the defaulters, the one enabling banks and financial institutions to sell, take over management and create third party interest and the other enabling them to even take over personal property of a borrower like residential accommodation, farm house and even personal shares. By upholding the Act, the court had given big relief to banks and financial institutions for quick recovery of bad debts, running into over Rs. 100,000 crores.

The challenge to the constitutional validity of the Act was led by the petition filed by Mardia Chemicals, whose assets were attached by financial institutions led by ICICI Bank for default in re-payment of loans. The apex court, while deciding the petitions, provided general guidelines regarding attachment of properties of the defaulting companies.

The Act could not be fully enforced by banks and financial institutions as several companies had moved the Supreme Court challenging the validity of the legislation.

While in certain cases the companies had entered into compromise with banks for settlement of loans, in other cases, banks and financial institutions had to attach the properties of defaulting companies and the court directed that the properties could not be alienated.

With the apex court upholding the Act, banks could now go ahead with auctioning of the attached properties to recover their non-performing assets and use the money for productive purposes.

During the course of hearing of the petitions, the Attorney General, Soli Sorabjee, had brought to the notice of the court that various corporate houses owed over Rs. 91,000 crores to banks and financial institutions out of which "almost 60 per cent of the non performing assets (NPA) estimated at Rs. 53,777 crores were due to public sector banks".

Debts to banks and various financial institutions owed by various industries, corporate groups and business houses were estimated at Rs. 150,000 crores with interest.

The apex court also transferred to itself a number of petitions pending in various High Courts challenging the validity of the Act.

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