TaxTMI 
TaxTMI 
2015 (2) TMI 686
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....cial sector reforms. This has resulted in slow place (sic pace) of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions." The enactment was preceded by three Committee Reports - two headed by Mr. M. Narasimham (Ex. Governor, Reserve Bank of India) and the third by Mr. T.R. Andhyarujina (Senior Advocate, Supreme Court of India). 3. Recovery of money from a debtor by resorting to the filing of a suit takes painfully long time in this country, for various reasons 1.31 There has been a perception, and not without reason, that our legal system have not kept pace with measures of financial sector reform and indeed economic reforms more generally. As far as the banking sector is concerned, there is continuing need for an appropriate legal framework to help enforce contracts and protect the interests of secured creditors especially in bankruptcy proceedings. Some of our laws are outdated and legal procedures are cumbersome and time consuming. Even where Court decrees are obtained their enforcement has been marked by delays. Our experience with the Debt Recovery Tribunals has not been altogether satisfactory in view of the le....
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....s such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or (iii) any other trustee holding securities on behalf of a bank or financial institution in whose favour security interest is created for due repayment by any borrower of any financial assistance;) who by definition under the Act becomes a 'SECURED CREDITOR', can be enforced without the intervention either of the court or tribunal (Section 13. Enforcement of security interest.- (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.) constituted under Act 51 of 1993 by following the procedure under Section 13 of the Act. Section 13(2) of the Act provides as follows: "(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in ....
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....forced by the secured creditor in the event of borrower not complying with the demand made in the notice. 8. Sub-section (4) provides that in the event of the borrower failing to discharge his liability in spite of notice under sub-section (2), the secured creditor may take recourse to any one or more of the measures indicated under sub-section 13(4) (Section 13(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 realising 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 realising 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....
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....e asset is acquired. 10. Under the Act, SCs and RCs are also treated to be SECURED CREDITORS by definition. [See Section 2(1)(zd)] 11. The constitutional validity of the Act was examined by this Court in Mardia Chemicals Ltd. & Others v. Union of India & Others, (2004) 4 SCC 311. This Court upheld the constitutionality of the Act except that of sub-section (2) of Section 17. "82. We, therefore, subject to what is provided in para 80 above, uphold the validity of the Act and its provisions except that of sub-section (2) of Section 17 of the Act, which is declared ultra vires Article 14 of the Constitution of India." 12. One of the grounds on which the Act was challenged in Mardia Chemicals (supra) was that the said Act enables the SECURED CREDITORS to classify the account of a borrower as NPA at the whims and fancies of such SECURED CREDITORS. This Court rejected the said submission for the reasons that the guidelines laid down by the Reserve Bank of India for classifying the account of a borrower as a NPA would eliminate the possibility of the SECURED CREDITOR arbitrarily declaring the account of a borrower as a NPA. "37. Next we come to the question as to whether it....
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....initiated during the pendency of the appeals from the two judgments referred to above. 17. Since the bone of contention in this bunch of matters is the amended Section 2(1)(o) of the Act, we deem it appropriate to extract the provision as it existed both prior to and after the amendment. THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 THE ENFORCEMENT OF SECURITY INTEREST AND RECOVERY OF DEBTS LAWS (AMENDMENT) ACT, 2004 2. Definitions (1) In this Act, unless the context otherwise requires: (o) "Non-Performing Asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss assets, in accordance with the directions or under guidelines relating to assets classification issued by the Reserve Bank. 2. Definitions (1) In this Act, unless the context otherwise requires: (o) "Non-Performing Asset" means an asset or account of a borrower, which has been classified by a bank or financial institution, as sub-standard, doubtful or loss asset.- (a) In case such bank or financial institution is administered or regulated by ....
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....evelopments in the banking system, both nationally and internationally. The High Court took note of the practice of the Reserve Bank of issuing master circulars annually which contain the consolidated instructions issued by the Reserve Bank from time to time on the above-mentioned matters. (b) The High Court took note of the fact that the Reserve Bank of India in exercise of the statutory authority under Section 21 and Section 35A of the Banking Regulation Act, 1949 prescribes norms for the various aspects of banking specified under the Act. (c) The High Court held that the Parliament, while defining a non-performing asset under Section 2(1)(o) of the Act, only adopted the norms prescribed from time to time by the Reserve Bank of India for the purpose of identifying the NPA. (29. However, the question for consideration before us is as to whether there is indeed any delegated legislation or not. We are of the view that there is no delegated legislation involved in the case on hand. As discussed above, the power exercised by the Reserve Bank of India in a separate enactment has been taken note of by the Legislature in the subsequent one. It is only a definition clause, which....
