TaxTMI 
TaxTMI 
2025 (7) TMI 141
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....ISPENSED WITH) CAV JUDGMENT (PER: THE HON'BLE MR JUSTICE V KAMESWAR RAO) This intra-court appeal has been filed by the appellants Sri. Deepak Raheja and Smt. Anita Raheja as Directors of Suspended Board of GSTAAD Hotels Pvt. Ltd. and GSTAAD Hotels Pvt. Ltd., challenging the order dated 28.02.2024 passed by the learned Single Judge in WP No.6037/2023, whereby the learned Single Judge has dismissed the writ petition filed by GSTAAD Hotels Pvt. Ltd., by stating in paragraphs No.16 and 17 as under: "16. It would become germane to notice the judgment of a coordinate Bench in the case of M/S NITESH RESIDENCY HOTELS PRIVATE LIMITED v. UNION OF INDIA [W.P.No.2004 of 2022 decided on 8-08-2022] in answer to two submissions one all the respondents not being a State under Article 12 of the Constitution and other being the concept of Emergency Credit Loan Guarantee Scheme and banker's prerogative. The coordinate Bench has held as follows: "E. AS TO EMERGENCY CREDIT LOAN GUARANTEE SCHEME AND BANKER'S PREROGATIVE: (i) The ECLG scheme promulgated by the Central Government which the petitioner's counsel heavily banked upon in support of his case, ....
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....ot wait indefinitely to recover its dues; the fairness required of the Bank cannot be carried to the extent of disabling it from recovering what is due; in matters of loan transactions, fairness cannot be a one-way street; both the Bank & the borrower have to be equally fair to each other ..." As observed by the co-ordinate Bench, banking business is better left to bankers. This Court would not sit as a supervisor to banking activities between the lender and the borrower except in cases where the dispute between the banker and the lender would touch upon violation of any statutory provision. No such violation though projected with all vehemence is found in the case at hand. Therefore, I decline to grant any of the prayers sought by the petitioner noticed supra. It is for the petitioner to avail all such remedies as are available in law. 17. In the light of the preceding analysis, the petition lacking in merit stands rejected. Interim order, operating if any, shall stand dissolved. Consequently, pending applications, if any, also stand disposed." 2. Some of the brief facts to be noted are, the appellant No.3 is in a hospitality business and owns land an....
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....ct of loan account. On 15.02.2023, respondent No.7-Omkara issued a notice to recall the main facility loan as well as the loans granted under the ECLGS scheme and also cautioned that if appellant No.3 would not repay the entire outstanding sums, it would result in legal proceedings. On 20.02.2023, respondent No.7-Omkara causes a legal notice seeking to invoke the corporate and personal guarantee in respect of the loans and in terms of the recall notices so issued. It is under such situation, appellant No.3 filed the writ petition before the learned Single Judge. 5. The case of appellant No.3 before the learned Single Judge was, reassignment of loan is contrary to law. Law, he would mean that, it is contrary to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act' for short) and also the Master Circulars issued by the Reserve Bank of India from time to time on the issue. According to the appellant, the assignment of loan in favour of respondent No.7-Omkara could have happened only after declaring the loans of appellant No.3 to be a non-performing asset ('NPA' for short). Without such declaration, the transfer coul....
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....er Circulars issued by the Reserve Bank of India which the Apex Court has held them to have a statutory force. Therefore, the limited scrutiny at the hands of this Court would be whether they are in tune with the Act and the Circulars. Barring this, no other submission with regard to various grievances, as submitted by the petitioner, would merit any consideration, as the parties to the lis are before the NCLT which has heard all the parties on the same submissions and has reserved its orders." 9. The learned Single Judge has also referred to the provisions of Section 2(ba), 2(o), of the SARFAESI Act as well as the Master Circulars issued by the Reserve Bank of India dated 01.04.2023. He was of the following view: "12. xx xx xx xx xx The afore-quoted frame work of resolution of assets has been in circulation right from 2019 in terms of the Circular issued by the Reserve Bank of India on 07-06-2019. All these circulars deal with four factors (i) declaration of an account to be a non- performing asset; (ii) what is a standard or stressed asset; (iii) frame work for resolution of standard or stressed asset and (iv) transfer of assets to an asset reconstruction com....
