TaxTMI 
TaxTMI 
2015 (2) TMI 686
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.... 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 Some of our laws are outdated and legal procedures are cumbersome and time consuming.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 legal issues that have been raised. Our laws inde....
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....y 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 respect of such debt is classified by the secured creditor as non-perfo....
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....ade 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 of the business is severable, the secured creditor shall take over the management of such business....
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....)(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 is on the whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We ....
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....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 any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets clas....
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.... 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 has been adopted by the Legislature. This has been done to put its machinery into use towards its avowed object of activity - appropriate recovery. Therefore, we do not find any delegated legi....
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.... 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 unconstitutional for the following reasons: (1) that the Parliament, by authorizing the various bodies to frame the guidelines in accordance with which the account of a borrower could be classified as a NPA abdicated its....
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.... 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 categories of borrowers and on different terms and conditions. 3. The third submission made on behalf of the borrowers is sought to be repelled on two grounds: (i) that, it is a purely hypothetical submission in the context of the present set of cases ....
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....n 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, takes within its sweep four categories of bodies specified under Section 2(1)(m). The activities of all the above mentioned categories of entities are primarily governed by some in-house managerial body which, in turn, are subject to the control and regulation eith....
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.... 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 different categories of assets which include certain off-balance sheet items as well. The Committee believes that it is necessary that banks in India also conform to these standards in a phased manner. [See: Capital Adequacy, Accounting Policies and Other Related Matters, Report of the ....
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....ts 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 Banking Financial Companies (NBFCs) (Section 45-I(f) ''non-banking financial company'' means- (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, o....
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....m 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 normally by instituting a suit for recovery of the amounts by enforcing the 'security interest'. The Recovery of Debts due to Banks and Financial Institutions Act, 1993 created an exclusive forum for a speedy ascertainment of the amounts actually due from the defaulting borrower and also provided for a mechanism for speedy recovery o....
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....unts 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 the SECURED CREDITOR under Section 13(2) as to which one of the steps contemplated under Section 13(4) should be resorted to in the case of a given defaulting borrower. We hasten to add that it may not be the only factor which determines the cause of action to be taken by the SECURED CREDITOR. The magnitude of the amount due and outstanding in a given ca....
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....or 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 Bank of India. 51. Regulation of monetary system and banking business is one of the fundamental responsibilities of any modern State and essential for the economic and political stability of the State. The vast increase of commerce both national and the international made easy by the tremendous developments of technology, renders such regulation a very complic....
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....wo 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 B. Shama Rao v. Union Territory of P ondicherry, AIR 1967 SC 1480, J.M. Shelat, J. speaking for majority (3) of a Constitution Bench of 5 Judges, after summarizing the views of the 7-Judges who delivered the judgment in Delhi Laws Act's case opined; "5. .......In view of the intense divergence of opinion except for their conclusion partially to uphold the validity of th....
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....urt 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 of the 'essential legislative function'. On an examination of the abovementioned authorities, apart from others, Chief Justice Wanchoo, speaking for himself and Justice Shelat, held as follows: "28. ...... The legislature must retain in its own hands the essential legislative functions and what can be delegated is the task of subordinate legislation necessary for implementin....
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....ation" ...... "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" and "guidelines" theory and seek such assistance as we may derive from cases where near identical provisions have been considered." This Court declined "to consider whether M.K. Papiah & Sons v. The Excise Commissioner, (1975) 3 SCR 607, beat the final retreat from the earlier position" but proceeded to examine the case before it on the theory of "policy" and "guidelines" propounded in some of the cases.....
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....rport 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 is the prescription that a SECURED CREDITOR could take steps contemplated under Section 13(4) on the "default" (Section 2(1) (j) "default" means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor ;) of the borrower. The expres....
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....nnumerable 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 sub-standard, doubtful or loss asset in accordance with the directions or under guidelines relating to assets classification issued by the Reserve Bank. Irrespective of whether the financial entity was regulated by RBI or not, for the purposes of SARFAESI Act, the asset classification stipulated by RBI was applicable. Though the regulator concerned of the financial entity had stipulated different standards for regulatory purposes, the entities h....
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....encies 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 secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within fifteen days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower. Provided that the reasons so communicated or the likely action of the secured creditor at the stage of commun....