In ‘Holystar Natural Resources (P) Limited V. Union of India’ – 2014 (1) TMI 1639 - DELHI HIGH COURT the petitioners challenged Section 2(1)(o) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’ Act for short) and the RBI circular dated 01.07.2013 as violative of articles 14 and 19(1)(g) of the Constitution of India.
Section 2(1)(o) defines the term ‘Non performing asset’ as an asset or account of a borrower, which has been classified by a bank or financial institution as sub standard or doubtful loss asset-
- In case such bank or financial institution is administered or regulated by an 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 classifications issued by such authority or body;
- In any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank.
Clause 2.1.RBI guidelines dated 01.07.2013 defines the non performing assets. Clause 4.1 provides for categories of non performing assets as substandard assets, doubtful assets and loss assets.
The petitioners submitted the following:
- Section 2(1)(o) of the Act was violative of article 19(1)(g) of the Constitution of India as it gave uncontrolled and arbitrary power in the hands of financial institution/RBI to declare any entity as an NPA;
- Under the SARFAESI Act, the borrower had a very limited right to question the proceedings and the consequences provided in the Act were drastic;
- By empowering the banks/financial institutions/RBI to determine what NPA is there had been a disastrous effect on business, profession and trade of the borrowers;
- RBI guidelines were contrary to Section 2(1)(o) of the Act;
- RBI guidelines defined sub standard asset as an asset which had remained non performing asset for a period of less than or equal to 12 months. In other words, it was entirely left to the whim and fancy of the banks/financial institutions/RBI as to whether they wanted to declare an account to be an NPA when it had become a sub standard or doubtful or loss asset;
- No guideline had been laid or prescribed according to which the bank/financial institution had to decide whether an account is sub standard or not;
- Uncanalized/uncontrolled/arbitrary power to the banks/financial institutions to decide whether an NPA became a sub standard asset one day post becoming NPA or 12 months from the said period;
- Under the guidelines of RBI an account could become an NPA even without becoming a sub standard asset;
The Government submitted the following:
- In order to reflect a bank’s financial health in its balance sheet RBI had introduced in a phased manner prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks;
- The SARFAESI Act was introduced in the year 2002 and amended from time to time. The whole concept of classification an account as an NPA was further clarified;
- Amendment in Section 2(1)(o) of the Act to empower the concerned regulator who was administering or regulating such an entity to lay down classification norms for an NPA.
- The Parliament had not delegated any essential legislative function to RBI under Section 2 (1)(o) of the Act;
- Madras High Court in ‘Signal Apparels (P) Limited V. Canara Bank’ held that Section 2 (1)(o) of the Act as well as RBI guidelines were not arbitrary or unreasonable in declaring the assets of the defaulter as NPA;
- The present writ petitions were not maintainable as the petitioners had an alternative remedy of filing applications under Section 17(1) of the Act to challenge the notices issued under Section 13(4) by the respective banks/financial institutions within a period of 45 days from the date on which measures under Section 13(4) had been taken.
The High Court framed the question – Whether Section 2(1)(o) of the Act and the RBI circular dated 01.07.2013 are violative of Articles 14 and 19(1)(g) of the Constitution of India?. The High Court relied on the following judgments:
The High Court observed that it is trite that presumption is always in favor of the Constitutionality of an enactment. In the first case the Supreme Court framed the following guidelines in this regard:
- The presumption is always in favor of the constitutionality of an enactment since it must be assumed that the Legislature understands and correctly appreciates the needs of its own people, that the experience and its discriminations are based on adequate grounds;
- The presumption may be rebutted in certain cases by showing that on the face of the statute, there is no classification at all and no difference peculiar to any individual or class and not applicable to any individual or class and not applicable to any other individual or class and yet the law hits only a particular individual or class;
- The principle of equality does not mean that every law must have universal application for all persons who are not by nature, attainment or circumstances in the same position and the varying needs of different classes of persons often require separate treatment;
- The principle does not take away from the State the power of classifying persons for legitimate purposes;
- Every classification is in some degree likely to produce some inequality and mere production of inequality is not enough;
- If a law deals equally with members of a well defined class, it is not obnoxious and it is not open to the charge of denial of equal protection on the ground that it has no application to other person;
- While reasonable classification is permissible, such classification must be based upon some real and substantial distinction bearing a reasonable and just relation to the object sought to be attained and the classification cannot be made arbitrary and without any substantial basis.
The High Court observed that the apex court in the above cited judgment has laid down the guidelines when the classification is not discriminatory when equality can be claimed and how a classification becomes arbitrary.
In the second case the Supreme Court held that there is always a presumption in favor of constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a clear violation of the constitutional principles. The Court must presume that the Legislature understands and correctly appreciate the claim of the people that its laws are directed against the problems made manifestly by experiences and that its discriminations are based on adequate grounds. It must be borne in mind that the Legislature is free to recognize degrees of harm and may confine its restrictions to those cases where need is deemed to be cleared and finally that in order to sustain the presumption of constitutionality, the court may take into consideration the matters of common knowledge, matters of rapport, history of the times and may assume every set of facts which can be conceived to be existing at the time of legislation.
In the third case law the Supreme Court held that the rule ‘there is always a presumption in favor of the constitutionality of a statute’ is based on the assumption judicially recognized and accepted that the Legislature understands and correctly appreciate the needs of its own people, its laws are directed to problems made manifest by experience.
The High Court also relied on the judgment in ‘Mardia Chemicals Limited V. Union of India’ – 2004 (4) TMI 294 - SUPREME COURT OF INDIA in which the Supreme Court held that declaring an asset as NPA is not based on the whims and fancies of bank and financial institutions but basing on the guidelines issued by the Reserve bank of India and upheld the provisions and guidelines.
The High Court held that the Supreme Court’s judgment in ‘Mardia Chemicals Limited’ (supra) provides complete answer to the contention of the petitioners. In this case the petitioner could not place any convincing material to show that Section 2(1)(o) of the Act and the RBI Guidelines dated 01.07.2013 are unreasonable, arbitrary or otherwise repugnant to the Constitutional principle. The High Court further held that the petitioners are not able to rebut the presumption of constitutionality of Section 2(1)(o) of the Act and the RBI guidelines in question.
Thus there is always a presumption in favor of constitutionality of an enactment and the burden is upon the person who attacks it to show that there has been a clear violation of the constitutional principles.
