Article 370 of the Constitution of India, 1950 & the Security Interest Act, 2002

Constitutional Set-up: The Constitution of India, 1950, like the most post-war constitutions, was based on the Westminster Model i.e. bicameral legislative bodies at the Centre and unicameral/bicameral legislatures in the states. The Constitution of India is federal in character and it recognises the existence of a legal system founded upon the rule of law and on the principle of legality, eschewing arbitrariness and ensuring equality before law and equal protection of laws within the territory of India. The federal structure of the Indian Constitution is largely reflected in Part XI of the Constitution of India, 1950, which is largely drawn from the Government of India Act, 1935.  Every state in India has a High Court (some smaller states share a common High Court) and the subordinate-judiciary in each state is under the administrative and judicial control of the concerned High Court of the particular state.[1] The law declared by the Apex Court i.e. the Supreme Court of India, is binding on all courts in the country.

Article 370 of the Constitution of India, 1950: Article 1 of the Constitution of India, 1950, states that, India is a Union of States. According to Section 3 of the Constitution of Jammu & Kashmir, 1956, the State of Jammu & Kashmir (hereinafter referred to as the “State of J&K”) is an integral part of the Union of India. Section 147 of the Constitution of Jammu & Kashmir, 1956, categorically states that, no Bill or amendment seeking to make any change in the provisions of Section 3 of the Constitution of Jammu & Kashmir, 1956, shall be introduced or moved in either House of Legislature of the State of J&K. Due to some historical reasons, the State of J&K has been accorded a special treatment within the framework of the Constitution of India. Amendments that are made to the Constitution of India, 1950 are made to apply to the State of J&K only if the President, with the concurrence of the State Government applies such amendments to the State of J&K. So far as distribution of powers between the Union of India and the State of J&K is concerned, it is to be noted that, regards being had to the matters of national importance in which a uniform policy is desirable, the same is retained with the Union of India, and the matters of local concern remain with the State of J&K. The State of J&K has no vestige of sovereignty outside the Constitution of India, 1950 and the Constitution of Jammu & Kashmir, 1956 is subordinate to the Constitution of India, 1950. The Preamble of the Constitution of Jammu & Kashmir, 1956 is bereft of the words, ‘Sovereign Socialist Secular Democratic Republic’, as they appear in the Preamble of the Constitution of India, 1950.

Under the British regime, the State of J&K was an Indian-State ruled by a hereditary- Maharaja. On 26.10.1947, when the State of J&K was attacked by the Azad Kashmir Forces with the support of Pakistan, then, the then Maharaja (Sir Hari Singh) was obliged to seek the help of India after executing the “Instrument of Accession” similar to the one which was executed by the Rulers of other Indian-States. By virtue of the Instrument of Accession dated 26.10.1947, the Dominion of India acquired jurisdiction over the State of J&K with respect to the following subjects: Defence, External Affairs and Communications; and like other Indian-States which survived as political units at the time of the framing of the Constitution of India, the State of J&K was included as a “Part-B” State in the First Schedule to the Constitution of India, as promulgated in 1950.[2] Though the State of J&K was included as a “Part-B” State, all the provisions of the Constitution of India applicable to “Part-B” States were not extended to the State of J&K. This peculiar position was due to the fact that having regard to the circumstances in which the State of J&K acceded to India, the Government of India declared that it were the people of the State of J&K, acting through their Constituent Assembly, who were to determine the Constitution of the State of J&K and the jurisdiction that the Union of India would exercise over the State of J&K. Thus, the applicability of the provisions of the Constitution of India, 1950 to the State of J&K were to be in the nature of an interim arrangement, and this in fact is the sum and substance of the provision embodied in Article 370 of the Constitution of India, 1950.[3]  

The SARFAESI Act, 2002: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the “SARFAESI Act”) empowers the banks to enforce their security interest outside the court’s process by moving under Section 13 of the SARFAESI Act to take possession of secured assets of the borrower and sell them outside the court process. The Preamble of the SARFAESI Act states that, it is an Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. Section 1(2) of the SARFAESI Act, categorically states that, it shall extend to the whole of India. The key provisions of the SARFAESI Act are Section 13(2), Section 13(4) and Section 17.

