IN THE HIGH COURT OF ANDHRA PRADESH

HON'BLE SRI JUSTICE V.V.S.RAO 

AND 

HON'BLE SRI JUSTICE G.KRISHNA MOHAN REDDY

WRIT PETITION NO.1315 OF 2012

31.01.2012

Head Note:- 

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 13(2) - Non Performing Asset - Right of the borrower  - The bank is bound to apply its mind and inform the borrower of its reasons as to why and how the account is classified 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 fulfilment of the obligation of the bank under Sections 13(2) and 13(3)(A) of the SARFAESI Act. 

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 13(2) - Non Performing Asset - Subsequent Payments - 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 if interest and principal are paid by the borrower in the 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 account would not be tenable, as jurisdictional fact under Section 13(2) of the SARFAESI Act would remain unsatisfied.

Counsel for Petitioners: Sri K.Mallikarjuna Rao

Counsel for Respondent: Sri B.Damodhar Reddy

ORDER: 

(Per the Hon'ble Sri Justice V.V.S.Rao)

A short question prone to recur often, arises for consideration in this Writ Petition filed against the demand notice dated 21.11.2011 issued under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereafter, the SARFAESI Act or the Act), by the authorised officer (Chief Manager) of Allahabad Bank, Hyderabad (hereafter the Bank). Being in the nature of a show cause notice, ordinarily a writ would not lie against such a notice issued in compliance with the statutory requirement. By impugned notice, the petitioners were called upon to discharge the entire liability to the tune of Rs.27,42,869.07 ps from the petitioners to the respondent-Bank. The possession notice to proceed further and the action as contemplated under the Act would follow only when the amount demanded is not paid. As such, the notice itself does not result in any consequence or causes prejudice to the petitioners to invoke the judicial review by this Court. But petitioners ventured to approach this Court raising an issue, which requires consideration in the background of the decision of the Supreme Court in Mardia Chemicals Ltd., v. Union of India1.

We will begin with the brief background facts. The second petitioner is a proprietary concern represented by its proprietor, the third petitioner herein. At his request, in the year 2010, the respondent sanctioned an amount of Rs.25,00,000/-, as a business loan. There was default in payment of loan instalments. The amount due mounted to Rs.27,43,000/-. The Bank, therefore, issued notice dated 21.11.2011 under Section 13 (2) of the Act. The petitioners submitted representation dated 06.12.2011 requesting for withdrawal of the demand notice. They contended that they are regular in making periodic payments; they are trying to establish their business; and that their signatures were obtained on blank papers. The petitioners would contend that without considering the representation made under Section 13(3A), the Bank cannot proceed with the further steps under the Act. They further contend that before this Court the classification of the petitioners' loan account as Non-Performing Asset (NPA) is not in accordance with the guidelines issued by the Reserve Bank of India (RBI).

The Chief Manager of the Bank in his counter affidavit denied the allegation that the representation under Section 13(3A) has not been considered. It is averred that the representation was considered and by communication dated 21.12.2011, the petitioners were informed. It is also stated that the reasons were communicated merely for the purpose of information/knowledge of the borrower without giving raise to any right to approach the Debts Recovery Tribunal (DRT) under Section 17 of the Act.

The counsel for the petitioners relies on Sravan Dall Mill P. Ltd., v. Central Bank of India2 in support of the submission that the consideration of the representation under Section 13 (3A) of the Act cannot be an empty formality and there should be proper application of mind. He also brought to the notice of this Court the decisions of Allahabad, Karnataka and Madras High Courts, which take a similar view. He, however, does not dispute or deny that the representation made by the petitioners was duly considered and the rejection was communicated by the respondent on 21.12.2011.

In furtherance of the reports of Narasimham Committee and Anadhyarujina Committees recommending bank sector reforms, Union of India enacted a special Legislation to regulate Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest empowering the banks to take possession of securities and to sell them without intervention of the Court. It is intended to provide fast track remedies to the banks, who play an important role in the Nation's economic development and growth. To begin with, the Legislation came into existence by way of an Ordinance, 2002, promulgated on 21.06.2002 enabling the banks to realise long-term assets and improve recovery by exercising those powers, which were hitherto unheard of. After Parliament enacted the Act, it faced stiff resistances. There was challenge to the Act in different High Courts after the promulgation of Ordinance as well as its enactment. All the cases were transferred to the Supreme Court. In Mardia Chemicals, the Supreme Court inter alia considered the question "whether the remedy available under Section 17 of the Act is illusory for the reason that it is available only after the action is taken under Section 13 (4) of the Act and appeal would be entertainable only on deposit of 75% of the claim raised in the notice of demand"? Having come to the conclusion that before the property (security asset) of the borrower is taken possession by the Bank, there should be at least one opportunity (other than a statutory remedy provided) before the bank itself to set right any lapse or inadvertence that may have occurred in the notice of demand, the apex court observed as under.

It is also true that till the stage of making of the demand and notice under Section 13(2) of the Act, no hearing can be claimed for by the borrower. But looking to the stringent nature of measures to be taken without intervention of Court with a bar to approach the Court or any other forum at that stage, it becomes only reasonable that the secured creditor must bear in mind the say of the borrower before such a process of recovery is initiated so as to demonstrate that the reply of the borrower to the notice under Section 13(2) of the Act has been considered applying mind to it. The reasons, howsoever brief they may be, for not accepting the objections, if raised in the reply, must be communicated to the borrower. True, presumption is in favour of validity of an enactment and a legislation may not be declared unconstitutional lightly more so, in the matters relating to fiscal and economic policies resorted to in the public interest, but while resorting to such legislation it would be necessary to see that the persons aggrieved get a fair deal at the hands of those who have been vested with the powers to enforce drastic steps to make recovery. (emphasis supplied)

In the summation of the findings in para-80 (1), it was further held as under.