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....cts and reasons of the Act, as it was originally enacted, which inter alia stated as: "(h) empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower's account as non-performing asset in accordance with the directions given or guidelines issued by the Reserve Bank of India from time to time." and recorded a conclusion that the Parliament deviated from the original aims and objects propounded by it. It also took note of the fact that this Court in Mardia Chemicals (supra) repelled the attack on the original definition of a NPA on the ground that the CREDITORS are bound by the policy guidelines issued by the Reserve Bank of India, and therefore, there is no possibility of the CREDITORS arbitrarily or whimsically classifying the account of any borrower as a NPA. The High Court therefore opined that the deviation from the original objects and reasons would be violative of Article 14 of the Constitution of India. 24. Learned counsel appearing for the borrowers argued that the amended Section 2(1)(o) is unconstitu....
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....s the Act does not provide for a reasonable opportunity to demonstrate that the classification of the borrower's account as a NPA is untenable, the power to make such a classification itself becomes arbitrary and violative of Article 14 of the Constitution. 25. On the other hand, the learned counsel appearing for the Union of India, the RBI and the various CREDITORS submitted that the impugned amendment is a constitutionally valid piece of legislation. 1. In recognition of the fact that the assessment of an account of borrower as NPA depends upon innumerable factors which constantly keep changing, Parliament thought it fit to stipulate that the assessment be made in the light of the guidelines made by either the RBI or various other REGULATORS regulating the activities of various CREDITORS. There is no delegation of any essential legislative functions. 2. The prescription that the classification of NPA is to be made on the basis of the guidelines framed by different bodies regulating the different CREDITORS is a constitutionally permissible classification having regard to the nature of the different credit facilities extended by the various CREDITORS to different categ....
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.... classification issued by the Reserve Bank becomes an NPA. The amended definition however defines a NPA as an asset classified by the CREDITOR as "sub-standard, doubtful or loss asset" in accordance with the relevant guidelines issued by the appropriate body. In the case of the CREDITORS "administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force", such 'REGULATOR', and with reference to CREDITORS, not so administered or regulated, the Reserve Bank are the appropriate authorities. 29. We have already noticed that one of the two main purposes of the Act is to facilitate the SECURED CREDITORS (The expression "SECURED CREDITOR" by definition under the Act takes within its sweep - (i) a bank, (ii) a financial institution, consortium or group of banks or financial institutions, (4) debentures trustees appointed by any bank or financial institution, (5) a securitisation company, (6) reconstruction company etc. Once again the expression 'bank' by definition takes within its sweep six categories of entities specified under Section 2(1)(c). The expression 'financial institution', by definition under the Act, ....
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....hich the country was facing at that point of time. 32. The Committee submitted its 1st Report on the 16th November, 1991. While examining the various aspects of the financial system, the said Committee considered the functioning of the banking system in the country. It took note of the existing guidelines issued by the Reserve Bank of India from time to time and also the various practices of the banking industry. The Committee was of the view that the "ratio of capital funds in relation to bank's deposits or its assets is a well known and universally accepted measure of the strength and stability of the institution". 33. It took note of the capital adequacy standards prescribed by the Committee known as Basle Committee (The Basle Committee on Banking Regulations and Supervisory Practices appointed by the Bank of International Settlements (BIS) has prescribed certain capital adequacy standards to be followed by commercial banks and these standards have been accepted for implementation by several countries. The BIS standard, as it is popularly known, seeks to measure capital adequacy as the ratio of capital to risk weighted assets. It has prescribed weightages for differ....
