* THE HON’BLE SRI JUSTICE GHULAM MOHAMMED AND THE HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO +W.P.No.23741 OF 2007 %Dated 31.12.2009 # Badugu Vijayalakshmi, Prakasam District. ..... Applicant VERSUS $ Authorised Officer and Chief Manager, State Bank of India, Chirala Branch and another. ...RESPONDENTS ! Counsel for the petitioner : Sri G. Vidya Sagar ^ Counsel for the Respondents : Sri M. Narender Reddy < GIST: > HEAD NOTE: ? Cases referred: 1. (2003) 3 SCC 309 2. AIR 1996 SC 550 3. (2003) 2 SCC 26 4. (1989) 4 SCC 155 : AIR 1989 SC 1988 THE HON’BLE SRI JUSTICE GHULAM MOHAMMED AND THE HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO W.P.NO. 23741 OF 2007 ORDER: Per the Hon'ble Sri Justice Nooty Ramamohana Rao This writ petition has been instituted questioning the validity of the action taken by the respondent – State Bank of India, in putting a commercial complex owned by the writ petitioner to auction. The case of the writ petitioner is that he availed certain credit facilities from the respondent – Bank, one is term loan and the other cash credit loan during the year 2004. He has created collateral security over his commercial complex building bearing Old Door No. 20-85, New Door No. 301/3, Block No. 7, T.S. Ward – 3, Chirala town. Though he has paid certain instalments, it is admitted by the petitioner that there was default committed in the matter of repayment of the instalments regularly to the bank. The bank therefore invoked the provision under sub-section (2) of Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for short `the Act’ henceforth. He was called upon to liquidate the liability of Rs.26,23,999.10 ps outstanding as of 31.3.2005 within 60 days from the date of the said notice. However, by 18.8.2006, the writ petitioner has paid in all a sum of Rs.27,96,000/- to the respondent – Bank. He was still found due as of 18.8.2006, in a sum of little more than Rs.2.27 lakhs. The case of the petitioner is that he has approached the bank to liquidate this reminder of the liability also, but, however, the bank insisted for payment of another Rs.2 lakhs towards the securitisation expenses incurred by it. While the matter stood thus, the impugned notice has been got published on 21.10.2007 inviting sealed bids for the sale of the secured asset through tender notice No. 1 of 2007. It is this notice which is called in question in this writ petition. It is contended by Sri G.Vidya Sagar, learned counsel for the writ petitioner that the tender notice which has been published as of 21.10.2007 inviting bids has not bothered to verify as to whether the account has become a non performing asset or not in terms of Section 2(o) of the Act. Secondly, the power has been improperly and unjustly invoked indicating the liability of Rs.26,23,999.10 ps as of 1.4.2005 whereas the petitioner has paid of as much as Rs.27.96 lakhs by 18.8.2007 and hence the proposed auction is the result of non application of mind to the relevant factors. It was also contended that the bank has no authority to reject to receive the balance outstanding amount from a borrower until and unless the securitisation expenses are also paid up simultaneously. It is contended that the securitisation expenses have got to be rationally worked out taking into account, the expenses already booked to his account and any irrational demand of securitisation expenses is an unjust act warranting interference by this court. Respondent – Bank has resisted the above writ petition by filing a counter affidavit sworn to by the Manager of Chirala Branch of the Bank. It is stated in paragraph (4) of the affidavit that the petitioner as the Proprietrix of M/s. Vishnupriya Bar and Restaurant had availed cash credit facility of Rs.5 lakhs and a term loan facility of Rs.19,64,000/- and executed the security documents in that regard on 28.6.2004. She has also created equitable mortgage over her immoveable property, the one that is described by the writ petitioner and that the petitioner has committed default in repaying the debts and hence notice under Section 13(2) of the Act was issued as on 5.10.2005 calling upon the petitioner to pay sum of Rs.26,23,999.10 ps and though the writ petitioner has paid substantial amounts thereafter, his liability was outstanding as of 20.11.2007 was Rs.2,96,684/- together with costs of Rs.1,90,000/- towards securitisation expenses, as claimed by M/s. Sisir and Ravi Associates, Visakhapatnam, the Recovery agent. Sri Narender Reddy, learned counsel for the respondent Bank was fair enough in stating that the impugned tender notice which was issued as of 21.10.2007 ought not to have mentioned the