SARFAESI Act will prevail over State Act to extent of inconsistency over...

SARFAESI Act will prevail over State Act to extent of inconsistency over auction of assets

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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a law enacted by Parliament traceable to Entry 45 of the Union List in Seventh Schedule to the Constitution and dealing exclusively with activities relating to sale of secured assets. A State law (in the present case, Tripura Land Revenue and Land Reforms Act, 1960), which places embargo on the category of persons to whom mortgaged property can be sold by the bank for realisation of its dues, to the extent that it is inconsistent with the SARFAESI Act, must give way. The dominant legislation being the Parliamentary legislation, the provisions of the said Tripura Act, pro tanto, (Section 187) would be invalid. It is the provisions of the SARFAESI Act, which do not contain any embargo on the category of persons to whom mortgaged property can be sold by the bank for realisation of its dues, that will prevail over the provisions contained in Section 187 of the Tripura Act of 1960. This has been held by the Supreme Court, by a bench comprising Justices Ranjan Gogoi and Abhay Manohar Sapre, in a judgment dated 25 November 2016 in the case of Uco Bank & Anr. v. Dipak Debbarma & Ors. [CIVIL APPEAL NO. 11247 OF 2016 (arising out of S.L.P. (C) No.36973 of 2012)].

The respondents before the Supreme Court are members of Scheduled Tribe(s) of the State of Tripura. They had contended (by a writ petition before the high court) that the Sale Notification dated 26.06.2012 issued by the appellant Bank under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was in infraction of Section 187 of the Tripura Land Revenue and Land Reforms Act, 1960 as under the Tripura Act there is a legislative embargo on the sale of mortgaged properties by the bank to any person who is not a member of a scheduled tribe. The auction purchasers in the present case happened to be the persons who are not members of any scheduled tribe.

The Agartala Bench of the Gauhati High Court by the impugned order answered the writ petition in favour of the respondents/writ petitioners on the ground that the Tripura Act of 1960 being included in the Ninth Schedule to the Constitution and, therefore, enjoying the protection of Section 31-B of the Constitution, would prevail over the SARFAESI Act so as to invalidate the sale Notification dated 26.06.2012, the same being contrary to the provisions of Section 187 of the Tripura Act of 1960.

However, the Supreme Court held that the High Court was wholly incorrect in answering the writ petition and striking down the sale Notification dated 26.06.2012 on the above basis. Article 31-B of the Constitution, on the very face of the language contained therein, is self explanatory and provides protection/immunity to a legislation from challenge on the ground that it violates any of the provisions of Part III of the Constitution (i.e., fundamental rights). Inclusion of the Tripura Act of 1960 in the Ninth Schedule by itself, would, therefore, not confer immunity to the said legislation from being overridden by the provisions of a Parliamentary statute. The Supreme Court therefore decided the core question arising in the present appeals, namely, whether the SARFAESI Act insofar as it provides for sale of immovable properties offered as security for a loan advanced, without any restriction as to the class or category of buyers, would prevail notwithstanding the restrictive provision in this regard under Section 187 of the Tripura Act of 1960.

The Supreme Court held that repugnancy or inconsistency between the provisions of Central and State enactments can occur in two situations. The first, in case of a Central and a State Act on any field of entry mentioned in List III of the Seventh Schedule (Concurrent List). To such a situation of repugnancy or inconsistency, the provisions of Article 254 of the Constitution would apply. The court observed that in the present case, however, the question was not one of repugnancy between a Central and a State law relatable to an Entry in List III (Concurrent List). The second situation of repugnancy or inconsistency as in the present case is between to a subsequent Central law (SARFAESI Act) covered by Entry 45 of List I and an earlier State law (Tripura Act of 1960) relatable to Entries 18 and 45 of List II. How this question is to be resolved?

The Supreme Court referred to Article 246 of the Constitution which addresses such a question:

246. Subject-matter of laws made by Parliament and by the Legislatures of States:- (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the ‘Union List’).

(2) Notwithstanding anything in clause (3), Parliament and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the ‘Concurrent List’).

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ‘State List’).

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that such matter is a matter enumerated in the State List”

The court held that in interpreting Article 246 regard must be had to the constitutional scheme which visualises a federal structure giving full autonomy to the Union Parliament as well as to the State legislatures in their respective/demarcated fields of legislation.

The court further held that in case of conflict between two legislations, State legislation will have to give way notwithstanding the fact that the State legislation is within the demarcated field (List II), which is the principle of federal supremacy which Article 246 of the Constitution embodies; the said principle will, however, prevail provided the pre-condition exists, namely, the Parliamentary legislation is the dominant legislation and the State legislation, though within its own field, has the effect of encroaching on a vital sphere of the subject or entry to which the dominant legislation is referable. In this regard, the court relied on the judgment of the Constitution bench in the case of State of West Bengal and Ors. vs. Committee for Protection of Democratic Rights, West Bengal and Ors., (2010) 3 SCC 571 and in the case of In re. Special Reference No. 1 of 2001, (2004) 4 SCC 489.

The Supreme Court further observed that the federal structure under the constitutional scheme can also work to nullify an incidental encroachment made by the Parliamentary legislation on a subject of a State legislation where the dominant legislation is the State legislation [see: ITC Ltd. vs. Agricultural Produce Market Committee and Ors., (2002) 9 SCC 232].

In the present case the conflict between the Central and the State Act was on account of an apparent overstepping by the provisions of the State Act dealing with land reform into an area of banking covered by the Central Act. The test, therefore, would be to find out as to which is the dominant legislation having regard the area of encroachment.

The provisions of the SARFAESI Act enable the bank to take possession of any property where a security interest has been created in its favour. Specifically, Section 13 of the SARFAESI Act enables the bank to take possession of and sell such property to any person to realise its dues. The purchaser of such property acquires a clear title to the property sold, subject to compliance with the requirements prescribed.

Section 187 of the Tripura Act of 1960, on the other hand, prohibits the bank from transferring the property which has been mortgaged by a member of a scheduled tribe to any person other than a member of a scheduled tribe. This is a clear restriction on what is permitted by the SARFAESI Act for the realisation of amounts due to the bank.

The Supreme Court held that the SARFAESI Act is relatable to the Entry of banking which is included in List I of the Seventh Schedule. Sale of mortgaged property by a bank is an inseparable and integral part of the business of banking. The object of the State Act is an attempt to consolidate the land revenue law in the State and also to provide measures of agrarian reforms. The field of encroachment made by the State legislature is in the area of banking. So long there did not exist any parallel Central Act dealing with sale of secured assets and referable to Entry 45 of List I, the State Act, including Section 187, operated validly. However, the moment Parliament stepped in by enacting such a law traceable to Entry 45 and dealing exclusively with activities relating to sale of secured assets, the State law, to the extent that it is inconsistent with the SARFAESI Act, must give way. The dominant legislation being the Parliamentary legislation, the provisions of the Tripura Act of 1960, pro tanto, (Section 187) would be invalid. It is the provisions of the SARFAESI Act, which do not contain any embargo on the category of persons to whom mortgaged property can be sold by the bank for realisation of its dues that will prevail over the provisions contained in Section 187 of the Tripura Act of 1960. The Supreme Court distinguished the decision in Central Bank of India vs. State of Kerala and Ors., (2009) 4 SCC 94 on facts.

In these circumstances, the high court order was set aside.

Read full order of the court:

 

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