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....lth Codes into the following broad groups: (i) Standard (ii) Sub-standard (iii) Doubtful and (iv) Loss The RBI should prescribe clear and objective definitions for these 4 categories to ensure a uniform, consistent and logical basis for classification of assets. Broadly stated, sub-standard assets would be those which exhibit problems and would include assets classified as non-performing for a period not exceeding two years. Doubtful assets are those non-performing assets which remain as such for a period exceeding two years and would also include loans in respect of which instalments are overdue for a period exceeding 2 years. Loss assets are accounts where loss has been identified but the amounts have not been written off." 35. Narasimham Committee Report on asset classification by the CREDITORS was accepted by the Reserve Bank of India and guidelines are being issued from time to time. Different instructions culminating into different "Master Circulars" with respect to various classes of banks and financial institutions came to be issued by the Reserve Bank from time to time. For example, the Reserve Bank of India issued instructions dealing with the Non Bankin....
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....f speedy recovery of the monies due from the borrowers to one class of creditors who are banks and financial institutions (CREDITORS). Advances/loans made by CREDITORS to businessmen and industrialists are generally not repayable on demand but repayable in accordance with a fixed time schedule agreed upon by the parties known as "term loans". "Term loans. A loan may be made for a specified period (a term loan). In such a case repayment is due at the end of the specified period and, in the absence of any express provision or implication to the contrary, no further demand for repayment is necessary." - Chitty on Contracts, Vol.II 30th Edn., p.913 In other words, such loans are repayable in instalments over a period of time the terms of which are evidenced by a written agreement between the parties. A default in the repayment, (in terms of the agreed schedule) generally provides a cause of action for the CREDITOR to initiate legal proceedings for the recovery of the entire amount due and outstanding from the borrower. Normally such term loans are also accompanied by some 'security interest' in a 'secured asset' of the borrower. Such a recovery is to be made no....
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....n repayment by the borrower is due to any factor which is a temporary phenomenon and the same could be managed by the borrower if some accommodation is given. 44. The above analysis of the scheme of Section 13 of the Act would derive support from the fact that even prior to the coming into force of the Act, the CREDITORS were classifying the accounts of the borrowers as NPAs under the statutory guidelines issued by the RBI. We have already noticed that under the said guidelines FINANCIAL ASSETS are sub-divided into 4 categories i.e. (i) standard, (ii) sub-standard, (iii) doubtful, and (iv) loss. Depending upon the length of the period for which the installment of money is over due, such assets are classified as NPA. As the length of the period of over due increased, the account of the borrower is progressively classified from "sub-standard" to "loss". 45. The same classification is adopted by the Parliament while enacting the Act. Therefore, all NPAs do not belong to the same class. Their characters vary depending on the length of time for which they remained NPAs. 46. In our view, such a classification is relevant and assumes importance in the decision making process of t....
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....of the loan or advance -whether the loan or advance is a term loan or agricultural loan, money advanced on bill discounting etc. 49. To make any attempt to define the expression 'non-performing asset' valid for the millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of CREDITORS for all time to come would not only be an impracticable task but could also simply paralyse the entire banking system thereby producing results which are counter productive to the object and the purpose sought to be achieved by the Act. 50. Realising the same, the Parliament left it to the Reserve Bank of India and other REGULATORS to prescribe guidelines from time to time in this regard. The Reserve Bank of India is the expert body to which the responsibility of monitoring the economic system of the country is entrusted under various enactments like the RBI Act, 1934, the Banking Regulation Act, 1949. Various banks like the State Bank of India, National Housing Bank, which are though bodies created under different laws of Parliament enjoying a large amount of autonomy, are still subject to the overall control of the Reserve ....
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....itution bench of 7-Judges. Seven separate judgments were delivered. It was a case where Section 7 of the Delhi Laws Act authorized the provincial government to extend by a notification in the official gazette to the provinces of Delhi, any enactment which was in force in any part of British India as on the date of such notification. Similar provisions were contained in two other enactments. One of the questions was whether such conferment of power on the executive amounted to excessive delegation of the legislative power. Even according to Patanjali Sastri, J., who was a member of the Bench which decided the case, in a subsequent decision in Kathi Raning Rawat v. State of Saurashtra, AIR 1952 SC 123, while dealing with the decision in Delhi Laws Act's case observed thus: "While undoubtedly certain definite conclusions were reached by the majority of the Judges who took part in the decision in regard to the constitutionality of certain specified enactments, the reasoning in each case was different, and it is difficult to say that any particular principle has been laid down by the majority which can be of assistance in the determination of other cases.". 54. In the case of ....
