2006 (5) TMI 188 - SC - Companies Law

Supreme Court Upholds RBI's Debt Write-Off Approval

Salim Akbarali Nanji Versus Union of India

The Supreme Court dismissed the appeal challenging the Reserve Bank of India's approval for writing off debts by a bank, affirming that the issues raised ... Whether the proposal of the Respondent No. 6 Development Credit Bank Ltd. for writing off of debts, amounting to ₹ 120 crores, of the Bank by RBI without following the proper procedures prescribed under the provisions of sections 13 and 14 of the Securitisation Act, 2002 and sections 19 and 31A of the Recovery of Debts Due to Banks Act, 1993 was illegal? Held that:- Appeal dismissed. Though some of the debts have to be written off with little chance of substantial recovery, we cannot lose sight of the fact that the Bank has generated considerable operating profits and has built up a substantial general reserve over the years, against which the debts written off have been adjusted. Issues Involved1. Justifiability of issues raised in writ jurisdiction.2. Legality of the Reserve Bank of India's approval for writing off debts.3. Compliance with statutory provisions under the Securitisation Act, 2002 and the Recovery of Debts Due to Banks Act, 1993.4. Reserve Bank of India's statutory obligations and exercise of powers under the Banking Regulation Act, 1949.5. Financial implications and internal procedures of writing off Non-Performing Assets (NPAs).Detailed Analysis1. Justifiability of Issues Raised in Writ Jurisdiction:The High Court of Judicature at Bombay dismissed the writ petition, holding that the issues raised by the appellant were not justifiable in writ jurisdiction. The Supreme Court concurred, indicating that the grievances raised did not warrant intervention through writ jurisdiction.2. Legality of the Reserve Bank of India's Approval for Writing Off Debts:The appellant, a shareholder of the Development Credit Bank Ltd., challenged the Reserve Bank of India's (RBI) approval of the Bank's proposal to write off Rs. 120 crores of debts. The Supreme Court noted that the RBI's approval was sought as a matter of practice, not as a statutory requirement. The RBI had considered the financial position of the Bank before granting permission, which was in line with accepted accounting policies and disclosed in the Notes to Accounts.3. Compliance with Statutory Provisions under the Securitisation Act, 2002 and the Recovery of Debts Due to Banks Act, 1993:The appellant argued that the write-off did not follow the procedures prescribed under sections 13 and 14 of the Securitisation Act, 2002, and sections 19 and 31A of the Recovery of Debts Due to Banks Act, 1993. The Court clarified that the write-off is an internal accounting procedure and does not preclude the Bank from continuing to recover the debts. The write-off does not bar the Bank from following up on recoveries, and such recoveries are credited to the income account, improving the Bank's net worth.4. Reserve Bank of India's Statutory Obligations and Exercise of Powers under the Banking Regulation Act, 1949:The appellant claimed that the RBI failed to exercise its statutory powers under various sections of the Banking Regulation Act, 1949. The Court examined sections 21, 22(4), 27, 30, 35, 35A, 36, 36AA, and 45 of the Act and found no evidence of the RBI failing to perform its legal duty. The RBI's approval for the write-off was within its discretionary powers and aligned with the regulatory framework.5. Financial Implications and Internal Procedures of Writing Off NPAs:The Court emphasized that writing off NPAs is a standard internal accounting procedure aimed at cleaning up the balance sheet. The write-off does not imply that the debts are irrecoverable. The Bank continues to pursue recovery efforts, and any recovered amounts are credited back to the income account. The decision to write off the debts was approved by the shareholders at the Annual General Meeting, indicating broad support for the measure.ConclusionThe Supreme Court found no merit in the appeal and dismissed it without any order as to costs. The Court upheld the RBI's approval for the write-off, noting that it was a standard practice and did not breach any statutory provisions. The write-off was deemed an internal accounting procedure that did not preclude the Bank from continuing recovery efforts. The appellant's claims of statutory non-compliance and financial detriment were not substantiated, leading to the dismissal of the appeal.