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....ng its assets inter se. Even in the matter of assigning debts, it cannot be said that the banks are trading in debts, as held by the High Court(s). The assignor Bank has never purchased the debt(s). It has advanced loans against security as part of its banking business. The account of a client in the books of the bank becomes non-performing asset when the client fails to repay. In assigning the debts with underlying security, the bank is only transferring its asset and is not acquiring any rights of its client(s). The bank transfers its asset for a particular agreed price and is no longer entitled to recover anything from the borrower(s). The moment ICICI Bank Ltd. transfers the debt with underlying security, the borrower(s) ceases to be the borrower(s) of the ICICI Bank Ltd. and becomes the borrower(s) of Kotak Mahindra Bank Ltd. (assignee). 47. At this stage, we wish to once again emphasise that debts are assets of the assignor Bank. The High Court(s) has erred in not appreciating that the assignor Bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee's rights in the mortgaged properties without in any manner ....
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....d and that this Court in APS Star Industries [ICICI Bank Ltd. v. APS Star Industries Ltd., (2010) 10 SCC 1: (2010) 4 SCC (Civ) 1] has recognised and upheld such an assignment." The Apex Court holds that the lender has a right to transfer/ assign its assets to another person without seeking consent of the borrower. The Apex Court also notices that earlier in APS Star Industries (2010) 10 SCC 1 it has recognized and upheld such assignment. Though the Apex Court was dealing with a situation where the account had been declared to be a non-performing asset it proceeded under SARFAESI Act on merit. 15. The underlying principle is that the assignment of asset to a new entity by the lender need not be on an express consent of the borrower. Knowledge to the borrower would be suffice and knowledge to the petitioner in the case at hand cannot be disputed. Therefore, the plea of assignment being contrary to the Master Circulars as is projected is untenable and all submissions shrouded with the plea of it being contrary to Master Circulars are all unsustainable. Assignment or re- assignment by private entities or in the business of banking is best left to bankers, borrowers an....
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....ing assignment of a debt to an Asset Reconstruction Company ('ARC' for short). This is reiterated in the Master Direction dated 19.10.2023 [Reserve Bank of India (Non-Banking Financial Company Scale Based Regulation) Directions 2023]; 16. The Respondent Piramal while contending that the account of the Petitioner/Appellant No. 3 was an SMA on 14.11.2022, does not state that the Petitioner/Appellant No. 3 was so notified. In fact, the Respondent Piramal contends that there is no such legal requirement. 17. According to him, the Respondent Omkara does not state that the Petitioner was notified that the account was an SMA. The Respondent Omkara contends that there is no legal requirement to notify the borrower that the account is an SMA. 18. According to Sri. Ajesh, despite the fact that the Petitioner/Appellant No. 3 was never notified that their account was either a Non-Performing Asset or a Stressed Asset, in contravention of the law prescribed by the Reserve Bank of India ("RBI") and the Master Circulars, the account was assigned to Respondent Omkara incorporated under Section 5 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Intere....
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.... 26.02.2014 A financial asset may be sold where the asset is reported as SMA-2. 3 Early Recognition of Financial Distress 21.03.2014 The NBFC is bound to notify the Borrower about their Account being an SMA. Ref. Clause 2.1.3 at Document No. 1 appended to Memorandum Submissions 4 RBI (Transfer of Loan Exposures) Directions 05.12.2022 updated "stressed loans" means loan exposures that are classified as Non- Performing Assets (NPA) or as Special Mention Accounts (SMA) Ref. Clause 9(k) at Pg. No. 751 The instructions contained in this Chapter would cover transfer of stressed loans including transfer to ARC. Ref. Clause 49 at Pg. No. 762 Subject to Master Circular of 2019, all stressed loans which are in default in the books of transferor are permitted to be transferred to ARC. Ref. Clause 73 at Pg. No. 768 Paragraph Nos. 3 and 4 of Master Circular dated 26.02.2014 repealed is Ref. Point 12 at Clause 88 at Pg. No. 776 7 Prudential Framework for Resolution of Stressed Assets 07.06.2019 Lenders shall recognise incipient stress in loan accounts. Ref. Clause 6 at Pg. No.....
