* THE HONOURABLE SRI JUSTICE GHULAM MOHAMMED AND THE HONOURABLE SRI JUSTICE VILAS V. AFZULPURKAR + WRIT PETITION No.18089 of 2006 % Dated 11.09.2009 # M/s. Sravan Dall Mill P. Limited, Rep. by its Managing Director, Regd. Office at Plot No.9 and 10, Bandlaguda, Nagaram, R.R. Dist. ... PETITIONER VERSUS Central Bank of India, Rep. by its Chief Manager, Corporate Finance Branch, Hyderabad and another. …RESPONDENTS ! Counsel for the Petitioners: MR.B. VIJAYA BHASKER ^Counsel for the Respondents: MR. P. VEERA REDDY <GIST: >HEAD NOTE: ? Cases referred 1. AIR 2009 KARNATAKA 136 2. (2004) 4 SCC 311 3. AIR 2008 CALCUTTA 88 4. 2006 (12) SCALE 585 5. AIR 2009 JHARKHAND 14 IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) FRIDAY, THE ELEVENTH DAY OF SEPTEMBER TWO THOUSAND AND NINE PRESENT THE HON'BLE MR JUSTICE GHULAM MOHAMMED AND THE HON'BLE MR JUSTICE VILAS V. AFZULPURKAR WRIT PETITION No.18089 0f 2006 BETWEEN: M/s. Sravan Dall Mill P. Limited, Rep. by its Managing Director, Regd. Office at Plot No.9 and 10, Bandlaguda, Nagaram, R.R. Dist. ... PETITIONER AND Central Bank of India, Rep. by its Chief Manager, Corporate Finance Branch, Hyderabad and another. ...RESPONDENTS Petition under Article 226 of the Constitution of India praying that in the circumstances stated in the Affidavit filed herein the High Court may be pleased to issue a writ, order or, direction one in the nature of Mandamus, or any other writ by declaring the notice dated 15.06.2009 issued under Section 13(2) of the SARFAESI Act, 2002 by the respondent bank as illegal, arbitrary and without jurisdiction and pass such other orders as the Honourable Court may deem fit and proper in the circumstances of the case. Counsel for the Petitioner: SMT. CH. VEDA VANI Counsel for the Respondents: MR. A. KRISHNAM RAJU The Court made the following: ORDER: (per Hon’ble Sri Justice Vilas V. Afzulpurkar) This writ petition is filed questioning the action of the first respondent bank in issuing notice dated 14.06.2006 under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (Act 54 of 2002), hereinafter called ‘the SARFAESI Act’. 2. In normal course we would not have entertained this writ petition inasmuch as no measures under Section 13(4) of the SARFAESI Act have been taken by the first respondent bank but we have heard the writ petition at length after permitting the respondent to file a counter affidavit in view of the fact that the petitioner questions the classification of its account, by the first respondent bank, as a Non-Performing Asset (NPA). The foundation of the writ petition and the basic contention of the petitioner, therefore, is that the declaration of the petitioner’s account as NPA is not justifiable and consequently the jurisdictional fact necessary for invocation of Section 13 of the SARFAESI Act is non-existent in this case. The sole question that falls for consideration in this case is whether the first respondent bank is justified in classifying the petitioner’s account as NPA. 3. The facts, in brief, are as follows: (a) The petitioner is a company incorporated in the year 2002 under the Companies Act, 1956 and is engaged in the business of finishing work of Dal products, which has been enjoying the credit facilities, such as Cash Credit (Hypothecation) to the extent of Rs.96,60,000/- and a term loan of Rs.41,12,000/-, from the first respondent bank from 2002 onwards. The term loan is against mortgage of immovable properties and thus, the overall exposure of the petitioner is to the tune of Rs.1,37,72,000/- and the said loans are said to have been granted by the first respondent bank after satisfactorily fulfilling the due documentation and securities required therefor. (b) The petitioner submits that the original limit sanctioned by the bank was revised from Rs.85 Lakhs to Rs.137.72 Lakhs vide their letter dated 12.10.2004 that the petitioner company is regular in repayment of the said loans. The petitioner, however, submits that on account of various cash constraints and business exigencies, it could not pay interest for a period of two months whereupon the bank has treated the petitioner’s account as NPA and issued the impugned notice dated 14.06.2006 under Section 13(2) of the SARFAESI Act and demanded an amount of Rs.1,31,57,549.05 as outstanding amount as on 31.05.2006. The petitioner has thereupon filed objections to the said notice through its counsel under their reply dated 14.08.2006, primarily, on the ground that though the petitioner is regular in repayment of amount, the present default has occurred due to delay in receivables from sundry depositors and the company has not lost its viability and as such, the classification of the petitioner’s account as NPA is unjustified. It was also alleged that while in classifying the said account as NPA, the directions and guidelines regarding asset classification issued by the Reserve Bank of India are not followed and therefore, the bank has no jurisdiction to issue notice under Section 13(2) of the SARFAESI Act. 4. The respondent bank alleges that its replied to the said notice under their reply dated 01.09.2006 informing the petitioner that ill operations of the account and weak management resulted in non-consideration of the petitioner’s proposal for enhancement of the cash credit limits. To the extent of classification of the account as NPA, the bank has replied that it has every right to take legal action under the SARFAESI Act, as the account is classified as NPA on 31.05.2006 and as such, the action under the SARFAESI Act is justified. 5. Petitioner, however, alleges in the affidavit that the bank has not communicated any reasons with regard to their objections dated 14.08.2006 and in any case, no reasons are communicated as to why the account has been classified as NPA. The present writ petition is accordingly filed on the ground that the classification of the petitioner’s account is against the norms relating to asset classification under the ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances’. 