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2015 (5) TMI 763 - ALLAHABAD HIGH COURT

2015 (5) TMI 763 - ALLAHABAD HIGH COURT - TMI - Default in repayment of dues - Account classified as NPA - Notice for possession of property under Section 13(4) of the Act read with Rule 8 and 9 of the Security Interest (Enforcement) Rules, 2002 - Writ jurisdiction in case of Alternate remedy - Three clear-cut circumstances wherein a writ petition would be maintainable even in a contractual matter. Firstly, if the action of the respondent is illegal and without jurisdiction, secondly, if the pri .....

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espondent-Bank in rejecting the petitioners' objection was per se arbitrary and illegal.

Held that:- In the light of the rival stand submitted by the parties, we first take up the plea of alternative remedy. The respondent-Bank has relied upon a decision of the Supreme Court in United Bank of India Vs. Satyawati Tondon and others [2010 (7) TMI 829 - SUPREME COURT ]. No doubt the petitioners has a remedy of filing an application under Section 17(1) of the Act. However, the jurisdiction .....

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Vs. Registrar of Trade Marks, Mumbai and others, [1998 (10) TMI 510 - SUPREME COURT] wherein this Court has held that there are three clear-cut circumstances wherein a writ petition would be maintainable even in a contractual matter. Firstly, if the action of the respondent is illegal and without jurisdiction, secondly, if the principles of natural justice have been violated, and thirdly, if the appellants' fundamental rights have been violated." The Supreme Court in Harbanslal Sahnia and anothe .....

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oresaid decisions, we are of the opinion that at present moment only a notice under Section 13(4) of the Act has been initiated. No action on it had been taken by the respondents and, therefore, at this stage the petitioners cannot avail the remedy of an appeal under Section 17 of the Act. It is only when an action is taken under Section 13(4) of the Act the cause of action arises for the petitioners to file an appeal under Section 17 of the Act. In any case, we are of the opinion that consideri .....

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ebt and his account in respect of such debt, is classified as NPA. Unless and until the account is declared as NPA, no notice under Section 13(2) of the Act could be issued, even if there is a default. Sub-section (3A) of Section 13 of the Act gives an opportunity for the borrower to make any representation or raise any objection to the said notice, which in turn is required to be considered and decided by the secured creditor. Sub-section (4) of Section 13 of the Act provides the secured credit .....

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corrects the deficiency then the substandard asset would be upgraded to a standard account as per para 4.2.5 of the RBI guidelines, which provides that if arrears of interest and principal is paid by the borrower, the account would no longer be treated as non-performing and would be classified as a standard account. In this regard, the Court further finds from a reading of para 4.2.4 of the guidelines that the classification of an account as NPA must be done by Bank based on the record of recove .....

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at the temporary deficiency in the petitioners' cash credit account was cured and the petitioners had brought its account within the cash credit limit in January, 2015. The RBI guidelines provides ninety days time to the petitioners to clear the deficiency, that is, till 31.03.2015 and the same was cleared by the petitioners in January, 2015 itself. The respondent-Bank should have upgraded the petitioners' account again as a standard account, which was not done and consequently the rejection of .....

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ng and, it is not a case where the business has stopped running or where the business is running in a loss. No doubt the respondent-Bank is required to protect the loan which it had sanctioned but, at the same time, the respondent-Bank should adopt a practical and pragmatic approach for which the RBI has framed guidelines which are binding upon them and which are required to be followed meticulously. In the instant case, we find the respondent-Bank has failed to adhere to the terms indicated in .....

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e and style of Umrrao Jewels which was subsequently changed to Aum Jewels. The petitioners were having business relationship with the respondent-Vijaya Bank since 2006. The petitioners applied for cash credit facility. The Bank vide its letter dated 31.01.2011 sanctioned a sum of ₹ 550.00 lakhs as cash credit facility for a period of one year, which was to be renewed on a year to year basis. While sanctioning the cash credit limit, the stocks of gold and diamond jewellery were hypothecated .....

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n 19.03.2012, the petitioners sought renewal of the cash credit limit for the financial year 2012-13. Another application on 18.06.2012 followed by an application dated 17.11.2012 was moved for conversion of part of cash credit limit to a term loan. It is alleged that the Bank was not happy with the builders agreement and insisted that a tripartite agreement should be executed. Accordingly, a tripartite agreement dated 08.03.2013 was executed between the petitioners, respondent-Bank and the buil .....

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owards Working Capital Demand Loan (hereinafter referred to as WCDL). According to the petitioners, this WCDL loan was to be paid in five years. Security for the aforesaid cash credit limit and WCDL was the same, namely, hypothecation of stocks of gold, diamond, gold and diamond jewellery, assignment of book debts/receivables and collateral security of the land situate at Allahabad. In addition to the aforesaid, a guarantee was also given by the petitioners as guarantors. The aforesaid cash cred .....

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377; 10.00 lakhs every month. The Court finds that on account of negotiation and financial performance by the petitioners, the cash credit limit was extended by the respondent-Bank till 28.10.2014. The petitioners contend that for the reasons best known to the respondent-Bank they became hostile and vindictive. The petitioners by way of example contended that petitioner no.1 took a term loan of ₹ 4.5 lakhs by pledging LIC policies and, after clearing the loan the Bank did not return the LI .....

