TaxTMI 
TaxTMI 
2019 (5) TMI 1948
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....inst its stock statement and book debt. Further, factory land and building measuring 11 bigha 4 biswa bearing Hadbast No.257, Opposite Gian Sagar Nursing Home, Village Rama Nagar, District Patiala was also given as collateral security by the petitioner to avail such credit facilities from the respondent-Bank. The respondent Bank on the basis of worth of stock in the stock statement and book credit sanctioned cash credit facilities to a limit of Rs. 4 crores.Since 2007, the respondent Bank had been renewing yearly the account of the petitioner company on the basis of its stock statement and book debt which is provided by the company on a monthly basis to the Bank. According to the petitioner, the respondent Bank even raised the cash credit limit to the extent of Rs. 13 to Rs. 17 crores in the year 2014 on the basis of stock statement and book debt of the petitioner company. The renewal of the petitioner's account with cash credit facility upto a limit of Rs. 4.80 crores was sanctioned by the bank on 22.3.2017.The petitioner's account was renewed in 2018. The petitioner asserts that it had a healthy relation with the respondent Bank and had never defaulted or delayed in makin....
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....n pointed by the auditor. Further, it came to the notice of the bank that the petitioner had closed the manufacturing unit situated at Village Alladadpur, Amloh, Fatehgarh Sahib in the month of October 2007 without informing the Bank. The availed facility was not being used for the purpose it had been financed to it. On these premises, prayer for dismissal of the petition has been made. 4. Learned counsel for the petitioner submitted that as per provisions of the RBI guidelines, for an asset to be classified as a non performing asset, there needs to be a default in principal amount or interest payment for the loan by the borrower. In the present case, no such default has occurred on behalf of the petitioner. Secondly, the action of the respondent bank in declaring the petitioner company as NPA is contrary to the principles of natural justice and audi alterm partem as the same was done by the respondent bank without giving any opportunity of being heard to the petitioner. There was no notice issued under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (in short, "the SARFAESI Act") before declaring the ac....
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....sifications issued by the Reserve Bank 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 court or tribunal, by such creditor in accordance with the provisions of this Act. (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-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4). (3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment o....
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.... (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. xxxxxxxxxxxxxxxx" 9. A plain reading of Section 2(1)(j) of the SARFAESI Act shows that '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. "Non-performing asset" under Section 2(1)(o) of the SARFAESI Act 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. Chapter III of the SARFAESI Act provides a complete mechanism for enforcement of Security interest by the secured creditor. Section 13 of the SARFAESI Act gives a....
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....r Section 17A of the SARFAESI Act. It is after the non-acceptance of the representation/objections under section 13(3A) of the SARFAESI Act, the action is taken by the secured creditor under Section 13(4) thereof to recover his secured debt which includes taking possessing of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset and then a right accrues to the borrower aggrieved by any of the measures under section 13(4) of the SARFAESI Act to take recourse to the remedies under Section 17 of the Act. 10. The disbursing power sanctioned to a borrower is the limit upto which the borrower can utilize the facility of the sanctioned loan. It is generally sanctioned on the basis of the value of the hypothecated stock and book debts which are taken as tangible secured asset. The borrower is obligated under the disbursing power to maintain minimum level of stocks and book debts to safeguard the financial interest of the financial/banking institution. It is required to submit its stock statements and other relevant information periodically and regularly for the verification of the lender. Any default on the....
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....s what is commonly known as audi alteram partem rule. It says that no one should be condemned unheard. Notice is the first limb of this principle. It must be precise and unambiguous. It should appraise the party determinatively the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him. This is one of the most important principles of natural justice. It is after all an approved rule of fair play. The concept has gained significance and shades with time. When the historic document was made at Runnymede in 1215, the first statutory recognition of this principle found its way into the "Magna Carta''. The classic exposition of Sir Edward Coke of natural justice requires to "`vocate interrogate and adjudicate''. In the celebrated case of Cooper v. Wandsworth Board of Works, (1963) 143 ER 414, the principle was thus stated: "Even God did not pass a sentence upon Adam, befo....
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.... it would certainly provide guidance to the debtors so that they may conduct their affairs in future in a manner to avoid recurrence of any such default resulting in unsavoury steps by the creditors. 12. Elaborating the need for providing opportunity of hearing before classification of an account as Non-Performing Asset, the Jharkhand High Court in Stan Commodity Pvt. Limited thorugh its Managing Director, Pawan Kumar Poddar vs. Punjab and Sind Bank through its Chairman and others, AIR 2009 Jharkhand 14 had laid down as under:- "28. In view of the provisions of the guidelines of the RBI, the petitioner was entitled to be informed and any doubt or dispute was to be settled between the creditor and the borrower through any specific internal channel within one month from the date on which the account would have been classified as NPA. Even if there was no internal channel to settle such dispute/doubt, the petitioner was entitled to be informed and to get an opportunity to explain or represent against the intended classification of his account as NPA. 29. The provision of the guidelines providing for some specific internal channel for settling the doubt in asset cl....
