THE HON’BLE SRI JUSTICE P.S. NARAYANA WRIT PETITION Nos.21783, 21764 and 21769 of 2007 Dated:14.02.2008 WRIT PETITION No.21783 of 2007 Between M/s.Muralikrishna Timber and Size Merchants and another …Petitioners And The State Bank of Hyderabad, Rep. by its Authorised Officer, Kothagudem, Khammam District and another. …Respondents WRIT PETITION No.21764 of 2007 Between M/s.Muralikrishna Wood Suppliers and others …Petitioners And The State Bank of Hyderabad, Rep. by its Authorised Officer, Kothagudem, Khammam District and another. …Respondents WRIT PETITION No.21769 of 2007 Between M/s.Muralikrishna Rice and Flour Mill and another …Petitioners And The State Bank of Hyderabad, Rep. by its Authorised Officer, Kothagudem, Khammam District and another. …Respondents THE HON’BLE SRI JUSTICE P.S. NARAYANA WRIT PETITION Nos.21783, 21764 and 21769 of 2007 COMMON ORDER: These three writ petitions are being disposed of by a common order. In these three writ petitions, notice before admission had been ordered and conditional interim orders had been granted. It is stated that certain of the amounts had been deposited. But, however, the conditional orders, as such, had not been complied with in true spirit, despite the fact that extension had been given. Be that as it may, these three writ petitions are filed for issuance of writ of mandamus declaring the notices, dated 01.08.2007, issued by the respondent bank, as illegal, arbitrary and violative of principles of natural justice, and consequently to set aside the impugned notices and to pass such other suitable orders. In all these matters, applications to vacate the interim orders had been filed. In W.P.No.21783 of 2007, the Proprietor of the first petitioner has sworn to the affidavit. The second petitioner is his mother, who stood as guarantor for the loan transaction. It is stated that the first respondent had issued the impugned notice dated 01.08.2007 under Section 13(2) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘the Act’ for the purpose of convenience) alleging that the first petitioner’s debt has been classified as “Non Performance Assets (NPA)” in accordance with the guidelines issued by the Reserve Bank of India (RBI) and on that basis the impugned notice had been issued directing the petitioners to repay the alleged outstanding amount of Rs.15,34,014/- as on 01.08.2007 inclusive of interest upto 31.07.2007. Further, the first respondent had directed him not to transfer the secured property by way of sale, lease or otherwise. The contentions of the bank are not correct. Their account is a running account and even upto March, 2007 they have paid part of the loan amount. It is further stated that the action of the bank in treating the first petitioner’s loan account as NPA is illegal. Even though the bank is having sufficient security by way of mortgage worth of Rs.2 crores (in all three accounts), he has been paying the loan amount regularly and that since it is a business loan transaction with interest he is paying the amount, as such, there is no basis for declaring his account as NPA. It is also stated that to avoid further complications, the first petitioner had submitted a representation dated 09.10.2007 to the impugned notice, in which, he had specifically requested the bank to grant two months time to settle one account out of three accounts, but there is no response from the bank. It is further stated that he is having three loan accounts namely (1) M/s.Murali Krishna Timber and Size Merchants (2) M/s.Murali Krishna Rice and Flour Mill and (3) M/s.Murali Krishna Wood Suppliers in which his wife is Proprietor. In all the three accounts, he had paid loan amount upto March, 2007 and cleared the amounts as per the instructions of the bank itself upto date i.e., upto March, 2007. Thereafter, without issuing any demand notice or any prior notice, the respondent bank straightaway issued the impugned notices invoking the Act, which is illegal. Despite the reply given by him, the bank is proceeding further to sell the property and trying to cause paper publication, due to which, he will be put to great hardship. The impugned notice, dated 01.08.2007 ex facie is illegal, arbitrary and violative of principles of natural justice. Since it is a cash credit facility and running account there is no monthly instalment fixed by the bank, as such, there is no justification in issuing the impugned notices. In all the three accounts, they had raised total loan of Rs.43,00,000/- and in fact cleared the amount as prescribed by the bank. Since it is cash credit facility, there is no fixed time limit prescribed for payment and interest will be added from time to time. The demanded amount requires verification of records since it is not correct and that they have already