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struction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the Act) demanding a sum of ₹ 5,58,59,198.04 alleging that the petitioners had committed a default in payment of principal, interest and other monies and that the operation and conducting of the account had become irregular and that the account of the petitioners had been classified by the Bank as a Non-Performing Asset (NPA). By the said notice, the respondent-Bank gave notice to the p .....

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lassified as NPA. The respondent-Bank, after considering the objection of the petitioners, rejected the same by an order dated 07.03.2015 alleging that the petitioners never adhered to the terms and conditions of the cash credit facility and the same was unsatisfactory. The respondent-Bank contended that the cash credit facility account had become irregular as on 31.12.2014 and subsequent deposit after 31.12.2014 could not regularise the account. The respondent-Bank contended that the classifica .....

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Interest (Enforcement) Rules, 2002. The notice was also published in a Hindi newspaper on 18.03.2015. It is also alleged that a possession notice at the site of the property situate at Allahabad was also pasted. The petitioners, being aggrieved by the action of the respondents, have filed the present writ petition. We have heard Sri A.D.Saunders along with Sri Rakesh Bagga, the learned counsels for the petitioners and Sri G.K.Srivastava, the learned counsel for the respondent-Bank. Sri Saunders .....

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, as per the RBI guidelines the account should have been regularised and upgraded as a "standard account". The refusal by the respondent-Bank to regularise the account on the strength that the subsequent payment would not cure the illegality was wholly arbitrary and against the guidelines. The learned counsel further contended that the petitioners had never exceeded the cash credit limit in all these years and had paid the interest without any demur. The petitioners for the first time .....

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ing the objection of the petitioners and further committed an error in issuing the notice under Section 13(4) of the Act. The learned counsel also submitted that the action of the respondents in proceeding to recover the amount from the collateral security was wholly arbitrary when the amount was secured by the primary security of the hypothecation of the stocks, namely, gold and jewellery. The respondents without touching the primary security had proceeded to recover the amount from the collate .....

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e the account was classified as a NPA, a valid notice under Section 13(2) of the Act was issued. The objection raised by the petitioners, being untenable was rejected and thereafter a notice under Section 13(4) of the Act was issued. The learned counsel further submitted that any deposit made by the petitioners after 31.12.2014 was done at the petitioners' own risk and peril, which would not cure the irregularity and would not make the NPA account as a "standard account". Sri Sriva .....

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s during the same period the total sum of ₹ 9,75,500.00 was credited in this account. Thus, as on 31.12.2014 an amount of ₹ 8,97,371.04 had remained unpaid and since this outstanding amount was not cleared within ninety days, therefore, as per RBI guidelines the account was classified as NPA, on the basis of which a notice under Section 13(2) of the Act was issued. The learned counsel also referred to paragraph 7 of the affidavit contending that as per para 2.2 of the master circular .....

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edy of filing an application under Section 17(1) of the Act. However, the jurisdiction of the High Court under Article 226 of the Constitution of India is not ousted merely because an appeal is provided under Section 17 of the Act. The power under Article 226 of the Constitution is wide and for the exercise of such power there is no restriction except the territorial restriction. However, the exercise of the writ jurisdiction is discretionary. Ordinarily, the Court does not entertain the matter .....

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the enforcement of any of the Fundamental Rights contained in Part III of the Constitution but also for "any other purpose." 15. Under Article 226 of the Constitution, the High Court, having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. But the High Court has imposed upon itself certain restrictions one of which is that if an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. .....

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e would rely on some old decisions of the evolutionary era of the constitutional law as they still hold the filed." Similarly the Supreme Court in Popcorn Entertainment and another Vs. City Industrial Development Corpn. and another, (2007) 9 SCC 593 held as under: "22. He invited our attention to Whirlpool Corpn. Case, (1998) 8 SCC 1 wherein this Court has held that there are three clear-cut circumstances wherein a writ petition would be maintainable even in a contractual matter. First .....

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The writ court has the jurisdiction to entertain a writ petition and there is no bar for entertaining a writ petition even if it involves some disputed questions of fact. The Supreme Court in Harbanslal Sahnia and another Vs. Indian Oil Corpn. And others, (2003) 2 SCC 107, held that the petitioners' dealership, which is their bread and butter, cannot be terminated for irrelevant and non-existent cause. The Supreme Court held that the petitioners should not be relegated to the rule of altern .....

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edings were wholly without jurisdiction or where the vires of an Act was challenged. In the light of the aforesaid decisions, we are of the opinion that at present moment only a notice under Section 13(4) of the Act has been initiated. No action on it had been taken by the respondents and, therefore, at this stage the petitioners cannot avail the remedy of an appeal under Section 17 of the Act. It is only when an action is taken under Section 13(4) of the Act the cause of action arises for the p .....