Under sub-Section (2) of Section 13 it is incumbent upon the secured creditor to serve 60 days' notice before proceeding to take any of the measures as provided under sub-section (4) of Section 13 of the Act. After service of notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not accepting the objections, howsoever brief they may be, must be communicated to the borrower. In connection with this conclusion we have already held a discussion in the earlier part of the judgment. The reasons so communicated shall only be for the purposes of the information/knowledge of the borrower without giving rise to any right to approach the Debts Recovery Tribunal under Section 17 of the Act, at that stage. (emphasis supplied)

After the decision of the Supreme Court by the Enforcement of Security Interest and Recovery of debts Laws (Amendment) Act, 2004, the Parliament inserted sub-Section (3A) to Section 13. For ready reference, we quote hereunder sub-Sections (1) to (3A) to Section 13 of the Act. 13. Enforcement of Security Interest - (1) Notwithstanding anything 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 the 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 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.

(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within one week of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower:

Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.

(Sub-Sections (4) to (13) are not printed here as not relevant)

A plain reading of the above would show that sub-Section (1) enables a Bank (secured creditor) to enforce a security interest created it its favour without intervention of the Court. The procedure therefor is contained in sub- Sections (2) to (13). Section 13(2) requires the secured creditor to issue notice in writing calling upon the borrower to discharge the liability in full within 60 days, duly informing the borrower that the failure to do so would result in the secured creditor exercising the rights under sub-Section (4) i.e., taking possession, bringing the property to sale etc. Before doing so, sub- Section (3A) will have to be kept in mind only when a borrower makes representation or raises objection in relation to the notice of demand issued under Section 13 (2). Section 13(3A) gives an opportunity to the borrower to make a representation and cast a limited duty on the secured creditor to consider the representation and communicate brief reasons within one week for rejecting or not accepting the representation. As per the proviso thereto, the borrower shall have no right to approach the Debts Recovery Tribunal under Section 17 (1) because, the reasons communicated by the Bank/secured creditor does not confer any right.

What is the nature of consideration of the representation made by the borrower under Section 13(3A)? A Division Bench of this Court considered this aspect in Sravan Dall Mill. While observing that the objections raised by the borrower including one as to the classification as NPA should be considered properly, the Division held as under.

The right of the borrower to have a due consideration of objections is, therefore, an important right of the borrower where the bank is bound to apply its mind and inform the borrower of its reasons as to why and how the account is classified 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 fulfilment of the obligation of the bank under Sections 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 if interest and principal are paid by the borrower in the 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 account would not be tenable, as jurisdictional fact under Section 13(2) of the SARFAESI Act would remain unsatisfied.

The plain reading of the provision to Section 13 (3A), which was inserted after the judgment of the Supreme Court in Mardia Chemicals, would leave no doubt that if a borrower raised objections to any aspect after receiving notice of demand under Section 13 (2), the secured creditor/Bank is required to consider all objections. Indeed, the counsel for the petitioners and the Standing Counsel for the Bank do not dispute the legal position and therefore, it is not necessary to burden this brief order with the precedents. Be that as it is, in their representation dated 06.12.2011, the petitioners raised an objection only on the ground that they are trying to establish the business and that the secured asset is very valuable. They did not raise any objection as to the bank treating the petitioners' loan as NPA. For ready reference, we quote the representation. With reference to the Notice ref.No.SAROFA-223 dated 21.11.2011 we have to submit as follows:

You are aware that the loan was sanctioned in December 2010. You have obtained signatures on Blank Papers from us and you have not even issued a Sanction Letter. We have been making periodical payments in to the loan accounts.

Your notice does not show the payments made by us. You have also not even informed us as to the terms of sanction so as to enable us to adhere to the terms of sanction.

We are unable to understand as to how we have violated any terms of sanction. You have also not furnished statement of A/c in spite of our request several times. You are aware that the loan was availed less than a year ago. You are also aware that we are trying to establish our business and we require some more time to establish in the trading. You are also aware that the loan is secured by the property is very valuable. In view of the above we request you to drop further proceedings and accommodate us to develop our business. We assure you that we will pay any over due amount within a period of three months from today.

Yours faithfully, M/s.Amrutha Sai Traders.

In response thereto, the bank sent a communication dated 21.12.2011, which reads as under. This has reference to your letter No.NIL dated 06.12.2011, received by us on 19.12.2011. In this connection, we would like bring to your notice that as per our records you have acknowledged our sanction letters on 23.12.2009 and also on 30.12.2010 accepting the terms and conditions of sanction letters dated 23.12.2009 and 11.12.2010 respectively. Therefore, your allegation of obtaining signatures on blank papers and not issuing the sanction letters are summarily declined. We advice that you can obtain statement of accounts during working/business hours from our Kukatpally branch as per your convenience. Further we would inform you that your request to drop further proceedings can not be considered at this juncture as the account has become NPA as per the RBI guidelines and we have taken measures for recovery of bank's dues. Hence you are advised to repay the banks dues, otherwise bank is constrained to proceed further under the applicable law.

In the Writ Petition, however, the counsel vehemently contends that treating the petitioners' loan as NPA itself is contrary to the RBI Guidelines. We are afraid such objection cannot be raised in a Writ Petition filed against demand notice under Section 13 (2) of the Act. The bank was right in rejecting the application. Indeed, even while doing so, the bank informed that the petitioners' loan is NPA as per the RBI Guidelines. The Writ Petition is devoid of any merit and is liable to be dismissed. For the above reasons, the Writ Petition is dismissed without any order as to costs.

_______________ 

(V.V.S.RAO, J) 

_________________________________ 

(G.KRISHNA MOHAN REDDY, J) 

31st January 2012