paid huge amounts till March, 2007. He further stated that the security property is more than Rs.2 crores and that the impugned demand is Rs.43,00,000/- and subject to verification of record, on grant of reasonable time, he had expressed his willingness to settle the account. Instead of rescheduling the account, unfortunately, the bank is trying to close the units, in which event he will be put to great hardship. In such circumstances, the petitioners approached this Court praying for appropriate reliefs. In W.V.M.P.No.2980 of 2007 a counter affidavit has been filed by the respondent bank. In the counter-affidavit, it is stated that the writ petition is not maintainable. Further it is averred that the action initiated by the bank is in accordance with the procedure laid down under the Act and it is for the recovery of the secured debt against the secured interest. The first petitioner’s account is classified as Non-Performing Asset as per the directions and guidelines issued by the Reserve Bank of India in regard to asset classification. Therefore, the proceedings initiated by the first respondent for recovery of the amount due in the loan account of the first petitioner is valid under law. Furthermore, the petitioners have not made out any case that the respondent bank violated the provisions of the law and/or the respondent does not have a right to proceed against the secured asset to realize the amount due in the loan account of the first petitioner. In reply to para No.2 of the first petitioner’s affidavit, it is true that he is the Proprietor of M/s.Muralikrishna Timber & Size Merchants and the second petitioner is related to him as indicated therein and that the petitioners have been having business relationship with their bank since 1998. It is also averred that it is true that the first respondent issued the impugned notice dated 01.08.2007 under Section 13(2) of the Act calling upon the petitioners to pay the amount due in the first petitioner’s account within 60 days from the date of receipt of the said notice and also informed them that in the event of non-payment of the amount within the stipulated time, the bank would be taking further steps against the secured asset to recover the amount due in the loan account of the first petitioner. The contents in the impugned notice issued to the petitioners are true and correct. It is pertinent to submit that their bank sanctioned Cash Credit Limit of Rs.14.50 lakhs to the first petitioner and the second petitioner stood as a guarantor and that they have created the mortgage in respect of vacant site and building bearing house Nos.7-4-1, 7-4-1/1 & 7-4-1/2 and also House No.7-4-2, situated at Medara Basti, Kothagudem as a security for the said cash credit limit. The said cash credit account was operated by the first petitioner as per the terms and conditions agreed, and consequently the account became irregular and a sum of Rs.15,34,014/- became due and payable as on 31.07.2007. Further, there are no operations in the cash credit account. In consonance with the guidelines issued by the Reserve Bank of India, the account was classified as Non Performing Asset on 30.06.2007. The contention of the petitioners that the account is a running account and that even upto March, 2007 they have paid part of the loan amount is irrelevant in regard to the issue raised in this writ petition. The first petitioner failed to adhere to the terms and conditions, on which the cash credit limit was last sanctioned in March, 2004 for a period of one year vide sanction letter dated 29.03.2004. Thereafter, the first petitioner’s account was not renewed, and as such, the entire amount in cash credit account became due and payable as it is payable on demand. Further, the first petitioner except paying Rs.50,000/- which is paid after this writ petition is filed, failed to pay the amount after 22.03.2007. It is manifest from the statement of account filed along with the counter affidavit that the first petitioner is indifferent in paying the dues to the bank and failed to discharge his contractual obligations. It is also stated that it is incorrect to state that the action of the bank in treating the loan account of the first petitioner as NPA is illegal. Their bank followed the guidelines and instructions given by the RBI in classifying the account as NPA and in terms of those guidelines the first petitioner’s account was classified as NPA. There is no nexus link between the value of the security and the account classification. Further, it is absolutely incorrect to state that the value of the property given as security in the first petitioner’s account and in two other accounts viz., M/s.Muralikrishna Modern Rice & Flour Mill and M/s.Muralikrishna Wood Suppliers is Rs.2.00 