Providing some relief to borrowers under the Securitisation Act, the Supreme Court has ruled that secured creditors cannot straightaway attach the defaulter's assets after giving the mandatory 60-day notice.

This ruling was given by a bench comprising Chief Justice V N Khare, Justice Brijesh Kumar and Justice Arun Kumar while upholding the constitutional validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act, 2002, in a recent order.

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The apex court said it was mandatory on the part of the secured creditors to serve 60 days notice on the defaulting borrower and consider the objections raised on it before proceeding to attach the assets of the latter.

"After serving of the notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not accepting the objections, howsoever brief they may be, must be communicated to the borrower," Justice Brijesh Kumar, writing for the bench, said.

However, the reason communicated by the secured creditor for non-acceptance of the borrower's objection to the notice could not give the latter a right to approach the Debt
Recovery Tribunal at that stage, he said and clarified that the borrower could also not demand a hearing on the objections raised by him from the creditor.

The apex court rejected the plea of Mardia Chemicals and other companies, which had challenged the validity of the Act, that the non-grant of hearing at the notice stage was violative of principles of natural justice.

Rejecting the plea, the bench made it clear that issue of a notice to the debtor by the creditor did not attract the application of principles of natural justice as "it is always open to tell the debtor what he owes to repay and no hearing can be demanded from the creditor at this stage."

"The plea of absence of natural justice lies ill in the mouth of chronic defaulters who have not paid the principal amount admittedly due to the banks," the bench said.

However, it quashed the provision of Section 17(2) of the Act which made it mandatory for the defaulters to deposit 75 per cent of the defaulted amount claimed in the notice if they wanted to appeal against the creditor's action of attaching the assets.

The bench felt that "this was an example of hitting below the belt" as the borrower in addition to facing attachment of the assets was asked to deposit a huge amount of the debt.