Law is a ass! Securitization Act and per in curiam judgments

Law is a ass! Securitization Act and per in curiam judgments

Date : 04 January 2012
Author : Nedumpara

ALMOST ALL JUDGMENTS OF THE SUPREME COURT, HIGH COURTS AND DRTS TOUCHING UPON SECURITIZATION ACT AND RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ARE PER INCURIAM, OR IN SIMPLE WORDS WRITTEN IN IGNORANCE OF LAW.

SECURITIZATION ACT AND PER INCURIAM JUDGMENS

The following are the few decisions and the reasons why they are per incuriam :

A) Secured creditor has a primacy over the claim of the crown. 
A full Bench of the Madras High Court in UTI Bank Ltd. Vs. The Deputy Commissioner of Central Excise, Chennai & Anr., reported in AIR 2007 Madras 118, was pleased to hold that, between the secured creditor and the crown, the secured creditor has a primacy. It further held that the crown enjoy a primacy only over unsecured creditors.

This finding is in clear violation of the maxim ‘quando jus domini regis et subditi concurrunt jus regis preferri debet- where the title of the kind and the title of a subject concur, the king’s title must be preferred. No Courts could decide contrary to this maxim. And the Madras High Court certainly would not have intended to decide contrary to this maxim.

However, it did so inadvertently without realizing that the answer to the reference which was made to the full Bench precisely mean deciding contrary to the afore-said maxim which exists time immemorial. The Court made the mistake because it failed to comprehend that, by a mortgage what is created is a charge which a crown enjoy in respect of the claims due to it even without a specific charge. Between the unsecured creditor and the crown, the Court held that the crown has a primacy. The reason is that there is no charge in favour of the unsecured creditor upon the property of the debtor.

The Court, however, missed the obvious that, by creating an equitable mortgage, the debtor permits a charge being created in favour of the creditor against the property which is mortgaged. If between the unsecured creditor and the crown, the crown has a primacy because an unsecured creditor cannot claim any charge in his favour.

The scenario is only changed a bit by creation of a mortgage in favour of the creditor. In simple words, the creditor when a mortgage is created secure a charge in his favour as against the property which is subjected to mortgage. The scenario thus emerging is that the king and the secured creditor both enjoying a charge against the property which is subjected to the mortgage. In such a situation, “the title of the king and the title of the subject concur”. And the above maxim squarely apply. That is to say, where the title of the king and the title of the subject concur, the king’s title must be preferred. Therefore, Madras High Court ought to have held that the crown, i.e., customs/central excise duties will take a primacy over the claim of the secured creditor.

B) Under Section 14 of the Securitization Act, Magistrate can order dispossession of even a tenant from his dwelling house without notice and without hearing :

The Hon’ble High Court of Mumbai, in Tradewell Vs. Indian Bank, reported in Manu/Mh/0195/ 2007, was pleased to hold that, a Magistrate exercising power under Section 14 of the Securitization Act can order dispossession of a secured debtor of his home, office or business premises or even a tenant without notice and without hearing him. The Court held that there is no need to observe natural justice. This judgment is per incuriam as it is in violation of the fundamental rights guaranteed under the Constitution as also many a Constitutional Bench judgments of the Supreme Court. Prior to the judgment of the House of Lords, in Ridge Vs. Baldwin, there was a controversy as to whether there is an obligation to observe natural justice if the function is administrative and not judicial.

In Ridge Vs. Baldwin, the House of Lords (4:1), was pleased to hold that, it is not necessary for the legislature to say every time that natural justice be complied with by expressly providing so in the enactment and that obligation to observe natural justice ought to be read into the statute. It also further held that the non-observation of natural justice would render the order null and void and not merely voidable. This judgment has been followed by a number of Constitution Bench judgment of the Supreme Court, particularly, A.K. Kripack, Menaka Gandhi, M.S. Gill Vs. Election Commission, Indira Nehru Gandhi Vs. Raj Narayan, Olga Tellies Vs. Municipal Corporation of Mumbai, etc.

The distinction between administrative and judicial function and the obligation to observe natural justice based on such distinction became any longer relevant.

Yet in Tradewell Vs. Indian Bank, the Bombay High Court was pleased to hold that a secured debtor or even a tenant could be evicted without compliance of natural justice. In coming to said conclusion, the Bombay High Court relied on certain observations of the Supreme Court in Transcore Vs. IOB. What the Court made was the grave error.

Particularly because the Constitution Bench judgment of the Supreme Court on the obligation to hear no matter whether the function to be discharged is judicial or administrative was even brought to the notice of the Court. The Court however failed to follow the ratio of the judgment of the Constitution Bench and instead chose to decide contrary to the binding precedents. The reason by the Court happened to commit the grave error and to pass a judgment which is manifestly per incuriam is that, it failed to comprehend the distinction between what is ratio decidendiand obiter dicta.

The judgment of the Constitution Benches, particularly of the Seven Judges Constitution Bench in Menaka Gandhi was on the sole issue of the obligation to observe natural justice, particularly audi alterem parterem. The judgment of the Supreme Court in Transcore’s case by a Bench of two Judges certain contains many an observation which is to the effect that the Bank invoking measures under Section 13 of the Securitization Act need not observe audi alterem parterem. The observation of the Supreme Court in Transcore is bad law indeed. However, that in itself could have done no damage had the Division Bench of the Bombay High Court in Tradewell’s case appreciated the meaning of the words stare decis, ratio decidendi and obiter dicta. Stare decis literally means, “decision stands”. Ratio decidendi means “reason for the decision”. And Obiter dicta means “an opinion given incidentally”. What is a binding precedent is the ratio decidendi. While the only issue or the main issue which falls for consideration in Menaka Gandhi’s case and other Constitution Benches of the Supreme Court was the obligation to observe natural justice, no such question arose in Transcore. In Transcore, the only question which arose for consideration is, in the context of this article, was the meaning of the words “action taken appearing in the first proviso to Section 19 of the Recovery of Debts due to Banks and Financial Institutions Act”.

The question was whether a notice under Section 13(2) issued prior to 11.11.2004 was an action taken within the meaning of the proviso to Section 19(1) of the Act or a mere show cause notice. In explaining that it is not a “mere show cause notice”, Justice Kapadia went on to analyze the scope and ambit of the Securitization Act.

While discussing the Act, he made many an observations to the effect that what is contemplated under the Act is quick recovery of the amounts due to Banks and financial institutions, a crying need for the smooth growth of the economy and, therefore, natural justice need not be observed. Whatever has been said were in the nature of mere obiter dicta which according to Justice Krishna Iyer, does not even bind the author