6. As mentioned above, the respondent filed a counter affidavit stating that the operation of the petitioner’s account was not satisfactory and not in accordance with the terms of sanction and due to non-service and defaults, the same was classified as NPA on 31.05.2006 and that no requests for One Time Settlement (OTS) was made by the petitioner and that the management of the petitioner had addressed a letter dated 27.02.2007 admitting the liability and requesting time till 03.03.2007 for liquidating the outstanding debt along with a proposal. It also mentions that the petitioner has made part payment of Rs.66,50,000/-on various dates and on the date of filing of the counter affidavit, after giving credit to the said payments, outstanding amount payable is Rs.83,31,258/- with interest thereon. It is also contended that the writ petition is not maintainable since adequate relief can be obtained from the appellate authority under the SARFAESI Act and consequently, the petitioner be relegated to the said appellate remedy. 7. We have heard Smt. Ch. Veda Vani, learned counsel for the petitioner and Sri Siva Reddy, learned counsel for the first respondent bank. 8. Apart from substantiating the averments in the affidavit as mentioned above, the learned counsel for the petitioner has placed before us, the Prudential Norms and Master Circular issued by RBI and has placed reliance upon the following clauses of the said circular, which are as follows: 2.1 Non-performing assets 2.1.1 An asset, including a leased asset, become non-performing when it ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under: Year ending March 31 Specified Period 1993 1994 1995 onwards four quarters three quarters two quarters 2.1.2… 2.1.3. With a view to moving towards international best practices and to ensure greater transparency, the ’90 days’ overdue’ norm for identification of NPAs has been adopted from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non- performing asset (NPA) shall be a loan or an advance where: (i) interest and/or instalment of principal remain overdue for a period of more than 90 days in respect 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) interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and (v) any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. * * * 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 realisibility of the dues: (a) Sub-standard Assets (b) Doubtful Assets (c) Loss Assets 4.1.1 Sub-standard Assets A sub-standard assets was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, 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. With effect from 31 March 2005, a sub-standard asset would be one which has remained NPA for a period less than or equal to 12 months. 4.1.2 Doubtful Assets A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 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 basis of currently known facts, conditions and values – highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. 4.1.3 Loss assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 4.2 Guidelines for classification of assets 4.2.1 Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. 4.2.2 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. 4.2.3… 4.2.4 Upgradation of loan accounts classified as NPAs 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 regard to upgradation of a restructured/rescheduled account which is classified as NPA contents of paragraphs 4.2.14 and 4.2.15 will be applicable. 9. Learned counsel for the petitioner contended that the first respondent bank is bound to follow the said prudential norms and only when the classification made in conformity with the said norms, would entitle the bank or financial institution to resort to the SARFAESI Act if the conditions thereunder are satisfied. She placed strong reliance on clause 2.1.3 which requires 90 days overdue norm is essential for identification of NPA, which in other words, means that the interest and or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan. She, further, contends that the policy of income recognition and asset classification has to be objective and based on record of recovery. The account, therefore, cannot be classified as NPA unless it satisfies the prudential norms. Further, the said NPAs may be of various categories where the account remains NPA for less than or equal to 18/12 months, it is broadly classified as sub-standard asset, if in such cases, the current net worth of the borrower or the guarantor or the current market value of the security is not enough to ensure recovery of dues to the bank in full. Further, such assets, which remain NPA for a period exceeding 18 months to 12 months of the loan is already classified as doubtful and the recovery is highly questionable and improbable, it is classified as doubtful asset. Further, such NPA account is identified by the bank, as uncollectible and of such little value that its continuance as a bankable asset is not warranted is classified as a loss asset. Learned counsel, therefore, asserts that there was never a default where the interest or instalment remained overdue for 90 days and in any case, as admitted in the counter of the first respondent, substantial subsequent payments made by the petitioner has already brought down the original liability of Rs.1,31,57,549.05 to Rs.83,31,258/-, which establishes that the petitioner’s account is not an NPA. She, therefore, contends that the first respondent bank ought to have upgraded the said account and should no longer be treated as NPA as provided under clause 4.2.4 of the norms. 10. Learned counsel has relied upon a decision of the Karnataka High Court in RAJA ASSOCIATES v. UNION OF INDIA[1], particularly para 14, which supports her contentions, which is extracted hereunder: “14. What was expected by this court was not as to whether the officers of the respondent-bank are aware of the circulars and the judgments, but what had been directed is to consider as to whether the account of the petitioner falls within the said category as defined in the circulars and such consideration should have come out in the form of a speaking consideration i.e., by assigning reasons as observed by the Hon’ble Supreme Court. Even the contents of para 5 does not disclose this aspect of the matter where it only says that the value of the security being more has no bearing towards classification without indicating what else was the method followed for classification. Thought the learned counsel for the respondents attempted to pointy out the circular of R.B.I., the same does not serve any purpose at this stage since neither the reply dated 25th May, 2005 nor the objection statement filed in this petition would refer to the details in this regard and what is required is not to notice the R.B.I guidelines alone but to indicate from the materials on record that the account in question falls within the guidelines. Only when that is done the respondents would be at liberty to proceed in accordance with law. Hence it requires reconsideration at the hands of the respondents themselves.” 