crores and he has been paying the amounts regularly. The total value of the immovable properties given as security in all the three accounts together i.e., property belongs to petitioners 1 and 2 is only Rs.44,33,500/- as per the valuation made by the approved valuer of the bank i.e., M/s.Kinnera Architects & Engineers vide valuation report dated 24.03.2007. Therefore, the allegations of the petitioners that the properties given as security are worth of more than Rs.2.00 crores is without any basis and it is highly exaggerated. Further, the bank cannot remain silent, without taking any action to recover their amounts, even if the security is available for the total amount due in the first petitioner’s account and two other accounts mentioned above. The total amount due in all the three accounts is more than the value of the properties given as security. No stocks are available in the first petitioner’s account and also in two other connected accounts. In reply to para 5 of the first petitioner’s affidavit, it is stated that it is true that the bank received a representation dated 09.10.2007 to the impugned notice dated 01.08.2007 issued under Section 13(2) of the Act. The first petitioner received the impugned notice dated 01.08.2007 on 14.08.2007. The first petitioner, who gave the representation, dated 09.10.2007, did not even wait for the reply from the bank and rushed to this Court by filing this writ petition. In view of the petitioners filing the writ petition on 10.10.2007 itself, their bank has not even given any reply, as the matter became subjudice. The first petitioner failed to pay the amounts, despite the bank officials have personally contacted and requested him to pay the amounts due in his account and also in two other accounts. As the accounts became irregular and were classified as NPA, and as there was no response from the petitioners and they were giving evasive replies regarding their plans for closing the accounts, the bank was constrained to take action against them under the Act. If the petitioners undertake to pay the entire dues in all the three accounts together with interest within two months as mentioned in the affidavit, the bank will defer further proceedings under the Act till 15.12.2007. In reply to para 6, it is stated that it is incorrect to state that the first petitioner is having three loan accounts and in all the three accounts he paid the loan amount upto March, 2007, as per the instructions of the bank. The true and correct facts relating to the loan availed by the first petitioner and his family members are detailed as below: S.No. Name of Firm Proprietor Guarantor Limit Rs. Amounts outstanding as on 31.07.2007 1. Muralikrishna Wood Suppliers Mrs.A.Vanaja, W/o.Murali Gopala Rao Mr.A.Murali Gopala Rao & Mrs.P.Nagamani 14.00 lakhs Rs.14,81,948 2 Muralikrishna Timber & Size Merchants Mr.A.Murali Gopala Rao Mrs.A.Anjaneya- mma 14.50 lakhs Rs.15,34,014 3 Muralikrishna R i c e & Flour Mill Mr.A..Murali Gopala Rao Mrs.A.Anjaneya- mma 14.50 lakhs Rs.15,32,234 The notice under Section 13(2) of the Act itself is a demand notice and no legal notice is required before issuing the same. Therefore, the contention of the petitioners that without issuing any demand notice or any prior notice straight away the respondent bank issued the impugned notice dated 01.08.2007, is illegal and has no legal and factual basis. As per the guidelines issued by the RBI, if there are no operations in Cash Credit Account and/or if the interest chargeable is not serviced for the period of 90 days, the account has to be classified as NPA. The bank has taken the action under the Act, as the petitioner failed to pay the amount despite the bank officials waited for reasonable time. In the facts and circumstances of the case, the action of the bank cannot be found fault and there is no illegality in taking action by the bank officials under the Act. Though in cash credit limit facility there is no requirement of paying monthly installment, it is imperative on the part of the borrower to hold the stocks and also to deposit the sale proceeds periodically and the stock statements should be submitted and the interest has to be serviced as and when it is debited/chargeable in his account. In the subject account the amount due as on 01.08.2007 was Rs.15,32,234/- against the cash credit limit of Rs.14.50 lakhs and further the said cash credit limit was sanctioned lastly in March, 2004 for a period of one year and thereafter the same was not renewed. Therefore, the first petitioner cannot claim any right to operate the account and enjoy the limit. Consequently, the entire amount due in his account became overdue and he is liable to pay the entire amount forthwith. It is further averred that it is incorrect to