Ruling that State of Jammu and Kashmir has no vestige of sovereignty outside the Constitution of India and its own Constitution, the Supreme Court has held that Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is applicable to the J&K state. The apex court set aside a Judgment of J&K High Court that had ruled out applicability of the Act to the state given its own sovereignty.
Citing the Judgment of J&K High Court, a division of the apex court comprising Justices Kurian Joseph and R.F. Nariman while setting aside the same, observed: "Having held that the provisions of SARFAESI cannot be applied to the State of Jammu & Kashmir, it is a contradiction in terms to state that SARFAESI can be availed of by banks which originate from the State of Jammu & Kashmir for securing monies which are due to them and which have been advanced to borrowers who are not the residents of the State of Jammu & Kashmir."
"It is clear that the state of Jammu & Kashmir has no vestige of sovereignty outside the Constitution of India and its own Constitution, which is subordinate to the Constitution of India. They (residents of state) are governed first by the Constitution of India and also by the Constitution of Jammu & Kashmir," the bench said, referring to the preamble of the Constitution of J&K, 1957.
The apex court termed it as "wholly incorrect" J&K High Court's observations that the state has "absolute sovereign power" to legislate laws touching the rights of its permanent residents regarding their immovable properties.
"There is no reference to sovereignty. Neither is there any use of the expression "citizen" while referring to its people. The people of Jammu & Kashmir for whom special rights are provided in the Constitution are referred to as "permanent residents" under Part III of the Constitution of Jammu & Kashmir," the apex court said.
The court said this while deciding a legal question on whether SARFAESI Act is applicable to J&K or the law was outside the legislative competence of Parliament since its provisions would collide with Section 140 of the Transfer of Property Act of J&K. Referring to High court's reliance on Article 35A of the Constitution of India as it applies to the State of Jammu & Kashmir, the apex court said: "This Article only states that the conferring on permanent residents of Jammu & Kashmir special rights and privileges regarding the acquisition of immovable property in the State cannot be challenged on the ground that it is inconsistent with the fundamental rights chapter of the Indian Constitution".
"Conferring such rights and privileges as mentioned in Section 140 of the Jammu & Kashmir Transfer of Property Act is not the subject matter of challenge on the ground that it violates any fundamental right of the Constitution of India."
The court pointed out that it was constrained to observe these because in at least three places, the High Court, in its judgment, "has gone out of its way to refer to a sovereignty which does not exist".
Underlining that the quasi-federal structure of the Constitution of India continues even with respect to J&K, the bench said: "Article 1 of the Constitution of India and Section 3 of the Jammu & Kashmir Constitution make it clear that India shall be a Union of States, and that the State of Jammu & Kashmir is and shall be an integral part of the Union of India."
It said the J&K Constitution has been made to further define the existing relationship of the state with the Union of India as an integral part thereof.
SARFAESI Act entitles banks to enforce their security interest outside the court's process by moving a tribunal to take possession of secured assets of the borrower and sell them outside the court process.
While the State Bank of India had approached the apex court in an appeal against the High Court order, the J&K government pleaded that the law encroached upon the property rights of permanent residents of the state and must be read down so that it will not be permissible to sell property belonging to a permanent resident of the state to outsiders.
The state government through its standing counsel, Sunil Fernandes, also submitted that Parliamentary legislation would need concurrence of the J&K government before it could apply to the state under Article 370.
"Provision added to Rule 8(5) of the SARFAESI Rules must be read along with Section 13(4) of the SARFAESI Act and if so read, the State of Jammu & Kashmir would have no objection to the SARFAESI Act applying to the State of Jammu & Kashmir," he pleaded.
The apex court, however held: "SARFAESI Act deals with recovery of debts due to banks and financial institutions, which is relatable to a subject under the Union List and parliamentary legislation did not require concurrence of the state government since the Centre had power to make law on this subject."
Underlining that the SARFAESI Act had itself made a special provision for sale of properties in J&K, the apex court said: "Entries 45 and 95 of List I clothe Parliament with exclusive power to make laws with respect to banking, the Act as a whole would necessarily operate in the state".
The bench, however, made it clear that any provision of the J&K Transfer of Property Act will have to give way to the central law in case the former is found repugnant. "It is clear that anything that comes in the way of SARFAESI by way of a Jammu & Kashmir law must necessarily give way to the said law," it said, adding that its judgement had no effect on Article 35A, which confers on permanent residents of J&K special rights and privileges regarding acquisition of immovable property in the state.
WHAT IS SARFAESI ACT:
It is an enactment which inter alia entitles banks to enforce their security interest outside the court's process by moving under Section 13 thereof to take possession of secured assets of the borrower and sell them outside the court process.
Its Sections 13 pertains to enforcement of security interest and it states:
(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 2 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:– (a) 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; (b) 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:
Provided that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: Provided further that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt. (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) 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.