2015 (5) TMI 763 - HC - Indian Laws

Court Invalidates NPA Classification, Orders Account Upgrade

Rita Bagga And 2 Ors. Versus Union Of India And 6 Ors.

The court ruled in favor of the petitioners, finding that the classification of their account as a Non-Performing Asset (NPA) was arbitrary and against ... Default in repayment of dues - Account classified as NPA - Notice for possession of property under Section 13(4) of the Act read with Rule 8 and 9 of the Security Interest (Enforcement) Rules, 2002 - Writ jurisdiction in case of Alternate remedy - Three clear-cut circumstances wherein a writ petition would be maintainable even in a contractual matter. Firstly, if the action of the respondent is illegal and without jurisdiction, secondly, if the principles of natural justice have been violated, and thirdly, if the appellants' fundamental rights have been violated - Amount classified as NPA in contravention of RBI guidelines - Bank should not classify the account as NPA only at the instance of such deficiency which was temporary in nature - The RBI guidelines provides ninety days time to the petitioners to clear the deficiency, that is, till 31.03.2015 and the same was cleared by the petitioners in January, 2015 itself - The action of the respondent-Bank in rejecting the petitioners' objection was per se arbitrary and illegal. Held that:- In the light of the rival stand submitted by the parties, we first take up the plea of alternative remedy. The respondent-Bank has relied upon a decision of the Supreme Court in United Bank of India Vs. Satyawati Tondon and others [2010 (7) TMI 829 - SUPREME COURT ]. No doubt the petitioners has a remedy of filing an application under Section 17(1) of the Act. However, the jurisdiction of the High Court under Article 226 of the Constitution of India is not ousted merely because an appeal is provided under Section 17 of the Act. The power under Article 226 of the Constitution is wide and for the exercise of such power there is no restriction except the territorial restriction. However, the exercise of the writ jurisdiction is discretionary. Ordinarily, the Court does not entertain the matter where the petitioners have an alternative remedy. In Whirlpool Corporation Vs. Registrar of Trade Marks, Mumbai and others, [1998 (10) TMI 510 - SUPREME COURT] wherein this Court has held that there are three clear-cut circumstances wherein a writ petition would be maintainable even in a contractual matter. Firstly, if the action of the respondent is illegal and without jurisdiction, secondly, if the principles of natural justice have been violated, and thirdly, if the appellants' fundamental rights have been violated.' The Supreme Court in Harbanslal Sahnia and another Vs. Indian Oil Corpn. And others [2002 (12) TMI 564 - SUPREME COURT], held that the petitioners' dealership, which is their bread and butter, cannot be terminated for irrelevant and non-existent cause. The Supreme Court held that the petitioners should not be relegated to the rule of alternative remedy and that the High Court should have entertained the writ petition and granted relief instead of driving the petitioners to initiate the arbitration proceedings. In the light of the aforesaid decisions, we are of the opinion that at present moment only a notice under Section 13(4) of the Act has been initiated. No action on it had been taken by the respondents and, therefore, at this stage the petitioners cannot avail the remedy of an appeal under Section 17 of the Act. It is only when an action is taken under Section 13(4) of the Act the cause of action arises for the petitioners to file an appeal under Section 17 of the Act. In any case, we are of the opinion that considering the facts and circumstances that has been brought on record, we find that the action of the respondents in declaring the petitioners' account as a NPA was arbitrary and in violation of RBI guidelines. We also find that there are no disputed questions of fact, which needs to be adjudicated and the entire matter can be decided on the basis of the guidelines framed by the RBI. It is clear that a notice can only be issued if a borrower commits default in the repayment of the security debt and his account in respect of such debt, is classified as NPA. Unless and until the account is declared as NPA, no notice under Section 13(2) of the Act could be issued, even if there is a default. Sub-section (3A) of Section 13 of the Act gives an opportunity for the borrower to make any representation or raise any objection to the said notice, which in turn is required to be considered and decided by the secured creditor. Sub-section (4) of Section 13 of the Act provides the secured creditor to adopt any of the measures for recovery of the secured debt. From the RBI guidelines, it is clear that a substandard asset is one, which has remained NPA for a period less than or equal to 12 months. The guidelines provides that such asset will have well defined credit weakness that jeopardies the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected, meaning thereby that if the borrower corrects the deficiency then the substandard asset would be upgraded to a standard account as per para 4.2.5 of the RBI guidelines, which provides that if arrears of interest and principal is paid by the borrower, the account would no longer be treated as non-performing and would be classified as a standard account. In this regard, the Court further finds from a reading of para 4.2.4 of the guidelines that the classification of an account as NPA must be done by Bank based on the record of recovery and that the Bank could not classify an account as NPA merely due to the existence of some deficiencies which are temporary in nature such as balance outstanding exceeding the limit temporarily. In the light of the aforesaid, we are of