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.... as an SMA, is bad in law and cannot be propagated to validate the impugned assignment. 37. Regardless of the intimation or otherwise, according to Sri. Ajesh, the account of the Borrower/ Petitioner/Appellant No.3 was not a Stressed Account; 38. That if the account of the Borrower was purportedly declared to be a SMA on 14.11.2022, then 60 days thereafter, it ought to have been declared as an NPA. Such is not the case and before this Court in WP No.6037/2023. This Court on 11.04.2023, had recorded the submission of the Lender Piramal that the account of the Borrower was not an NPA. 39. According to Sri. Ajesh, in view of the account not being declared as an NPA, as per the Master Circular dated 03.04.2023, a Standard Asset means an Asset which is not an NPA. Therefore, there is no concept of a Stressed account qua the Borrower. 40. He stated, there has been no intimation either under the Loan Agreements and/or under the Cash Management Agreement whereby the Lender has sought for the borrower/obligor to bring in any sums/deficit, if any. 41. That upon the utilisation of the ECLGS sums, notwithstanding the same being in contravention to law of over INR. 140 Crores, th....
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....another bank whereas the case at hand is between an NBFC and an ARC. 54. According to him, the learned Single Judge in paragraph No.14 of the Impugned Order, held that it was the contention of the Petitioner that they were not informed of the Assignment, whereas such a case was never argued. It was the case of the Petitioner/Appellant No. 3 that they were neither notified to be either a Stressed/SMA or an NPA. 55. According to him, the learned Single Judge has failed to consider the fact that no notice was given prior to any asset classification as enunciated in the Loan Agreements and or the Master Circulars which have a Statutory Force. 56. He stated, that the basis of which the learned Single Judge concludes at paragraph No.13 to be a Stressed Account, has already been set aside by the Order of the NCLAT and therefore such a finding is unsustainable. In view of the foregoing, his prayer is the Order Impugned is liable to be set aside. Submissions of Sri. Vakiti Vineeth Reddy, learned counsel for respondents No.4 to 6: 57. At the outset, Sri. Vakiti Vineeth Reddy submits that it is settled law that a debt is in the nature of an asset of a lender and such asset can ....
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....n SMA-0 1-30 Days SMA-1 31-60 Days SMA-2 61-90 Days 62. Further, upon perusal of the aforementioned clause also makes it very clear that the "Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA)", which means an event of classifying an account as SMA comes after the event of default. 63. Therefore, the Appellants contention that their account was not in default is entirely not tenable under law. Furthermore, the definition of default as per the RBI Master circular is definition of default as per the IBC which defines default as "non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be". 64. He submitted, even as per the definition of the default as per the RBI Circular, the Appellants account was in default as it was classified as the SMA on 14.11.2022, which means the amount is wholly or partly overdue between 1-30 days, therefore it classifies as default as per the definition because the whole or any part or instalment of the amount of debt ha....
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....effected in compliance with the applicable RBI guidelines and regulatory frameworks governing the assignment of stress assets. 68. He stated, following the assignment, the respondent No.7 - the new lender and assignee of the debt, initiated corporate insolvency resolution proceedings under the IBC against appellant No.3. In response, the appellant had filed the writ petition being WP No.6037/2023 challenging the assignment and seeking relief against Piramal Enterprises and Omkara including directions concerning the release of credit under the ECLGS. 69. According to Sri. Phanindra, the case of appellant No.3 before the learned Single Judge was, challenging the assignment of its loan to respondent No.7-Omkara as legally invalid and unsustainable, as the same has been effected without prior notice or intimation to the appellant and that the assignment in favour of respondent No.7-Omkara could not have been effected as appellant No.3's account was neither stressed nor declared as an NPA within the guidelines of RBI. According to him, in addition to challenging the assignment, appellant No.3 had also argued that the RBI was under an obligation to direct the Piramal Entities to re....
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.... Single Judge's order that its loan or loan account ought to have been classified as SMA-2 or at the very least as a default before any assignment could be effectuated, is clearly untenable as according to him, the respondents maintained that assignment is permissible for any stressed account as per RBI guidelines. The definition of stressed account includes both NPAs and SMA-0, SMA-1 and SMA-2. Thus, the classification of appellant's account as SMA-1 fully justified the assignment. In fact, Sri. Phanindra has laid stress on the fact that appellant No.3 has categorically admitted before the learned Single Judge that there is a default; hence the appellants cannot dispute the occurrence of default. His submission was, the assignment was carried out in strict compliance with the RBI directives which do not prescribe SMA-2 classification as prerequisite for assignment. He also stated that, the issue of whether the appellants/appellant No.3 are in default, is a matter of adjudication exclusively by NCLT under the IBC. The definition of 'default' under RBI regulations is aligned with the IBC and Sri. Ajesh's arguments are misplaced. He further stated, the RBI circular relied upon by the....