state that the first petitioner and two other borrowers in connected amounts have cleared the amounts as prescribed by the bank. As submitted above, the loan account of the first petitioner was not renewed after March, 2004 which was valid for one year only, and as such, the allegations made by the petitioners in contra are not correct. It is incorrect to state that the property given as security is worth more than Rs.2.00 crores. The first petitioner had been supplied with the statement of accounts periodically. If the first petitioner so desires, he can verify the records by visiting their branch on any date during business hours. The question of rescheduling of the account does not arise as there is no business activity and further the entire amount became overdue. The allegations of the first petitioner that he will be put to great hardship and running unit will be closed, if the loan repayment is not rescheduled, is invented for the sake of inviting sympathy from the Court. If the petitioners are prepared to pay the entire amount due, the bank will defer further action under the Act till 15.12.2007. It is further stated that this Court directed the first petitioner to deposit half of the demanded amount within a period of six weeks from 11.10.2007, but the first petitioner so far paid a sum of Rs.50,000/- on 29.10.2007 in his account and an amount of Rs.1,00,000/- on 30.10.2007 in M/s.Murali Krishna Wood Suppliers account, which belongs to his wife. It is further stated that the petitioner filed the writ petition even before the bank has taken the steps under Section13(4) of the Act, and therefore, the writ petition is premature. In W.P.No.21764 of 2007, the Proprietor of the first petitioner has sworn to the affidavit. The second petitioner is her sister-in-law and the third petitioner is her husband, who stood as guarantors for the loan transaction. It is stated that the first respondent had issued the impugned notice dated 01.08.2007 under Section 13(2) of the Act alleging that her debt has been classified as “Non Performance Assets” in accordance with the guidelines issued by the RBI and on that basis the impugned notice has been issued directing them to repay the alleged outstanding amount of Rs.14,81,948/- as on 01.08.2007 inclusive of interest upto 31.07.2007. Further, the first respondent had directed her not to transfer the secured property by way of sale, lease or otherwise. The other facts need not be reiterated since they are almost similar and identical to the facts in W.P.No.21783 of 2007. In W.V.M.P.No.21764 of 2007 a counter affidavit had been filed by the respondent bank. In the said counter-affidavit, similar averment had been made stating that the writ petition is not maintainable and even otherwise the writ petition is premature. In para 4 of the counter affidavit, it is averred that the action initiated by the bank is in accordance with the procedure laid down under the Act and further it is for the recovery of the secured debt against the secured interest. The first petitioner’s account is classified as Non-Performing Asset as per the directions and guidelines issued by the Reserve Bank of India in regard to asset classification. Therefore, the proceedings initiated by the first respondent for recovery of the amount due in the loan account of the first petitioner is valid under law. Furthermore, the petitioners have not made out any case that the respondent bank violated the provisions of the law and/or the respondent does not have a right to proceed against the secured asset to realize the amount due in the loan account of the first petitioner. In reply to para No.2 of the first petitioner’s affidavit, it is true that she is the Proprietor of M/s.Muralikrishna Wood Suppliers and the second and third petitioners are related to her as indicated therein. It is also averred that it is true that the first respondent issued the impugned notice dated 01.08.2007 under Section 13(2) of the Act calling on the petitioners to pay the amount due in the first petitioner’s account within 60 days from the date of receipt of the notice and also informed them that in the event of non-payment of the amount within the stipulated time the bank would be taking further steps against the secured asset to recover the amount due in the loan account of the first petitioner. The contents in the impugned notice issued to the petitioners 1 & 3 are true and correct. It is pertinent to submit that their bank sanctioned Cash Credit Limit of Rs.14.00 lakhs to the first petitioner and the second and third petitioners stood as guarantors and that the third petitioner besides giving his personal guarantee created the mortgage in respect of vacant site and building bearing house No.7-4-1, 7-4-1/1 & 7-4-1/2 situated