liability as Rs.26,23,999.10 and instead it should have reflected the correct amount of liability as of that date. However, what the learned Standing Counsel for the respondent Bank would urge is, in terms of sub-section (7) of Section 13 read with Rule 4 of the Security Interest (Enforcement) Rules, 2002, and the guidelines issued by the Reserve Bank of India on the subject, the respondent – Bank is legitimate and justified in demanding a sum of Rs.1,90,000/- from the petitioner towards securitisation expenses. It was further stated by the Bank that pursuant to the interim directions granted by this court on 7.11.2007, the writ petitioner has also paid a further amount of Rs. One lakh. Pursuant to our further directions issued on 13.10.2009, the writ petitioner has since deposited a further sum of Rs.2,11,000/- to the respondent Bank. Thus, the outstanding liability of Rs.2.96 lakhs was also cleared and an additional sum of Rs.15,000/- to cover the securitisation expenses, was also paid. The only question of importance that is needed to be decided in this writ petition is relating to the quantum of securitisation expenses which the financial institutions are entitled to recover from the borrowers in terms of the provisions contained in the Act. The Act has been ushered in for the purpose of regulating securitisation and reconstruction of financial assets and for enforcing the security interests of the banks and financial institutions. Section 13 of the Act exhaustively dealt with the manner in which the security interest can be enforced by the banks and financial institutions. Sub-section (1) of Section 13, which is couched in very broad language, has conferred wide powers in favour of secured creditors enabling them to enforce any security interest created in their favour, without intervention of any court or tribunal. Sub-section (2) requires the secured creditor to demand the borrower whose debt or account has been classified as a non performing asset to discharge the entire liability within 60 days from the date of the notice, failing which the secured creditor is entitled to exercise all or any of his rights. It is therefore absolutely fundamental that a secured creditor before proceeding any further has to necessarily ensure that the account in respect of the debt concerned is classified as a non performing asset. The expression `non performing asset’ has been defined in Section 2(o) in the following manner: “2(o) `non-performing asset’ 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, - (a) in case such bank or financial institution is administered or regulated by any 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; (b) in any other case, in accordance with the directions or guidelines relating to assets classification issued by the Reserve Bank; The guidelines relating to `assets classification’ issued by the Reserve Bank of India were also required to be followed by the secured creditor. It is, therefore, inevitable for any secured creditor to faithfully adopt and follow the guidelines issued on classification of assets issued by the Reserve Bank of India from time to time before action contemplated by sub-section (2) of Section 13 is initiated. Failure to do so would vitiate action initiated under sub-section (2) of Section 13 of the Act. Equally important to notice is the follow up action. Sub-section (3) enabled any such borrower, to whom a notice under sub-section (2) has been delivered, to raise any objection with regard to the proposed action and such objections have got to be considered by the secured creditor and only if the secured creditor comes to the conclusion that the objections raised by the borrower are not acceptable or tenable, he was required to communicate within one week of receipt of such representation or objection, the reasons for non acceptance thereof. Thus, a safety mechanism has been built in for ensuring a recheck of the entire fact situation prevailing on record. Sub-section (4) of Section 13 enabled recourse to the measures indicated therein to be adopted by the secured creditor. In the instant case, the impugned tender notification is the one, indicating the action taken by the respondent – Bank under Clause (a) of sub-section (4) of Section 13. After the notice under sub-section (2) of Section 13 was delivered on the writ petitioner, the writ petitioner has in fact cleared substantial portion of the debt. He has in fact paid more money Rs.27.96 lakhs, than Rs.26,23,999.10 ps, claimed as due in the notice issued under sub-section (2) of Section 13. When once a borrower pays up in full the liability, as demanded by the Notice, the follow