06 January 2017

Central legislation shall have precedence over State legislation – Supreme Court rulings on SARFAESI Act

The Supreme Court of India has held that provision of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) shall have precedence over State legislation. The dispute arose from Order of the High Court wherein the lower court had held that since the Tripura Land Revenue and Land Reforms Act was protected under Article 31-B (pertaining to validation of certain legislations under Section IX) of the Constitution of India, therefore, the Tripura Act would prevail over SARFAESI Act.
Section 13 of the SARFAESI Act enables a bank to take possession of a property and sell such property to realize its dues, as it deems fit. The purchaser of such property gains clear title to the property that has been sold, so long as the prescribed requirements under the law have been met. The alleged contravention arose with respect to Section 187 of the Tripura Act, whereby a bank is prohibited from transferring the property which was mortgaged by a member belonging to a Scheduled Tribe to any person other than a member of a Scheduled Tribe. 
The Apex Court, in its Judgement dated 25-11-2016, applied the test of ‘dominant legislation’ in the present case and enunciated the difference between Central and State Laws. The Apex Court also made it clear that the sale of mortgaged property by a bank is ‘an inseparable and integral part’ of the banking sector. Prior to the enactment of SARFAESI Act, no parallel Central legislation existed that dealt with the sale of secured assets. Hence till such time SARFAESI Act had not been enacted, the Tripura Act operated validly within this sphere. However, when the Parliament enacted the SARFAESI Act as a Central legislation to exclusively deal with the sale of secured assets, the State law, to the extent of its inconsistency with the Central legislation, shall be severable.
In another judgment of the same date, SARFAESI Act was held to be applicable in the State of Jammu and Kashmir, by the Supreme Court of India. The case filed before the Court was an appeal against the judgment given by the High Court of Jammu and Kashmir, which pertains to the applicability of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 in the State of Jammu and Kashmir. The High Court of Jammu and Kashmir had held that certain provisions of the SARFAESI Act were in contravention to the provisions of Section 140 of the Transfer of Property Act of Jammu and Kashmir, 1920 and were outside the scope of ‘the legislative competence of the Parliament.’

The Apex Court in its judgment, however reversed the order given by the Jammu and Kashmir High Court, stating that ‘Jammu and Kashmir has no vestige of sovereign outside the Indian Constitution and its own, while citizens of the state are first and foremost citizens of India.’ The Court also stated that the ‘judgment begins from the wrong end and therefore reaches the wrong conclusion.’ It was observed that Entries 45 and 95 of List I of the Constitution grant the Parliament the exclusive power to enact laws with respect to banking. The Court also held that if any State law contravenes the SARFAESI Act, then SARFEASI Act, being a Central Act, will always take precedence by virtue of Article 246 of the Constitution as extended to the State of Jammu and Kashmir.


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