the view that the initial action taken by the Bank classifying the petitioners' account as NPA was wholly invalid, illegal and against the guidelines issued by the RBI, which has the force of law and which is binding upon the Bank. We further find that the temporary deficiency in the petitioners' cash credit account was cured and the petitioners had brought its account within the cash credit limit in January, 2015. The RBI guidelines provides ninety days time to the petitioners to clear the deficiency, that is, till 31.03.2015 and the same was cleared by the petitioners in January, 2015 itself. The respondent-Bank should have upgraded the petitioners' account again as a standard account, which was not done and consequently the rejection of the petitioners' reply by the respondent-Bank and issuance of notice under Section 13(4) of the Act becomes patently illegal and arbitrary. At this stage, we must observe that the finance is required so that the petitioners could run their business. If the loan or the cash credit limit is withdrawn abruptly it becomes difficult for the borrower to repay the amount since the amount sanctioned by the Bank is invested in the business. We find that the business of the petitioners is running and, it is not a case where the business has stopped running or where the business is running in a loss. No doubt the respondent-Bank is required to protect the loan which it had sanctioned but, at the same time, the respondent-Bank should adopt a practical and pragmatic approach for which the RBI has framed guidelines which are binding upon them and which are required to be followed meticulously. In the instant case, we find the respondent-Bank has failed to adhere to the terms indicated in the guidelines. Consequently, the action of the respondent-Bank in declaring the petitioners' account as NPA by its order dated 31.12.2014 as well as the notice dated 01.01.2015 issued under Section 13(2) of the Act and the notice dated 17.03.2015 issued under Section 13(4) of the Act are quashed. - Decided in favour of appellant. Issues Involved:1. Validity of classifying the petitioners' account as a Non-Performing Asset (NPA).2. Compliance with RBI guidelines regarding NPA classification.3. Legality of the notices issued under Sections 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.4. Availability and appropriateness of alternative remedies.5. Alleged arbitrariness and illegality in the actions of the respondent-Bank.Issue-wise Detailed Analysis:1. Validity of Classifying the Petitioners' Account as a Non-Performing Asset (NPA):The petitioners contended that the classification of their account as NPA was arbitrary, illegal, and against the RBI guidelines. They argued that their account was regularized within a month of becoming irregular, and thus, should have been upgraded to a 'standard account.' The bank, however, maintained that the account was rightly classified as NPA due to continuous overdrawn status for more than ninety days and non-compliance with the terms of the cash credit facility.2. Compliance with RBI Guidelines Regarding NPA Classification:The court examined the RBI's 'Master Circular-Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances.' According to para 2.1.2(ii) and para 2.2 of the guidelines, an account is classified as NPA if it remains out of order for ninety days. The court found that the petitioners' account was not continuously overdrawn for ninety days, and there were credits during this period. The court also noted that the classification of an account as NPA should be based on the record of recovery and not merely on temporary deficiencies. The court concluded that the bank's action in classifying the account as NPA was in violation of the RBI guidelines.3. Legality of the Notices Issued Under Sections 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002:The court held that the notices issued under Sections 13(2) and 13(4) of the Act were invalid as they were based on the wrongful classification of the account as NPA. The court emphasized that a notice under Section 13(2) can only be issued if the borrower defaults and the account is classified as NPA. Since the classification was found to be invalid, the subsequent notices were also deemed illegal.4. Availability and Appropriateness of Alternative Remedies:The respondent-Bank argued that the petitioners had an alternative remedy under Section 17 of the Act. However, the court cited precedents to assert that the availability of an alternative remedy does not oust the jurisdiction of the High Court under Article 226 of the Constitution. The court held that in cases where actions are arbitrary, illegal, or violate principles of natural justice, the High Court can exercise its jurisdiction. The court found this case fit for exercising its jurisdiction despite the alternative remedy.5. Alleged Arbitrariness and Illegality in the Actions of the Respondent-Bank:The court concluded that the respondent-Bank's actions were arbitrary and illegal. The bank failed to adhere to the RBI guidelines, which are binding and have the force of law. The court noted that the petitioners' temporary deficiency was cured within the permissible period, and the account should have been upgraded to a standard account. The court quashed the bank's order classifying the account as NPA and the subsequent notices issued under Sections 13(2) and 13(4) of the Act.Conclusion:The court allowed the writ petition, quashing the respondent-Bank's actions and notices. The court emphasized the need for banks to follow RBI guidelines meticulously and adopt a practical approach in dealing with borrowers' accounts. The petitioners' account was ordered to be upgraded to a standard account, and the bank's arbitrary actions were deemed illegal. Each party was ordered to bear its own costs.