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....tled law which has been noted by the learned Single Judge in paragraph No.13 of the impugned order by referring to the judgment of the Supreme Court in the case of ICICI Bank Limited -Vs.- Official Liquidator of APS Star Industries Limited [(2020) 10 SCC 1]. Similarly he has referred to the case of Indiabulls Housing Finance Limited -Vs.- Deccan Chronicle Holdings Limited [(2018) 14 SCC 783] in paragraph No.14 of the impugned order, on a similar proposition. The same reads as under: "14. Yet another submission is made that the petitioner was not put on notice of such transfer of asset in favour of 7th respondent and that is in violation of principles of natural justice. This is again is unacceptable as the petitioner was notified on 27- 12-2022 that the assets would be transferred to the 7th respondent. The petitioner was made aware of such transfer and the silence of the petitioner was in vindication of such transfer from respondents 4 to 6 in favour of respondent No.7. The submission that the petitioner was not even made aware of this is contrary to the record, as the document appended to the statement of objections clearly indicates knowledge of the petitioner of such t....
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....eking the consent of the borrower. Such a transfer/assignment is recognized in the case of ICICI Bank Limited (supra), wherein the same has been upheld. 75. Insofar as the submission of Sri. Ajesh at (ii) to (v) above are concerned, one of the plea of Sri. Ajesh was relying upon the circular dated 21.03.2014. At the outset we may state that, the said circular was neither referred to nor relied upon by the appellants before the learned Single Judge. The same has been filed by the appellants in this Court along with the written submissions. Be that as it may, the said circular was issued with the subject matter of early recognition of financial distress, prompt steps for resolution and fair recovery for lenders; framework for revitalizing the stress asset in the economy. It was in that context the circular stipulated that the NBFC must take up with the borrower with a view to rectifying the deficiencies at the earliest that too only when the accounts are reported as SMA-1 or SMA-0 as the said circulars contemplate as soon as the account is reported as SMA-2 by one or more lending banks/notified NBFCs, the same will trigger the mandatory formation of joint lenders forum and formula....
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....egated fund based and non-fund based exposure of and over Rs. 5 Crores and also report the SMA status of their borrowers to CRILIC constituted by the RBI to collect, store and publish data of all borrowers' credit exposures. Accordingly, respondent No.5 has reported the list of accounts which have become NPA or SMA to respondent No.2 on 30.11.2022. In the said report, on 30.11.2022, the details of the account of the appellant No.3 are also disclosed at Sl.No.15, which we reproduce as under showing that the appellant's account was in default as it was classified as the SMA on 14.11.2022: "NBFC CRILC XBRL Publishing Reporting Institution Piramal Enterprises Limited Report Geerated on 31 Mar 2023 11:32:01 Reporting Friday 30-Nov-2022 Report Status Provisional Processing Status Completed Email Id [email protected] 78. Insofar as the plea of Sri. Ajesh at (vi) above is concerned, the learned Single Judge has, in paragraph No.16 of the impugned order, by referring to the judgment of this Court in the case of Nitesh Residency Hotels Private Limited -Vs.- Union of India [WP No.2004 of 2022, decided on 8-08-2022], has held as under, with....
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....as Appellate Authorities over the acts & deeds of the Bank and seek to correct them; even the doctrine of fairness/reasonableness does not convert the Writ Courts into appellate authorities over administrative decisions concerning the Banking business; unless the action of the Bank is apparently malafide, even a wrong decision taken by it cannot be interfered. (iv) It is not for the Court or a third party to substitute it's decision howsoever prudent or business like it may be, for the decision of the Bank; in commercial matters, the Courts do not risk their judgments for the judgments of the bodies to which that task is assigned; a Public Sector Bank or a Financial Institution cannot wait indefinitely to recover its dues; the fairness required of the Bank cannot be carried to the extent of disabling it from recovering what is due; in matters of loan transactions, fairness cannot be a one-way street; both the Bank & the borrower have to be equally fair to each other ..." As observed by the co-ordinate Bench, banking business is better left to bankers. This Court would not sit as a supervisor to banking activities between the lender and the borrower except in c....