up action under sub-section (4) should not have been taken up at all. It would have been a different matter if the bank has initiated recourse to any of the measures indicated under sub-section (4), immediately after the expiry of 60 days period after service of the notice, during which period the borrower continued to be a defaulter. But, wherever the secured creditor has held on to his patience and he is allowing the borrower to liquidate his liability at one go or in number of instalments, it is obligatory for the secured creditor to verify as to whether the liability indicated in the notice served under sub-section (2) of Section 13 is still outstanding or is liquidated already before the follow up measures are initiated. If the amount of liability indicated in the notice served under sub-section (2) of Section 13 is liquidated by the borrower, then recourse to any of the measures contemplated by sub-section (4) of Section 13 are impermissible to be undertaken. It would be a different matter that the liability of the borrower may not have stopped accruing during the post sub-section (2) of Section 13 notice period. The liability keeps swelling with passage of time, to the extent it is subsisting and outstanding. Consequently, it is quite possible that the liability of a borrower would have further increased by the time measures contemplated by sub-section (4) are taken up by the secured creditor. Clearly, the secured creditor without once again following the procedure contemplated by sub-section (2) cannot jump the queue and invoke the provisions contemplated by sub-section (4) of Section 13. It is too well known a legal principle that those who take the sword shall perish by it. If a statute has provided for a particular procedure for performing an act, it shall be done in the same manner or it shall not be allowed to be done at all. See Taylor v. Taylor – (1876) 1 Ch.D 426 – wherein it is held that “where a power is given to do a certain thing, the thing must be done in that way or not at all, and that other methods of performance are necessarily forbidden. The principle behind this rule is that if this were not so, the statutory provision might as well not have been enacted at all. Therefore, we have no hesitation to hold that the respondent Bank has exceeded its power in publishing the impugned notice. Sub-section (7) of Section 13 enabled all costs, charges and expenses incurred properly by the secured creditor to be recovered from the borrower. Since, it will have a bearing upon the controversy at issue, we prefer to quote it: 13. Enforcement of security interest. – (7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. A mere look at the provision contained under sub-section (7) would indicate that all such costs, charges and expenses which have been properly incurred by the secured creditor and any other expenses incidental thereto to be recovered from the borrower. It is not very difficult to assume that the various measures contemplated by sub-section (4) of Section 13 do not necessarily lead to sale of the secured asset at the very first instance. The possession of the secured asset can be taken over and the right therein can also be transferred by way of lease, assignment or by sale and further the management of the business of the borrower can be taken over with similar rights aforementioned. It is also possible for the secured creditor to appoint any person as a Manager for the purpose of managing the secured asset. Further, the secured creditor, upon taking over the possession of the secured asset, will have to protect and preserve it and, if necessary maintain it. Therefore, the secured creditor can incur, in a variety of ways, several expenses. Such expenses must be properly incurred. The crucial expression used by the legislature, therefore, is “properly incurred”. In other words, if the expenses are not properly incurred, they are not liable to be recovered from the borrower. The word “proper” has fallen for consideration before the Supreme Court in Mithilesh Singh v. Union of India and others[1] and it was held: “The expression “proper” means appropriate, in the required manner, fit, suitable, apt. The mere making of a request of leave, which has not been accepted, is not a proper intimation. It cannot be said that the word is a surplusage. The intention of the legislature is primarily to be gathered from the language used, and as a consequence a construction, which results in rejection of the words as meaningless has to be avoided.” It is therefore clear that the expenses must be incurred by the secured creditor by applying the standard of a prudent and