11. She has also placed reliance upon the decision of the Supreme Court i n MARDIA CHEMICALS LTD. v. UNION OF INDIA[2] particularly paragraphs 37 and 44 thereof, which are extracted hereunder: “37. Next we come to the question as to whether it is on whims and fancies of the financial institutions to classify the assets as non- performing assets, as canvassed before us. We find it not to be so. As a matter of fact a policy has been laid down by the Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as "RBI’s prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 2001. It is mentioned in the said Circular as follows: "1.1 In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts." 2.1 Non-performing Assets: 2.1.1 An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ’non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained ’past due’ for a specified period of time. The specified period was reduced in a phased manner as under: Year ending March 31 Specified Period 1993 1994 1995 onwards four quarters three quarters two quarters 2.1.2 An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with ’past due’ concept, with effect from March 31, 2001. Accordingly, as from that date, a non-performing Asset (NPA) shall be an advance where (i) interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, (ii) (ii) the account remains ’out of order’ for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC), (iii) (iii) the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, (iv) interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and (v) (v) any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. 4.2.2 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high-value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines." From what is quoted above, it is quite evident that guidelines as laid down by the Reserve Bank of India which are in more details but not necessary to be reproduced here, laying down the terms and conditions and circumstances in which the debt is to be classified as non-performing asset as early as possible. Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a non-performing asset.” “44. As a matter of fact, the Narasimham Committee also advocates for a legal framework which may clearly define the rights and liabilities of the parties to the contract and provisions for speedy resolution of disputes, which is a sine qua non for efficient trade and commerce, especially for financial intermediation. Even the guidelines of the Reserve Bank of India in relation to classifying the NPA’s while stressing the need of expeditious steps in taking a decision for classifying and identification of NPA’s says, a system be evolved which should ensure that the doubts in asset classification are settled through specified internal channels within the time specified in the guidelines. It is thus clear that while recommending speedier steps for recovery of the debts it is envisaged by all concerned that within the legal framework, such provisions may be contained which may curtail the delays. Nonetheless dues or disputes regarding classification of NPAs should be considered and resolved by some internal mechanism. In our view, the above position suggests the safeguards for a borrower, before a secured asset is classified as NPA. If there is any difficulty or any objection pointed out by the borrower by means of some appropriate internal mechanism it must be expeditiously resolved.” 12. According to the learned counsel, therefore, the manner in which the first respondent bank has classified the petitioner’s account as NPA is wholly unwarranted and consequently the very reason for invocation of Section 13(2) of the SARFAESI Act is liable to be set aside under the judicial review jurisdiction of this court. 13. Learned counsel for the respondent has justified the actions of the first respondent bank by stating that the counter affidavit already records that the performance of the petitioner’s account is not satisfactory and on account of the defaults committed by it, their account was classified as NPA as early as on 31.05.2006 and mere subsequent payments by the petitioner will not mitigate against the said status of the said account as NPA. He submits that the said payments are made after the notice by the bank under Section 13(2) of the SARFAESI Act dated 14.06.2006 and thereby it cannot be said that the initial classification of the account as NPA itself is not justified based on the subsequent payments in the year 2007. He also placed reliance upon the reply given by the bank dated 01.09.2006 and submits that all the questions raised by the petitioner being relating to factual aspects it would be more appropriate that they be adjudged in the appeal provided under Section 17 of the SARFAESI Act. Learned counsel has relied upon a decision of the Calcutta High court in CORE CERAMICS LTD. v. UNION OF INDIA[3] where a similar question was considered and he relies upon para 8 thereof, which holds that the Debts Recovery Tribunal has been conferred with wide powers to examine the facts and circumstances of the case and evidence produced and whether measures taken under Section 13(4) conform to and in accordance with the provisions of the SARFAESI Act, which includes consideration whether classification of a debt as NPA is in accordance with the RBI guidelines. He relies upon para 12 of the aforesaid judgment, which is extracted hereunder: “12. In the instant case I find that the authorities of the bank had issued notice dated 3rd November, 2003 classifying the account as non-performing asset as per RBI guidelines. Whether there is any doubt or question that under the guidelines of the RBI the accounts are non-performing assets or not, is a matter to be settled through the internal specified channels of the bank. Once bank authorities under Section 13(2) classifies the account as non-performing asset and issues notice, as has been done in the instant case, the writ Courts have little or no role to play in deciding such issue. Therefore, since it is clear