SARFAESI Act, 2002
Constitutional Validity of SARFAESI: The Leading Cases
A law that lets a creditor seize property without a court was always going to be challenged. The Supreme Court has upheld SARFAESI repeatedly, but each time on terms: a hearing read in, an onerous deposit struck down, safeguards to be strictly followed. Exams often ask for this line of cases together. This note sets out the four leading decisions and the role of Articles 300A and 14.
1. The Four Leading Decisions
Figure 1: Challenge and result
- Mardia Chemicals (2004). The Act was upheld, but the 75% pre-deposit for a s.17 application was struck down as onerous, and a hearing on objection was read in, later enacted as s.13(3A) (Topic 7)
- Narayan Chandra Ghosh (2011). The s.18 pre-deposit is mandatory; the DRAT may reduce it to 25% but cannot waive it (Topic 39)
- Keshavlal Khemchand (2015). The amended NPA definition, tied to regulator's norms, was upheld against an excessive delegation challenge (Topic 9)
- Pandurang Chaugule (2020). Application to co-operative banks was upheld, banking falling under Entry 45 of the Union List (Topic 58)
2. Articles 300A and 14
Figure 2: Property, equality and the remedy
- Right to property, Article 300A. No person may be deprived of property save by authority of law, and SARFAESI is such a law.
- Due process through the Rules. Because property is taken without a court, the Act's safeguards must be strictly followed, as Mathew Varghese and J. Rajiv Subramaniyan stress (Topics 52, 67)
- Article 14. Treating secured creditors and bank recovery as a distinct class, with a speedy procedure, was held reasonable given the public interest in recovering bank money.
- Remedy saves the scheme. The real post-decisional remedy before the DRT is what made the scheme constitutional in Mardia (Topic 68)
⚠ Exam trap Present the validity question as a sequence of qualified approvals. Mardia (2004) upheld the Act but struck down the 75% s.17(2) deposit and read in the hearing that became s.13(3A); Narayan Chandra Ghosh (2011) held the s.18 deposit mandatory; Keshavlal Khemchand (2015) upheld the NPA definition; Pandurang (2020) upheld coverage of co-operative banks under Entry 45. Add Article 300A: since property is taken without a court, strict compliance with the safeguards is part of the constitutional bargain. Do not say the s.18 deposit was struck down; the s.17(2) deposit was. |
3. Frequently Asked Questions
What did Mardia Chemicals decide about the validity of SARFAESI?
In Mardia Chemicals v Union of India (2004), the Supreme Court upheld the SARFAESI Act as a whole, accepting that Parliament could provide a speedy, non-judicial method of enforcing security in the public interest. It struck down the requirement in Section 17(2), as it then stood, that a borrower deposit 75 per cent of the claimed amount before applying to the DRT, as onerous and illusory. It also required the creditor to consider the borrower's objection and communicate reasons, which Parliament then enacted as Section 13(3A).
Which later decisions confirmed the validity of parts of SARFAESI?
Narayan Chandra Ghosh v UCO Bank (2011) held the pre-deposit for an appeal under Section 18 mandatory, reducible to 25 per cent but not waivable. Keshavlal Khemchand and Sons v Union of India (2015) upheld the amended definition of non-performing asset, which adopts the regulator's classification norms, against a challenge of excessive delegation. Pandurang Ganpati Chaugule v Vishwasrao Patil (2020), a Constitution Bench, upheld the Act's application to co-operative banks, holding that banking falls under Entry 45 of the Union List.
4. Related Topics
- Topic 7: Mardia Chemicals. The foundational validity decision.
- Topic 81: Natural Justice in SARFAESI. How fairness is built into the scheme.