at Medara Basti, Kothagudem as a security for the said cash credit limit. The said cash credit account was operated by the first petitioner as per the terms and conditions agreed and consequently the account became irregular and a sum of Rs.14,81,948/- became due and payable as on 31.07.2007. Further, there are no operations in the cash credit account. In consonance with the guidelines issued by the Reserve Bank of India, the account was classified as Non Performing Asset on 30.06.2007. The contention of the petitioners that the account is a running account and even upto March, 2007 they have paid part of the loan amount is irrelevant in regard to the issue raised in this writ petition. The first petitioner failed to adhere to the terms and conditions, on which the Cash Credit Limit was last sanctioned in March, 2004 for a period of one year vide sanction letter dated 29.03.2004. Thereafter the first petitioner’s account was not renewed and as such the entire amount in her cash credit account became due and payable as it is payable on demand and further the first petitioner except paying an amount of Rs.1,00,000/- in M/s.Murali Krishna Wood Suppliers, which is paid after this writ petition is filed, failed to pay the amount after 22.03.2007. It is manifest from the statement of account filed along with the counter affidavit that the first petitioner is indifferent in paying the dues to the bank and she failed to discharge her contractual obligations. It is also stated that it is incorrect to state that the action of the bank in treating the loan account of the first petitioner as NPA is illegal. Their bank followed the guidelines and instructions given by the RBI in classifying the account as NPA and in terms of those guidelines the first petitioner’s account was classified as NPA. There is no link between the value of the security and the account classification. Further, it is absolutely incorrect to state that the value of the property given as security in the petitioner’s account and in two other accounts viz., M/s.Muralikrishna Timber and Size Merchangts and M/s.Muralikrishna Rice & Flour Mill is Rs.2.00 crores and she has been paying the amounts regularly. The total value of the immovable properties given as security in all the three accounts together i.e., property belongs to the third petitioner and also his mother-in-law Smt. A.Anjaneyamma is only Rs.44,33,500/- as per the valuation made by the approved valuer of the bank vide valuation report dated 24.03.2007. Therefore, the allegations of the petitioners that the properties given as security are worth of more than Rs.2.00 crores is without any basis and it is highly exaggerated. Further, the bank cannot remain silent, without taking any action to recover their amounts, even if the security is available for the total amount due in the first petitioner’s account and two other accounts mentioned above. The total amount due in the three accounts is more than the value of the properties given as security. No stocks are available in the first petitioner’s account and also in two other connected accounts. Further it is averred that it is true that the bank received a representation dated 09.10.2007 to the impugned notice dated 01.08.2007 issued under Section 13(2) of the Act. The first petitioner, who gave the representation, dated 09.10.2007, did not even wait for the reply from the bank and rushed to this Court by filing this writ petition. In view of filing of the writ petition on 10.10.2007, their bank has not given any reply, as the matter became subjudice. The first petitioner failed to pay the amounts, despite the bank officials have personally contacted and requested the petitioners to pay the amounts due in the first petitioner’s account and also in two other accounts. As the accounts became irregular and were classified as NPA, and as there was no response from the petitioners and they were giving evasive replies regarding their plans for closing the accounts, the bank was constrained to take action against them under the Act. If the petitioners undertakes to pay the entire dues in all the three accounts together with interest within two months as mentioned in the affidavit, the bank will defer further proceedings under the Act till 15.12.2007. It is also averred that it is incorrect to state that the first petitioner is having three loan accounts and in all the three accounts she paid loan amount upto March, 2007 as per the instructions of the bank. The true and correct facts relating to the loan availed by the first petitioner and her family members are similar as specified in the counter-affidavit filed in W.P.No.21783 of 2007. The notice under Section 13(2) of the Act itself is a demand notice and no legal notice is required before issuing