Under Section 13(2) of the SARFAESI Act, where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of a secured debt (or any instalment thereof), and his account in respect of such debt is classified as a non-performing asset by the secured creditor, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from the date of such notice, failing which the secured creditor shall be entitled to exercise all or any of the rights as provided for to the secured creditor under Section 13(4) of the SARFAESI Act.

Under Section 13(4) of the SARFAESI Act, in case the borrower fails to discharge his liability in full within the period specified in Section 13(2) of the SARFAESI Act, then, the secured creditor may take recourse to one or more of the following measures to recover his secured debt: (1) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; (2) take over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset; (3) appoint any person to manage the secured assets the possession of which has been taken over by the secured creditor; and (4) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. The secured creditor can proceed against the guarantor also without recourse to any of the said measures, and he is entitled to sell the assets pledged with him without first taking any of the actions mentioned in (1) to (4) above.

Section 17 of the SARFAESI Act confers a right of appeal to any person, including the borrower, if that person is aggrieved by any of the measures referred to in Section 13(4) of the SARFAESI Act taken by the secured creditor. Any person aggrieved by any order made by the Debt Recovery Tribunal under Section 17 of the SARFAESI Act may also prefer an appeal to the Appellate Tribunal under Section 18 of the SARFAESI Act.[4] The expression “any person” used in Section 17 of the SARFAESI Act is of wide import and takes within its sweep not only the borrower but also the guarantor or any other person who may be affected by the action taken under Section 13(4) of the SARFAESI Act.[5] It is necessary to note that insofar as the State of J&K is concerned, Section 17-A and Section 18-B of the SARFAESI Act are applicable; in these sections the words ‘Debt Recovery Tribunal’ and ‘Appellate Tribunal’ as appearing in Section 17 and Section 18 of the SARFAESI Act, are substituted for the words ‘District Judge’ and ‘High Court’.   

State Bank of India v. Santosh Gupta & Anr[6]: Following set of questions arose for adjudication before the Hon’ble Supreme Court of India in the present case:

1. Whether the SARFAESI Act falls in Entry 45 and Entry 95 of List I of the Seventh Schedule or in Entry 6 and Entry 11-A of List III of the Seventh Schedule to the Constitution of India, 1950?
2. Whether a Parliamentary Legislation would require concurrence of the State Government before it can apply to the State of J&K under Article 370 of the Constitution of India, 1950?
3. Whether the SARFAESI Act in its application to the State of J&K would be held to be within the legislative competence of the Parliament as the provisions of the SARFAESI Act, namely, Sections 13, 17-A and 18-B collide with Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920?

The Hon’ble Supreme Court of India held as follows:

1. Article 246(1) of the Constitution of India, 1950 read with Entry 45 and Entry 95 of List I of the Seventh Schedule clothe the Parliament with the power to enact the SARFAESI Act.[7] Entry 45 of List I of the Seventh Schedule has no other competing Entry, and so far as List II of the Seventh Schedule is concerned, the same does not extend to the State of J&K, moreover, Entry 11-A (dealing with ‘Administration of Justice’) in List III of the Seventh Schedule does not apply to the State of J&K for the Forty Second Amendment Act, 1976 by virtue of which Entry 11-A come into existence does not extend to the State of J&K, also, Entry 6 of List III of the Seventh Schedule dealing with the transfer of property does not apply to the State of J&K. The SARFAESI Act in pith and substance is identifiable with Entry 45 read with Entry 95 of List I of the Seventh Schedule to the Constitution of India, 1950.
2. In the case of, Union of India Delhi High Court Bar Association, (2002) 4 SCC 275, the Hon’ble Supreme Court of India categorically held that, Entry 45 of List I of the Seventh Schedule relates to “banking” and banking operations inter alia include the following: accepting of loans and deposits; granting of loans; and recovery of the debts due to the banks. Further, in the case of, Central Bank of India v. State of Kerala, (2009) 4 SCC 94, the Apex Court held that, “…undisputedly, the DRT Act and the Securitisation Act have been enacted by Parliament under Entry 45 in List I in the 7th Schedule…”. Recently, in the case of, UCO Bank & Anr. v. Dipak Debbarma & Ors., Civil Appeal No. 11247 of 2016 & Civil Appeal No. 11250 of 2016 (Date of Decision: 25.11.2016), the Hon’ble 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.
3. Amendments that are made to the Constitution of India, 1950 are made to apply to the State of J&K only if the President, with the concurrence of the State Government, applies such amendments to the State of J&K. Moreover, Sub-clause (3) of Article 370 of the Constitution of India, 1950 makes it clear that Article 370 of the Constitution of India, 1950 shall cease to be operative only from such date as the President of India may by public notification declare, and this cannot be done under the Proviso to Article 370(3) unless there is a recommendation of the Constituent Assembly of the State of J&K so to do.
4. According to Article 370(1) (b) (i) of the Constitution of India, 1950 the power of Parliament to make laws for the State of J&K shall be limited to the matters enumerated in the Union List (List I) and the Concurrent List (List III) of the Seventh Schedule to the Constitution of India,1950, which in consultation with the State of J&K are declared by the President of India to correspond to matters specified in the Instrument of Accession dated 26.10.1947. For matters contained in the Constitution of India, 1950 in the Union List (List I) and the Concurrent List (List III) but not in the Instrument of Accession, the concurrence and not consultation of the State of J&K is required. Regards being had to the import of Article 370(2), the concurrence given by the Government of the State of J&K before the Constituent Assembly is convened, can only be given effect to, if it is ratified by the Constituent Assembly of the State of J&K.
5. It is important to note that the Instrument of Accession dated 26.10.1947 was superseded by the Constitution (Application to Jammu and Kashmir) Order, 1950, and this in turn was superseded by the Constitution (Application to Jammu and Kashmir) Order, 1954 (as amended from time to time). A combined and harmonious reading of Article 370 of the Constitution of India, 1950; the Constitution (Application to Jammu and Kashmir) Order, 1954 (as amended from time to time); and the Constitution of Jammu & Kashmir, 1956 will help us reach the following set conclusions:
   1. All entries specified in the Constitution (Application to Jammu and Kashmir) Order, 1954 (as amended from time to time) as contained in List I of the Seventh Schedule to the Constitution of India, 1950, clothe the Parliament with an exclusive jurisdiction to make laws in relation to the subject matters set out in those entries. Following Entries as they appear in List I of the Seventh Schedule to the Constitution of India, 1950 do not apply to the State of J&K: Entries 8, 9, 34 and 79; all other Entries in List I apply to the State of J&K with the necessary modifications and/or substitutions.
   2. The State List (List II) continues to be omitted altogether so far as its application to the State of J&K is concerned. Parliament has the concurrent power with respect to the State of J&K as regards the Entries specified in the Presidential Order of 1954 under List III of the Seventh Schedule to the Constitution of India, 1950 is concerned.
   3. Every other subject matter which is not expressly referred to, either in List I (Union List) or List III (Concurrent List) of the Seventh Schedule to the Constitution of India, 1950, is within the legislative competence of the State Legislature of the State of J&K.        
6. To refer to Entry 11-A and Entry 6 of List III of the Seventh Schedule to the Constitution of India, 1950 and to further state that Section 140 of the Transfer of Property Act of Jammu and Kashmir, 1920, would render the key provisions (Sections 13(1), 13(4) & 17) of the SARFAESI Act as nugatory is wholly incorrect. Entry 6 of List III of the Seventh Schedule to the Constitution of India, 1950 which deals with the transfer of property does not apply to the State of J&K as it has not been extended to the State of J&K.
7. The SARFAESI Act in pith and substance relates to “banking” and not to “transfer of property”. Entry 45 of List I of the Seventh Schedule to the Constitution of India, 1950 is applicable to the State of J&K. There is no direct conflict as regards Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920 and Section 13 of the SARFAESI Act. Holistic reading of the Proviso added to Rule 8(5) of SARFAESI Rules, 2002, read with Section 13(4) of the SARFAESI Act will leave no room to doubt the applicability of the SARFAESI Act to the State of J&K. Proviso to Rule 8(5) of SARFAESI Rules, 2002 states as follows:

“Provided that in case of sale of immovable property in the State of Jammu & Kashmir, the provisions of Jammu and Kashmir Transfer of Property Act, 1977 shall apply to the person who acquires such property in the State.”[8]

Thus, Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920 would not stand infracted by application of the SARFAESI Act to the State of J&K. 