reasonable person. Learned counsel for the writ petitioner Sri Vidya Sagar, is right in drawing our attention to the statement of account of the writ petitioner filed at pages 20-22 of the paper book. The respondent bank has already debited the account of the writ petitioner – borrower in a sum of Rs.10,000/- towards inspection charges on 29.3.2006, and on 19.4.2006, an amount of Rs.17,632/- has been similarly debited towards auction notice. On 8.5.2006, a sum of RS.15,727/- has been debited towards the newspaper notification bill. On 16.8.2006, a further sum of Rs.5,900/- has been booked towards the newspaper advertisement bill and an amount of Rs.750/- has been debited to his account on 17.8.2006 towards printing of pamphlets and banners. Thus, substantial amount has already been charged to the borrower. One can perhaps understand these amounts representing proper expenditure. These expenses have been incurred by the respondent bank for securing the realization of the secured asset by way of it’s sale. Therefore, they can legitimately pass the muster in terms of sub-section (7) of Section 13. But what baffled us was the statement made in the counter affidavit that the borrower is liable to pay a further sum of Rs.1,90,000/- for payment to the recovery agent. It was brought to our notice that M/s. Sisir and Ravi Associates, Chartered Accountants, was appointed as enforcement agent of the respondent bank. They raised a bill in a sum of Rs.1,96,641/- on 15.11.2007. They have calculated their professional fees at the rate of 5% on Rs.35,00,213/- which came to Rs.1,75,010/-. They also claimed additionally service tax at the rate of 12.36% thereon which came to Rs.21,631/-. Thus, they raised a bill for the aforesaid amount of RS.1,96,641/-. Firstly, there was no satisfactory explanation as to why this enforcement agent has raised his professional bill on an amount of Rs.35,00,213/-. As was already noticed supra, as of 18.8.2006 itself, the outstanding liability of the writ petitioner has come down to Rs.2,27,165/-. Clearly, therefore there was some gross error of judgment on somebody’s part. When we enquired as to the nature of instructions issued by the Reserve Bank of India in this regard, the learned Standing Counsel of the bank has brought to our notice the E-circular issued by the State Bank of India at its Corporate center, Mumbai, to all the Chief General Managers on December 26th, 2006. The circular has been issued in continuation of an earlier circular dated 18.12.2006 wherein it was advised that the scheme for outsourcing of recovery efforts will be used in respect of small accounts, with outstandings up to Rs.25 lakhs only. For recovery in respect of accounts with outstandings above Rs.25 lakhs, the service of enforcement agents may be utilized. However, the operating offices of the bank sought for a demarcation and distinction between the role of recovery agents and enforcement agents. Hence, the follow up circular dated 26.12.2006 has been issued by the bank. However, the bank has made this much clear that that the efforts of outsourcing are for supplementing the recovery efforts of the branch officials. In annexure (1) to the circular dated 26.12.2006, the role of recovery agents and enforcement agents has been set out in detail. The following parameters thereof are significant for our inquiry and hence we prefer to quote them. Parameter Recovery Agents Enforcement Agents Eligible Agencies: The following categories of outfits have been permitted for empanelment of Recovery Agents: Ø Local NBFCs with good reputation and track records of 3 years. Ø Self-Help Groups banking with us with good track record. Ø Individuals such as retired revenue/IT/Sales Tax Department officials. Retired Teachers, Retired A rm y / P oli c e Officers, Village Sarpanch etc. below 65 years of age and with impeccable reputation for integrity. Ø Retired Officers of RBI, Fis, Banks and NBFCs below 65 years of age. Retired SBI officers also would be eligible, except those who retired under Voluntary Retirement Schemes of the Bank i.e., SBI VRS-2001/Exit Option Scheme. The following categories of outfits/establishments have been permitted for empanelment of Enforcement Agents: § NBFCs with good track record. § Govt. approved auctioneers. § Reputed Management Consultants (Indian and Foreign) § Accounting firms (Indian and foreign) § Firms with international experience in impaired Asset Management/Business Recovery Services § Merchant Banks (Indian and foreign) including SBI Caps § Companies/firms that may be set up by reputed corporates/NBFCs for the purpose in the coming days. Eligible Accounts: All written-off