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TMI Blog2019 (5) TMI 1948X X X X Extracts X X X X X X X X Extracts X X X X ..... her, 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 making repayments against the sanctioned credit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account of the petitioner as NPA. It was urged tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 of secured debts by the borrower. Provided that - (i) The requirement of classification of secured debt as non-performing asset under this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 detail procedure for the said purpose. Sub section (1) of Section 13 provides for enforcement of security interest credited in favour of the secured creditor without intervention of the Court or Tribunal in accordance with the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 part of the borrower to adhere to these norms entitles the creditor to alter/reduce the disbursing power. The question is whether before altering or reducing the disbursing power given to the borrower by the Bank, notice is required to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven 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, before he was called upon to make his defence. "Adam'' says God, "where art thou has thou not eaten of the tree whereof I commanded thee that though should not eat''. 12. Since then the principle has been chiselled, honed and refined, enriching its con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 classification is akin to the requirement of the principles of natural justice, which according to the Supreme Court in Smt. Maneka Gandhi v. Union of India and Anr. : [1978]2 SCR 621 must be read and followed even if the provision is silent to that regard. The respondent being a Public Sector Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (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. (2) Without prejudice to the generality of the power vested in the Reserve Bank under sub- section (1) the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to- (a) the purposes for which advances may or may not be made, (b) the margins to be maintained in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 issued by the Reserve Bank of India. 18. The Master Circular - Prudential Norms on Income Recognition, Asset, Classification and provisioning pertaining to Advances dated 01.07.2015 has been issued by the Reserve Bank of India in exercise of its powers under Sections 21 and 35A of the Banking Regulation Act, 1949 to all commercial banks which provides for the manner in which a loan account is to be declared NPA, recovery and the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. 4.1.2 Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full, - on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rawings 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. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory. ii) Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Reserve Bank, the entire provisioning is required to be made at once. In addition, Reserve Bank of India may also initiate appropriate supervisory action where there has been a delay by the bank in reporting a fraud, or provisioning there against. 19. Clause 2.1 of RBI guidelines Master Circular deals with Non- Performing Assets and it inter alia provides that an asset including a leased asset becomes non performing when it ceases to generate income for the Bank. A non performing asset is a loan or an advance where interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan or the account remains out of order in respect of an overdraft/cash credit. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andled 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 recovery on account of erosion in the value of security or non availability of security and existence of other factors such as frauds committed by borrowers, it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent 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. 20. From the aforesaid, it clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssified 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 section 13(2) and 13(3)(A) of the SARFAESI Act. It also cannot be disputed that even assuming that particular had become NPA, the subsequent payments by the borrower entitled a borrower to upgrade the said account and may come out of the said classification of his account as NPA. Therefore, it is incorrect to presume that once an NPA is always an NPA and it is precisely for the said reason that the clause 4.2.4 of the prudential norms specifically states that interest and principal are paid by the borrower in case of loans classified as NPA, the said account should no longer be treated as NPA and may be classified as sub standard account. Consequently, therefore, the action under the SARFAESI Act with regard to the said accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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