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2019 (5) TMI 1948 - HC - Indian LawsClassification of account as Non-Performing Asset (NPA) - disbursing power sanction to a borrower can be altered/reduced or not - principles of natural justice in the form of an opportunity are required to be provided to the borrower - Position of cash credit or term loan - When can the disbursing power be altered/reduced and whether principles of natural justice in the form of an opportunity are required to be provided to the borrower before doing so? - HELD THAT:- 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 part of the borrower to adhere to these norms entitles the creditor to alter/reduce the disbursing power - due opportunity of hearing and explaining the factual position alongwith documentary proof is required to be given to the borrower to support his claim. The decision is based on the principle enunciated in audi alterm partem. The principles of natural justice are required to be followed when a quasi judicial body engages in determining disputes between the parties or administrative action is taken which involves civil consequences. Further, sub-section (2) of Section 13 of the SARFAESI Act provides for giving a notice by the secured creditor to the borrower in writing to discharge his liability to the secured creditor within 60 days from the date of notice failing which the provision has been made for entitling the secured creditor to exercise all or any of the rights under sub section (4) of Section 13 of the SARFAESI Act - In MARDIA CHEMICALS LTD. VERSUS UNION OF INDIA [2004 (4) TMI 294 - SUPREME COURT], the Supreme Court clearly emphasized the need of serving a notice upon the borrower under sub-section (2) of Section 13 of the SARFAESI Act so that an opportunity is provided to the borrower for explaining the reasons within sixty days for not initiating action under sub-section (4) of Section 13 of the SARFAESI Act. It was observed that the objective of the issuance of notice under Section 13(2) of the SARFAESI Act and providing an opportunity to the borrower was to ensure that there was fair consideration of some meaningful objection raised by the borrower, if any, before affecting his rights. It is concluded that in view of the principles of equity and natural justice, an opportunity is required to be provided to the borrower before the creditor modifies or reduces the disbursing power. Whether cash credit limit or term loan once declared NPA, can it be restored as standard account? - HELD THAT:- The Supreme Court in M/S SARDAR ASSOCIATES & ORS. VERSUS PUNJAB & SIND BANK & ORS. [2009 (7) TMI 1274 - SUPREME COURT] 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 issued by the Reserve Bank of India. Where the borrower expresses willingness for regularizing the loan account by discharging the arrears of interest and principal, the Bank/financial institutions are obligated to accept the same as per mandate expressed in the Master Circular dated 01.07.2015 issued by the Reserve Bank of India in exercise of powers under the 1949 Act and declare the account to be 'Standard' account. The action of the respondent is legally unsustainable. Undisputedly, the petitioner had availed cash credit facilities from the respondent Bank since 2007 against the company stock statements and book debts. Collateral security was given in terms of factory, land and building by the petitioner to fully secure the cash credit facility. The Bank was renewing the contract yearly. Suddenly on 27.6.2018, the Bank informed the petitioner that its account had been declared NPA by the statutory auditor and was directed to deposit the entire outstanding amount in the account. The reasons given by the Bank were that the company was incurring loss from its core activity for which the Bank had financed; the petitioner company was misusing the capital advanced to earn interests which was not directly related to the manufacturing activity of the company. The petitioner was not afforded any opportunity before reducing the disbursing power and declaring the account as NPA. Further, as per clauses 4.2.4 and 4.2.5 of the Master Circular dated 01.07.2015 issued by the RBI, the petitioner could remove the temporary deficiencies in the maintenance of account as standard and to upgrade the account so as to be out of NPA. The irresistible conclusion is that notice was required to be issued to the petitioner under the provisions of the SARFAESI Act by the Bank before declaring its account as NPA - Matter is remanded to the respondents to take a decision afresh in accordance with the guidelines issued by the Reserve Bank of India termed as RBI's prudential norms of income recognition, asset, classification and provisioning pertaining to advances after affording an opportunity to the petitioner - petition allowed by way of remand.
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