accounts with outstandings up to Rs.25 lacs (incuding AUCA) All accounts with total outstandings (ledger balance) of Rs.1 lac and above in live ledger or otherwise/NPAs. Functions/Duties: The Recovery Agent will help/assist the Bank’s officials in the following functional areas related to recovery of advances: § Follow-up with the borrower/guarantors. § Follow-up of legal cases with the office of the Bank’s Advocate, in consultation with the Bank’s officials. § Follow-up of revenue recovery cases with Revenue officials in consultation with the Bank’s officials (subject t o related State Govt. guidelines, if any). § Follow-up of cases pending before Lok Adalat in consultation with the Bank’s officials. § Arranging buyers for assets/properties hypothecated/mortgaged to the Bank. § Collecting details of personal properties of borrower/guarantors. § Marketing compromises/ OTS (Settlement amount to be negotiated only in the presence of branch officials). § Any other legally permissible action that may facilitate recovery. The Enforcement Agent will assist help the Authorised Officer in the following functional areas related to recovery of advances: § Assist in taking possession of movable a n d immovable properties as an Agent of the Authorised Officer, in full compliance with the procedure laid down under the Rules. § Assist the Authorised Officer in preparing the panchanama, inventory of the property, etc., as per procedure and formats prescribed. § Arrange, on behalf of the Authorised Officer, for storage, maintenance, preservation and locking up arrangements, as appropriate, of the movable/fixed/immovable assets so taken over. § Arrange, on behalf of the Authorised Officer, for Security, Insurance and/or any other action required to ensure safety of the asset taken over. § Assist the Authorised Officer to send notices to debtors of the borrower- follow up collection. § Assist the Authorised Officer in arranging for valuation as per procedure laid down. § Assist the Authorised Officer in arranging for sale of the assets as per any of the modes prescribed. § Assist the Authorised Officer in receipt of sale proceeds, issue of sale certificate and all other n e c e s s a r y formalities prescribed. Commission The structure for payment of remuneration to Recovery Agents is as under: § The agent will be paid commission on a graded basis depending upon the scale of recovery with a floor of 10% and a ceiling of 15% depending upon the performance. Any commission above the floor of 10% would be decided by the CGM, i.e., in special cases, where the Recovery Agent has made s ignif ic ant recoveries, the Module DGM may make recommen-dations for payment of additional commission of up to 5% over and above the normal floor of 10%. § Commission to be paid by debit to Charges Account (sundries). The structure for payment of remuneration to Enforcement Agent is as under: (a) for recoveries up to Rs.1 lac @ 20% of the amount recovered. (b) For recoveries above Rs.1 lac and up to Rs.20 lac – Rs.20,000/- plus 10% of the above amount recovered in excess of Rs.1 lac. (c) For recoveries above Rs.20 lac – Rs.2 lac plus 5% of the amount recovered in excess of Rs.2 lac. (d) I n case the recovery exceeds 50% of the assessed value of security, an additional incentive equal to 25% of the above remuneration may be paid. In case the recovery exceeds 75% of the assessed value of security, an additional incentive equal to 50% of the a b o v e remuneration [io.e., as per para (ii) above] may be paid. It is clear to our mind that the respondent bank has intended to outsource the services of recovery agents or enforcement agents, as the case may be, as a supplementing measure to the efforts of recovery which the bank officials themselves are required to undertake. In other words, without the bank officials undertaking steps and measures for recovering the securitisation asset, they cannot jump at the option of outsourcing the service of recovery agents or enforcement agents. These agents are essentially chosen for their specialized knowledge. Therefore, it may not be improper to describe them as professionals. The services of professionals can be outsourced as a measure of supplementing to the efforts of the officials of the bank concerned inasmuch as recovering the loans advanced by the very same banks and financial institutions is also one of the important tasks assigned to such officials and they get paid by the bank or the financial institution for also performing those duties. While performing these duties of recovery of loans, one can reasonably be assured, that the Officers, do not depart from the decorum and decency