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tly, we are of the opinion that it is a fit case in the given circumstances where appropriate direction should be issued to the respondents. Hence, the preliminary objection raised by the learned counsel for the respondent-Bank is rejected. From a perusal of the notice issued under Section 13(2) of the Act, we find that the petitioners' account has been classified as NPA. At this stage, it may be pointed out that there was no default in the petitioners' WCDL account. The interest is bein .....

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jointly classified as NPA. On the basis of the notice under Section 13(2) of the Act read with paragraph 5 of the Counter Affidavit and paragraph 7 of the affidavit of the Bank, the only reason for the cash credit account being made irregular and thereafter being classified as a NPA is that this account was overdrawn by ₹ 8,97,371.04 as on 31.12.2014 and that between 30.09.2014 to 31.12.2014 total interest payable was ₹ 14,19,176.00, whereas the total credit during this period was &# .....

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account in respect of such debt is classified by the secured creditor as a 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) of Section 13 of the Act. From the aforesaid, it is clear that a notice can only be issued if a borrower commits def .....

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of the Act provides the secured creditor to adopt any of the measures for recovery of the secured debt. Default has been defined under Section 2(j) of the Act. For facility, the said provision is extracted hereunder: "(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 secure .....

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assifications issued by such authority or body; (b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank." The classification of the NPA as per the aforesaid meaning has to be in accordance with the directions or guidelines relating to the asset classification issued by the RBI. In this regard, RBI has issued a master circular known as "Master Circular-Prudential Norms on Income Recognition, Asset Classificatio .....

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ect of a term loan, ii. the account remains 'out of order' as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops, vi. the am .....

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he interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. 2.1.4 In addition, an account may also be classified as NPA in terms of paragraph 4.2.4 of this Master Circular." Para 2.2 provides as to when an account should be treated out of order, which is extracted hereunder: "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 sancti .....

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ould be treated as NPA. Para 2.2 provides that an account would be treated as out of order if the outstanding balance remains continuously in excess of the sanctioned limit or where the outstanding balance in the account is less than the sanctioned limit/drawing power and there are no credit continuously for ninety days or credits are not enough to cover the interest debited during the same period . If any of the contingencies are existing, the account will be treated out of order. Para 2.1.3 pr .....

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arch 31,2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardies the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected." Paragraph 4.2 provides guidelines for classification of assets. Classification of assets into above categories should be done after taking into account th .....

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statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc." Paragraph 4.2.5 provides for upgradation of loan accounts classified as NPAs, which is extracted hereunder: "If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as 'standard' accounts. With r .....

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s will sustain some loss, if deficiencies are not corrected, meaning thereby that if the borrower corrects the deficiency then the substandard asset would be upgraded to a standard account as per para 4.2.5 of the RBI guidelines, which provides that if arrears of interest and principal is paid by the borrower, the account would no longer be treated as non-performing and would be classified as a standard account. In this regard, the Court further finds from a reading of para 4.2.4 of the guidelin .....

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overdrawn by ₹ 8,97,371.04 as on 31.12.2014 and that the outstanding balance remained continuously in excess of the sanctioned limit continuously for ninety days without there being any credit in the said account. The respondent-Bank has filed the statement of account, which shows that on 30.09.2014 the petitioners had exceeded the cash credit limit by ₹ 4.53 lakhs, which came down to the prescribed limit on 29.10.2014 by deposit of ₹ 6,76,000.00. However, from 31.10.2014 to 3 .....

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at the outstanding balance remained continuously in excess of the sanctioned limit for ninety days. It is also incorrect to state that there was no credit during this period. We find that from September, 2014 to December, 2014 the petitioners had deposited a sum of ₹ 6,76,000.00 on 29.10.2014 and ₹ 2,99,500.00 on 29.12.2014. We also find from a reading of paragraph 2.1.3 that the account can only be classified as a NPA, if the interest due and charged during any quarter is not servic .....

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the guidelines could not be invoked on 01.01.2015 by the Bank nor could be the petitioners' account be declared as NPA on 31.12.2014 merely on the ground that the petitioners had overdrawn ₹ 8,97,371.04 in excess of the cash credit limit. We are of the opinion that the petitioners were required to pay this amount of ₹ 8,97,371.04 within ninety days from the end of the quarter i.e. till 31.03.2015. We also find that prior to 30.09.2014 the petitioners never exceeded the cash cred .....

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the overdrawn amount in cash credit account was cured and the deficiency was removed in January, 2015. This is reflected in the petitioners' reply to the notice under Section 13(2) of the Act. The Bank acknowledges the removal of the deficiency while rejecting the petitioners' reply under Section 13(2) contending that subsequent deposit made by the petitioners could not cure the deficiency nor such deposit could allow the Bank to recall its order classifying the petitioners' account .....

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l action taken by the Bank classifying the petitioners' account as NPA was wholly invalid, illegal and against the guidelines issued by the RBI, which has the force of law and which is binding upon the Bank. We further find that the temporary deficiency in the petitioners' cash credit account was cured and the petitioners had brought its account within the cash credit limit in January, 2015. The RBI guidelines provides ninety days time to the petitioners to clear the deficiency, that is, .....

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