8. Entry 95 in the Union List of the Seventh Schedule to the Constitution of India, 1950, empowers the Parliament to enact provisions in the nature of Section 17-A and Section 18-B of the SARFAESI Act, thus, thereby vesting the powers ordinarily to be exercised by in the Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal under the SARFAESI Act with the District Court and the High Court respectively.      

Excursus: Entries 45 and 95 of the Union List clothe the Parliament with the exclusive power to make laws with respect to banking, and the SARFAESI can be said to be ascribable to Entries 45 and 95 of the Union List of the Seventh Schedule to the Constitution of India, 1950. Section 5 of the Constitution of Jammu & Kashmir, 1956 categorically states that, the executive and legislative power of the State of J&K shall extend to all matters except those with respect to which Parliament has power to make laws for the State of J&K under the provisions of the Constitution of India, 1950. Thus, anything that comes in the way of the SARFAESI Act by way of the State of J&K enactment, must necessarily give way to the SARFAESI Act by virtue of Article 246 of the Constitution of India, 1950 as extended to the State of J&K, read with the Section 5 of the Constitution of Jammu & Kashmir, 1956. Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920, no doubt gives certain special privileges to the Permanent Residents of the State of J&K as regards matters concerning transfer of property, but, by virtue of Article 246 of the Constitution of India, 1950 read with Section 5 of the Constitution of Jammu & Kashmir, 1956, in case of any conflict between the provisions of the SARFAESI Act and Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920, the provisions of the SARFAESI Act are to prevail. Section 35 of the SARFAESI Act also declares that, the provisions of the SARFAESI Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for time being in force or any instrument having effect by virtue of any such law.

Lastly, the entire gamut controversy can be diluted by taking into consideration the following points of relevance:

1. The SARFAESI Act is relatable to Entry 45 read with Entry 95 of List I of the Seventh Schedule to the Constitution of India, 1950;
2. Provisions of the SARFAESI Act are not in conflict with Section 140 of the Transfer of Property Act of Jammu & Kashmir, 1920, necessary emphasis must be supplied to the proviso annexed to Rule 8(5) of the SARFAESI Rules, 2002;
3. List II (State List) is frozen, so far as its application to the State of J&K is concerned;
4. Entry 11-A in List III of the Seventh Schedule to the Constitution of India, 1950 is not applicable to the State of J&K in light of the fact that the Forty Second Amendment Act does not extend to the State of J&K;
5. Entry 6 in List III of the Seventh Schedule to the Constitution of India, 1950 which deals with transfer of property has not been extended to the State of J&K;
6. The Constitution of Jammu & Kashmir, 1956 is subordinate to the Constitution of India, 1950. The State of J&K has no vestige of sovereignty outside the Constitution of India, 1950.

[1] See: Fali S. Nariman, India’s Legal System: Can it be saved? , Penguin Books India (2006), p.41-42

[2] In the original Constitution of India, the State of Jammu & Kashmir was specified as a “Part-B” State. After independence, all the ‘Princely States’ that had acceded to the Indian Dominion were labelled as “Part B” States in the Constitution of India, 1950. While all the ‘Princely States’ accepted the Constitution of India, 1950, the State of J&K reserved the right to frame its own constitution.

[3] See: Dr. Durga Das Basu, Introduction to the Constitution of India, Lexis Nexis (20th Edition), 2011, p.263-266

[4] See: Jagdish Singh v. Heeralal & Ors, Civil Appeal No. 9771 of 2013 (Arising out of SLP (Civil) No. 18 of 2011), Supreme Court of India, Date of Decision: 30.10.2013, Coram: K.S. Radhakrishnan & A.K. Sikri, JJ.

[5] See: United Bank of India v. Satyavati Tondon & Ors, (2010) 8 SCC 110

[6] Civil Appeal Nos. 12237-12238 of 2016 (Arising out of SLP (Civil) Nos. 30884-30885 of 2015), Supreme Court of India, Date of Decision: 16.12.2016

[7] Entries 45 and 95 of List I of the Seventh Schedule to the Constitution of India, 1950 state as follows:

“45. Banking;

95. Jurisdiction and powers of all courts, except the Supreme Court, with respect to any of the matters in this List; admiralty jurisdiction”

[8] Inserted vide S.O. 1578 (E), Dated: 12.07.2012, with effect from 12.07.2012