1995 (3) TMI 506 - HC - Indian Laws

Summary

The core legal questions considered by the Court were: (1) whether the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the Act) is constitutionally valid, particularly in light of Articles 14, 50, 226, 227, 233, 245, 246, 323A, and 323B of the Constitution; (2) whether the Act is within the legislative competence of Parliament; (3) whether the establishment of Debts Recovery Tribunals outside the framework of Articles 323A and 323B is permissible; (4) whether the Act violates the principle of independence of the judiciary as a basic feature of the Constitution; (5) whether the Act is unreasonable, discriminatory, and arbitrary, thus violating Article 14; (6) whether the appointment of the Presiding Officer of the Tribunal, specifically the third respondent, was valid under Section 5 of the Act and Article 233 of the Constitution; and (7) whether the procedural provisions of the Act, including the bar on counter-claims and set-offs and the pre-deposit condition for appeals, are constitutionally permissible.

Regarding the constitutional validity and legislative competence of the Act, the Court examined the Statement of Objects and Reasons, the Tiwari Committee Report, and the Narasimham Committee Report. It was found that the Tiwari Committee's recommendations related to revival of sick industrial undertakings and not directly to recovery of debts, thus the petitioners' reliance on it was misplaced. The Narasimham Committee did recommend special recovery tribunals with summary powers, but the Court noted that the Committee's terms of reference did not specifically address recovery of debts due to banks and financial institutions. The Court emphasized that while the Law Commission was not consulted before enactment, this procedural omission did not render the Act unconstitutional. The Court held that the validity of legislation depends on its conformity with constitutional provisions and not on the legislative process or necessity.

The Court analyzed the provisions of the Act extensively. The Act establishes Debts Recovery Tribunals and Appellate Tribunals with jurisdiction over debts exceeding a specified monetary threshold, bars civil courts from entertaining such matters (except for High Courts under Articles 226 and 227), and prescribes a summary procedure for recovery. The Act excludes the possibility of counter-claims or set-offs by defendants in proceedings before the Tribunal, which was held to create an anomalous and arbitrary situation. The Court observed that while the bank can proceed under the Act for recovery, the debtor's claims or defenses must be pursued separately in civil courts, potentially leading to inconsistent outcomes and procedural unfairness. The absence of counter-claim provisions or set-off rights was found to be a serious procedural defect.

On the question of the establishment of the Tribunal outside Articles 323A and 323B of the Constitution, the Court considered the petitioners' argument that tribunals can only be constituted under these Articles. Article 323A relates to Administrative Tribunals and Article 323B to certain specified tribunals. The Court rejected this narrow interpretation, holding that Parliament's legislative competence under Entry 97 of List I (residuary powers) and Entry 11-A of List III (Concurrent List) relating to "administration of justice" and "constitution and organisation of all courts" permits the creation of tribunals outside the ambit of Articles 323A and 323B. The Court referred to authoritative precedents and constitutional provisions to conclude that the expression "administration of justice" includes tribunals administering justice, and that the Constitution does not restrict Parliament's power to establish tribunals to only those under Articles 323A and 323B. The Court emphasized that the independence of judiciary is a basic feature of the Constitution but that does not preclude the creation of tribunals for specialized adjudication.

The Court then addressed the critical issue of independence of the judiciary and whether the Act erodes this fundamental principle. It was noted that the Presiding Officers of the Tribunals are appointed solely by the Central Government without consultation with the High Court, and the High Court has no supervisory jurisdiction over the Tribunal except under Articles 226 and 227. The Tribunal exercises powers akin to a civil court but is under the administrative control of the executive, which is also the principal litigant before the Tribunal. The Court expressed serious concern that this arrangement undermines the independence of the judiciary and public confidence in the justice delivery system. The Court observed that no sitting Judge would accept appointment under such terms and that the Act effectively reduces the High Court's jurisdiction and importance, which is constitutionally impermissible. The Court held that the Act is unconstitutional as it erodes judicial independence and violates the basic structure of the Constitution.

