JK didn’t act on SARFAESI Act, say legal experts, officers

The Supreme Court judgment upholding applicability of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to Jammu and Kashmir comes after years of inaction on part of State Government to amend J&K Transfer of Property Act to incorporate provisions, as specified in the central Act, for protecting interests of banks in case of default by borrowers.
JK didn’t act on SARFAESI Act, say legal experts, officers
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The Supreme Court judgment upholding applicability of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to Jammu and Kashmir comes after years of inaction on part of State Government to amend J&K Transfer of Property Act to incorporate provisions, as specified in the central Act, for protecting interests of banks in case of default by borrowers.

Details accessed by Greater Kashmir revealed how successive governments in J&K slept over the sensitive issue by ignoring its own assurances to New Delhi to amend the State Act despite the Government of India amending the SARFAESI Act/Rules for initiation of action by banks against defaulters in the state strictly under the relevant state laws owing to J&K's special position under Article 370.

"Had the State Government amended J&K Transfer of Property Act 1977 in time for allowing Banks to initiate action against defaulters under the state law itself, the case would have never landed in courts," said a senior official in the State's Law Department.    

Following differences between J&K Government and New Delhi over applicability of section 13 (4) of SARFAESI Act and the corresponding rules in J&K, both the Governments had in 2009 arrived at a consensus over protection of lending by financial institutions.

As per the agreement, the State was to make a provision similar to section 13 (4) of the SARFAESI Act and the rules in State's Transfer of Property Act for protecting interests of banks. On its part, the Government of India had given assent to amend SARFAESI Act to exempt J&K from applicability of the section 13 (4) and make it mandatory on banks to decide upon sale of immovable property in J&K as per provision of the J&K Transfer of Property Act.

The decisions (to amend State Act and securitization law/rules) were arrived at following series of deliberations between a three member sub-committee headed by then J&K Advocate General MI Qadri with Union Finance and Law Secretaries.

The section 13 (4) says in case the borrower fails to discharge his liability in full within the period specified…the secured creditor may take recourse to one or more of following measures to recover his secured debt: take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset, take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.

While the SARFAESI Act, enacted in 2002, allows financial institutions to auction properties in case borrowers fail to repay their loans, it was however challenged in the State High Court on the grounds that the Parliament had no powers to make laws on immovable property in J&K owing to state's special status. The differences had prompted both state and Government of India to find a way for protecting financial interests of the banks under the state law.

However when there was no action on part of the State Government to amend the Transfer of Property Act, the then Secretary Union Finance Ministry, DK Mittal, wrote a letter (D No. 39/21/2009-BO.II-DRT) to the State Chief Secretary Madhav Lal in May 2012 seeking the State should amend the State Act as already decided in the meeting in 2009.

After getting no response from State Government, Mittal again sent a reminder to Lal in July 2012 asking for information on action taken to amend the Act. This time the then Union Secretary informed the State Government that Government of India has amended the Security Interest (Enforcement) Rules 2002 and it was now for the State Government to amend its Property Act for securing the interests of the banks.

A notification issued by the Government regarding the amendment to the securitization rules (dated July 12, 2012) reads that the rules may be called Security Interest (Enforcement) (Amendment) Rules providing that in case of sale of immovable property of a defaulter in J&K, provisions of J&K Transfer of Property Act shall apply to a person who acquires such property in the state.

But despite repeated reminders the State Government didn't proceed on amending the law, forcing the then Advocate General MI Qadri, in January 2013, to remind the Finance Department this time that despite passing of time no progress had been conveyed vis-à-vis amending the Act.

"I was told by the Finance Department that it was the Law and Revenue Departments which had to initiate the process for amending the Act," Qadri told Greater Kashmir.

A senior official said that time while Revenue Department raised objections saying the matter was sub-judice in the High Court, the Law Department for unknown reasons didn't cooperate to start the process for bringing amendments in the state law. "There was no progress on the issue ultimately," said the official.

He said some years back the Government had also mooted a proposal to draft a bill for securing interests of banks by allowing them to sell mortgaged property of defaulters but strictly as per the laid down laws in the state.

"Even a draft bill was prepared but nobody knows what happened to that," said the official. 

Qadri held the successive dispensations responsible for not pursuing the case seriously. "The State could have amended the Transfer of Property Act and the case would have never landed up in the courts. They (Government) should have engaged constitutional lawyer or a senior lawyer like Attorney General or Solicitor General for the case as was done in case of police officer Yasir Qadri (DSP) where the government spent huge amount in defending the police officer," said MI Qadri.

"Both the things (amending state law or pursuing case seriously in Supreme Court) were within the domain of the State. The failure of the successive government to follow on the matter is deplorable," said another official of Law Department.

He also argued had the Government amended the Right to Transfer Act the issue would have never landed in the High Court or the Apex Court.

"Even when the case was being heard by the High Court, the government on number of occasion argued that it will bring ordinance for allowing the banks to deal with the mortgaged property of defaulters as per the state laws," the official said.

He said following the State's assurance the High Court while hearing the case in June 2015 had also observed that the State would be at liberty to enact law similar to that of the SARFAESI Act. "The State of J&K, in the event of framing such a law, has to ensure that interests of State subjects/citizens of J&K regarding their immoveable properties are not affected by transferring the same to non State subjects," the Court had observed.

"But there was no urgency shown by the Government to act on the assurance it gave to the court," the official said.

State's standing counsel in Supreme Court Sunil Fernandes supported the viewpoint. "If the Government would have amended section 140 of J&K Transfer Property Act in time, then probably there would have been no reason for the court to allow the writ petition," said Fernandes.

He however asserted that the same has been taken care of by amendments in the securitization rules to include a proviso in rule 8(5) of the Act that any proposed auction in J&K would have to be in accordance with JK Transfer of Property Act.

"I argued strictly as per instructions of the State Government and based on the consistent historical stand of the Government for several years now that the SARFESI Act indeed applies to the State of J&K. Even the past governments have never contended or argued in any Court of law or otherwise that SARFESI doesn't apply to J&K…," said Fernandes. "Even legally, State Govt could not have argued that SARFESI does not apply to the State."

Former Law Minister Mir Saifullah said during his tenure he opposed the extension of SARFAESI Act as well as amendments to J&K Transfer of Property Act "as any such move would have gone against Jammu and Kashmir's special position."

Asked that a committee of legal experts had after deliberations with Union Government agreed to amend the State law and if he considered that wrong, Saifullah said: "I don't want to comment on the issue."

The incumbent Law Minister and Revenue Minister didn't respond to repeated phone calls from Greater Kashmir for getting their viewpoints on the issue.

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