THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE NOUSHAD ALI W.P. No. 5618 of 2010 DATE: 22-03-2010 Between: M/s. Sri Satyanarayana Rice Mill, rep., by its Managing Partner Maddukuri Veerabhadra Rao, s/o Raja Rao, Aged: 47 years, Business r/o R.B. Patnam, Peddapuram Mandal, East Godavari District. ….. Petitioner And State Bank of India rep., by its Branch Manager, Peddapuram, East Godavari and others. .. Respondents THE HON’BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE NOUSHAD ALI W.P. No. 5618 of 2010 Order: (Per: THE HON’BLE SRI JUSTICE GODA RAGHURAM) Heard Sri Subba Reddy S, the learned counsel for the petitioner and Sri Vikram Ragi, learned counsel representing Sri B.S. Prasad, the learned standing counsel for the State Bank of India. Aggrieved by the taking possession of the petitioner’s rice mill located in an extent of Ac. 0-20 cents in R.S.No. 248/1, R.B. Patnam, Peddapuram Mandal, East Godavri District, in purported exercise of powers under Section 13 (4) read with Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short ‘the Act’), the writ petition is filed. The petitioner obtained Rs.10,00,000-00 loan from the 1st respondent bank (the secured creditor) on 26-12-2005 and mortgaged the immovable property including the plant and machinery thereon. It is stated that the property of the petitioner’s wife in an extent of Ac.3-00 of R.B. Patnam village was offered as a collateral security as well and the petitioner and his wife stood guarantors for the loan. On the admitted factual scenario, as against the obligation to discharge the liability in eighty (80) monthly installments at Rs.20,000-00 each, the petitioner paid in all an amount of Rs.3,25,675-00 and admittedly defaulted in the payment of EMI. The debt was declared a ‘non- performing asset’ (for short ‘NPA’) and the 2nd respondent issued a notice dated 22-10-2008 to the petitioner under Section 13 (2) of the Act. The petitioner approached the 1st respondent, expressed its financial constraints and sought time for repayment. Eventually, the 2nd respondent issued a notice dated 27-01-2009 under Section 13 (4) of the Act; invoked the provisions of Section 14 of the Act; and the Mandal Revenue Officer caused seizure of the rice mill under a panchanama dated 01-03-2010, pursuant to the 3rd respondent’s order dated 27-11- 2009. The petitioner pleads to have alienated Ac.0-80 cents of land in Vetlapalem village to discharge the loan owed to another individual. Latter the petitioner approached the 2nd respondent to negotiate for aborting the processes under the provisions of the Act. It states to have approached the 1st respondent on 03-03- 2010 offering to pay Rs.6,00,000-00 obtained by the petitioner from sale of its property. In substance, the petitioner states that it is ready and willing to pay Rs. 6,00,000-00 and if such deposit were accepted by the respondent-bank, his credit would cease to be a NPA. The petitioner contends that in the circumstances, continuance of proceedings under the provisions of the Act is an arbitrary and illegal exercise of powers liable to be interdicted by this Court, in exercise of its jurisdiction under Article 226 of the Constitution of India. As against the order of seizure, the petitioner has an appellate remedy under Section 17 of the Act. However, the petitioner contends that in view of the decision of the Full Bench of Madras High Court in Lakshmi Shankar Mills (P) Ltd., v. Authorised Officer, Indian Bank (FB) (AIR 2008 Madras 181), the Debts Recovery Tribunal in exercise of its appellate jurisdiction under Section 17 of the Act cannot direct interim re-delivery of possession, till the final determination of the appeal and therefore the petitioner does not have an effective alternative remedy in the exigent circumstances of this case. In support of the contention that in view of the petitioner’s offer to deposit Rs. 6,00,000-00 and on acceptance of such offer, his debt account with the secured creditor would cease to be NPA and therefore the continuance of the process under the provisions of the Act would be illegal, the petitioner relies on the decision of a Division Bench of this Court in Sravan Dall Mill Pvt. Ltd. V. Central Bank of India (2009 (6) ALD 615 (DB). In Sravan Dall mill (supra) this Court was dealing with a fact situation of the action of the respondent-bank (a secured creditor) was challenged at the stage of a notice issued under Section 13 (2) of the Act. Inter alia the petitioner therein assailed the determination by the secured creditor of the debt and the asset furnished as security towards the realization of the debt as NPA, asserting that the Reserve Bank of India norms for treating a debt account as NPA were violated in determination of the asset as NPA by the secured creditor therein. During the course of arguments however and without such an issue arising for determination in that case, on behalf of the petitioner, it was additionally