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.... to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to interests of the banking company or to secure the management of any banking company generally. However, under sub section (2), the Reserve Bank may modify or cancel any such direction issued under sub section (1) on a representation made to it or on its own motion and it may impose such condition as it thinks fit in doing so. 15. The 1949 Act also provides for power of the Reserve Bank of India to control advances by banking companies in terms of Section 21 thereof which reads thus:- "21 - Power of Reserve Bank to control advances by banking companies (1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined....
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....isions. RBI has been issuing directions/circulars from time to time which, inter alia, deal with the rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy." 17. The Supreme Court in M/s Sardar Associates and others vs. Punjab and Sind Bank and others, 2009 (8) SCC 257 while examining the nature of supervisory power of Reserve Bank of India in the matter of functioning of Scheduled Banks concluded that a distinction must be made between statutory and non-statutory guidelines. Further, the mandate of Banking Policy and directions issued by Reserve Bank of India in public interest or in the interest of the depositors are required to be followed by the Banking company. In other words, they are equally bound to comply with all the guidelines ....
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....ddition, an account may also be classified as NPA in terms of paragraph 4.2.4 of this Master Circular. 2.2 'Out of Order' status An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. 4. ASSET CLASSIFICATION 4.1 Categories of NPAs Banks are required to classify non performing assets further into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues: • Substandard Assets • Doubtful Assets • Loss Assets 4.1.1 Substandard Assets With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an a....
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.... 4.2.4 Accounts with temporary deficiencies The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non- availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. ....
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....such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate: b. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category. c. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. ii) Provisioning norms in respect of all cases of fraud: a. The entire amount due to the bank (irrespective of the quantum of security held against such assets), or for which the bank is liable (including in case of deposit accounts), is to be provided for over a period not exceeding four quarters commencing with the quarter in which the fraud has been detected; b. However, where there has been delay, beyond the prescribed period, in reporting the fraud to the....
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....g the limit temporarily, non submission of stock statements and non renewal of the limits on the due date etc. Further, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. Clause 4.2.5 provides for upgradation of loan accounts classified as NPAs. If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should not longer be treated as non performing and may be classified as standard accounts. As per clause 4.2.6, the asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the Banks must furnish satisfactory evidence to the statutory auditors/inspecting officers about the manner of regularization of the account to eliminate doubts on their performing status. Clause 4.2.9 prescribes that in respect of accounts where there are potential threats for....
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.... NPA must be in accordance with the directions or guidelines relating to assets classification issued by RBI. Further, it was categorically recorded that it is incorrect to presume that once an NPA is always an NPA. It was noticed that clause 4.2.4 of Prudential Norms specifically provides that if the interest and principal are paid by the borrower in the case of loans classified as NPA, said account should no longer be treated as NPA. The relevant para of the judgment reads thus:- "23. The right of the borrower to have a due consideration of objections is, therefore an important right of the borrower where the bank is bound to apply its mind and inform the borrower of its reasons as to why and how the account is classified as NPA, particularly, when the borrower raises specific objections in that regard. The reply of the bank must indicate application of mind by the bank that the decision of the Bank in classifying the account as NPA was fully in conformity with the prudential norms of RBI. Non consideration of the said objection by mere statements in the reply that the bank has considered the same cannot be said to be the fulfillment of the obligation of the bank under s....
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....m the borrower to a creditor are paid in full. It is sufficient if the amounts due at the material time towards principal and interest are paid. This is clear from the opening words of the first sentence of Clause 4.2.5 of the Master Circular - "If arrears of interest and principal are paid by the borrower .... .... ...". These words clearly indicate that payment of the amounts due at a particular point of time towards interest and principal is sufficient for the account not to be treated any longer as an NPA and to have the same classified as a standard account. If it were otherwise, the clause would have been worded entirely differently. It would have required the borrower to pay all the dues of the lender. Indeed, in that event, there would be no question of reclassifying the account from an NPA to a standard account for upon repayment the account would stand closed. Clause 4.2.5 contemplates the continuation of the accounts and not the closure thereof." 23. Having analysed and crystallized the legal position as noticed hereinabove, we advert to the factual matrix in the present case. In our opinion, the action of the respondent is legally unsustainable. Undisputedly, the pet....