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....et down any standard for the guidance of the executive; it may confer an arbitrary power on the executive to change or modify the policy laid down by it without reserving for itself any control over subordinate legislation. Thus self effacement of legislative power in favour of another agency either in whole or in part is beyond the permissible limits of delegation. It is for a court to hold on a fair, generous and liberal construction of an impugned statute whether the legislature exceeded such limits. But the said liberal construction should not be carried by the courts to the extent of always trying to discover a dormant or latent legislative policy to sustain an arbitrary power conferred on executive authorities. It is the duty of the court to strike down without any hesitation an arbitrary power conferred on the executive by the legislature." 56. In 1968, a Constitution Bench of 7-Judges in Municipal Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills, Delhi & Another, AIR 1968 SC 1232 considered the question whether Section 150 of the Delhi Municipal Corporation Act (66 of 1957) is unconstitutional on the ground that it provided for impermissible delegation....
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....ds, the very fact that the legislature has the power to repeal and withdraw the authority of the delegate and the discretion vested in the delegate, should lead to the conclusion that the legislature did not abdicate its essential functions. 59. According to Seervai, by its judgment in M.K. Papiah's case (supra), this Court "after twenty five years of wandering in the legal maze of its own creation" ...... "come round to the view expressed by the Privy Council in 1878" i.e. Queen v. Burah [1878 (5) Ind App 178]. 60. This Court in the case of Registrar of Cooperative Societies v. K. Kunjaboo, AIR 1980 SC 350 took note of the uncertainty prevailing in the following words; "2. Lawyers and judges have never ceased to be interested in the question of delegated legislation and since the Delhi Laws Act case, we have been blessed by an abundance of authority, the blessing not necessarily unmixed. We do not wish, in this case, to search for the precise principles decided in the Re Delhi Laws Act case, nor to consider whether M.K. Papiah v. Excise Commissioner beats the final retreat from the earlier position. For the purposes of this case we are content to accept the "policy" a....
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....ion that it is not necessary that legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. It has been the practice of the legislative bodies following the British parliamentary practice to define certain words employed in any given statute for a proper appreciation of or the understanding of the scheme and purport of the Act. But if a statute does not contain the definition of a particular expression employed in it, it becomes the duty of the courts to expound the meaning of the undefined expressions in accordance with the well established rules of statutory interpretation. 66. Therefore, in our opinion, the function of prescribing the norms for classifying a borrower's account as a NPA is not an essential legislative function. The laying down of such norms requires a constant and close monitoring of the financial system demanding considerable amount of expertise in the areas of public finance, banking etc., and the norms may require a periodic revision. All that activity involves too much of detail and promptitude of action. The crux of the impugned Act....
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.... delegation of essential legislative function, in our view, is untenable and is required to be rejected. 67. Coming to the submission that by authorizing different REGULATORS to prescribe different norms for the identification of a NPA with reference to different CREDITORS amount to unreasonable classification is also required to be rejected for the reason that all the CREDITORS do not form a uniform/homogenous class. 68. There are innumerable differences among the CREDITORS. Differences based on the legal structure of the CREDITORS' organization, differences based upon the nature of the loan advanced by them, and differences based on the terms and conditions subject to which such loans or advances are made by each of those CREDITORS, etc. For example, the Exim Bank loans are generally in foreign currencies. Similarly, loans granted by Housing Finance CREDITORS which are in turn regulated by the National Housing Bank are loans which are term loans for relatively longer periods than other loans. There is nothing uniform about these CREDITORS or their activities. 69. It is submitted by learned counsel for the RBI- "Prior to the amendment in 2004, NPA was defined as su....
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....ties under the Act regulated by different regulators such as Reserve Bank of India, National Housing Bank etc. who had stipulated their own guidelines for the purpose. At the same time, the amendment also covered the entities like Asian Development Bank, which did not fall within the purview of any regulator in India. Therefore, the amendment was made in the Act to take care of these situations and these amendments were necessary to cover the deficiencies noticed in the Act." 71. Therefore, to say that enabling them to follow different norms would be violative of Article 14, in our view, would be wholly untenable. 72. Coming to the third submission of the borrower, we would not like to deal with this submission in the instant batch of cases as there are few cases where factually the SECURED ASSETS have been transferred by the ORIGINAL CREDITORS. Those cases have been de-tagged from this batch to be heard separately. 73. Coming to the fourth submission of the borrower, it must fail on the basis of express language of Section 13(3A) (Section 13(3A). If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secur....