The Court further examined the procedural provisions of the Act, including the bar on counter-claims and set-offs, the summary nature of proceedings, and the pre-deposit requirement for appeals. It found that the denial of counter-claims and set-offs violates principles of natural justice and creates an irrational and discriminatory regime contrary to Article 14. The pre-deposit condition for appeals was also criticized for lack of clear guidelines, leaving room for arbitrary discretion. The Court noted that the Act's procedure is more akin to tax recovery laws and that the bar on jurisdiction of civil courts except for High Courts under Articles 226 and 227 is unnecessary and does not substitute for ordinary civil trial procedures. The Court also referred to international law and Supreme Court precedent holding that imprisonment for non-payment of debt is unconstitutional, suggesting that the Act's stringent recovery provisions may contravene fundamental rights.

On the issue of the appointment of the third respondent as Presiding Officer of the Tribunal, the Court scrutinized Section 5 of the Act, which requires the Presiding Officer to be or have been or be qualified to be a District Judge. The third respondent was neither a District Judge nor qualified to be one under Article 233 of the Constitution and relevant judicial service rules applicable to Delhi. The Court analyzed the constitutional provisions governing appointment of District Judges, including the requirement of recommendation by the High Court and minimum years of advocacy. It rejected the government's contention that the third respondent's service as a public prosecutor qualified him as an advocate eligible for appointment, relying on precedent that public prosecutors employed full-time are not deemed practicing advocates for judicial appointment purposes. The Court held that the appointment of the third respondent was invalid and quashed the notification constituting the Tribunal with jurisdiction over Delhi.

The Court also considered the petitioners' challenge that the Act creates two parallel procedures for recovery of debts-one under the Act and another under the various enactments establishing financial institutions-and that this duality violates Article 14. The Court, relying on Supreme Court precedent, held that the availability of two procedures does not per se render the Act unconstitutional, provided the Act covers only a specific class of cases and contains sufficient guidelines. Thus, this challenge was rejected.

Regarding locus standi, the Court recognized the Delhi High Court Bar Association's standing to challenge the Act, especially given the constitutional issues raised concerning judicial independence.

The Court's significant holdings include the following:

"We hold that though tribunal could be constituted by Parliament not falling within Articles 323A and 323B of the Constitution, and that the expression 'administration of justice' as appearing in Entry 11-A of List III of Seventh Schedule to the Constitution would include tribunals as well administering justice; the Act called 'The Recovery of Debts Due to Banks and Financial Institutions Act, 1993', is unconstitutional as it erodes the independence of judiciary and is irrational, discriminatory, unreasonable, arbitrary and is hit by Article 14 of the Constitution; and that respondent No. 3 does not fulfill the qualification to be appointed as Presiding Officer of the Tribunal."

"The Act erodes independence of judiciary. It is a case where jurisdiction of a Civil Court has been truncated and it has been deprived of existing jurisdiction. It is a different matter if in a law enacted by Parliament jurisdiction is conferred on the civil court, but when the existing jurisdiction is taken away and conferred on a Tribunal having only trappings of a Court, it certainly affects the independence of judiciary."

"The appointment of a person to be District Judge and the posting and promotion of District Judge in any State is made by the Governor of the State in consultation with the High Court exercising jurisdiction in that State. Clause (2) of Art. 233 uses the words 'service of the Union or of the State' and these have been interpreted to mean judicial service. ... Under clause (2), when a person is not already in judicial service he can be appointed a District Judge only if he fulfills the two conditions mentioned above. As far as Delhi is concerned, the third respondent is not qualified to be appointed as District Judge. He is not and has not been a District Judge. Therefore, the order appointing him as Presiding Officer of the Tribunal is bad and is set aside."

"The provisions of the Act are wholly loaded in favor of the banks and financial institutions as if the debt to be recovered is a tax. The Act would appear to be more like the Customs Act and the Central Excises and Salt Act where there are provisions for adjudication and appeal and recovery of the tax found due."

"The Act is bad in so far as it places the Tribunal on a higher pedestal than the High Court and is, thus, unconstitutional. It lowers the authority of the High Court vis-a-vis the Tribunal which is impermissible as it is against the scheme of the Constitution."

As a consequence of these findings, the Court quashed the notification constituting the Debts Recovery Tribunal for Delhi and held the Act unconstitutional. It directed that all cases pending before the Tribunal be transferred to the original side of the High Court, to be treated as instituted on the dates originally filed, with appropriate refund and payment of court fees. The Court declined to suggest amendments or modalities for the Act, emphasizing that it is not the Court's role to frame legislation.