contended that where subsequent payments made by the petitioner had brought down the original liability, the petitioner’s account would no longer be an ‘NPA’. In the fact matrix of Sravan Dall Mill, some payments appear to have been made by the borrower prior to initiation of proceedings under the Act viz., before issuance of a notice under Section 13 (2) of the Act. However in paragraph No.23 of the judgment in Sravan Dall Mill, the Court made the following observations: “…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 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 above extracted observations are, on a true and fair construction of the judgment of this Court made in the context of the factual matrix of that case viz., that the challenge was at the stage of issuance of a notice under Section 13 (2) of the Act. Any payment by the petitioner prior to initiation of process under the Act would, if the facts so warrant, bring the asset below the NPA radar and if that be the factual position, invocation of process under the provisions of the Act is impermissible in view of the provisions of Section 13 (4) of the Act. Though the quoted observations in the judgment are susceptible of a broader intendment, that (all) subsequent payments by the borrower would upgrade the debt account and liberate it from the status of NPA, even after initiation of action under Section 13 (2) of the Act, such broader interpretation is negated in view of the clear language of the provisions of Section 13 of the Act. Section 2 (ha) of the Act defines ‘debt’ by reference to the expression as defined in Section 2 (g) of the Recovery of Debts due to Banks & Financial Institutions Act, 1993. Section 2 (j) defines ‘default’ inter alia as where an account of a borrower is classified a non-performing asset. Section 2 (o) defines ‘non- performing asset’ as under: (o) “non-performing asset” means an asset or account of a borrower, which has been classified by a bank or financial institution as substandard (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 assts classifications issued by the Reserve Bank). Chapter-III of the Act sets out provisions for ‘Enforcement of Security Interest’. Section 13 therein fortified by a non-obstante provision [not-with-standing the provisions of this Act or any contrary provisions contained in Section 69 or Section 69A of the Transfer of Property Act, 1882 (4 of 1882)], enjoins that 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. Sub- section (2) of Section 13 of the Act provides that where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of a secured debt or any installment 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). On a true and fair construction of the provisions of Section 13 (2) of the Act the conclusion is compelling that the classification of a debt as NPA is a condition precedent to the exercise of jurisdiction under the provisions of the Act, for enforcement of the security interest in accordance with the stringent provisions of the Act. If there be any error in the classification of the debt as NPA, including on account of transgression of the prudential norms fixed by the Reserve Bank of India or any other regulatory agency (regarding classification of assets ), then and in such an event the exercise of jurisdiction under the provisions of the Act would be unsustainable. Where however the ingredients of Section 13 (2) of the Act are satisfied and the determination of a debt as NPA is not flawed, the invocation of the enforcement process under Chapter-III of the Act is unassailable. Section 13 (2) of the Act clearly enjoins that the notice to be issued to the secured creditor may require the borrower to discharge in full his liability to the secured creditor within sixty days from the date of notice. On a legitimate invocation of the provisions of the Act therefore and in accordance with the terms of the contract, if any, between the parties, the liability of the borrower could be invoked by the bank in respect of his entire liability and payment demanded to be paid within sixty days. Sub-sections (3) and (3A) of Section 13 of the Act deal with the procedural prescriptions as to issuance of a notice and the obligation of the secured creditor to communicate to the borrower its decision and the reasons for non-acceptance of any representation or objection lodged by the borrower pursuant to a notice under Section 13 (2) of the Act. Sub-section (4) of Section 13 clearly enjoins that in case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the measures enumerated in sub-section (4), to recover the secured debt. On a holistic analysis of the provisions of the Act, in particular the provisions of Section 2 (o) and 13 of the Act (which alone are relevant in the context of the lis presented in this writ petition), the conclusion is irresistible and compelling that on legitimate invocation of process under Section 13 of the Act for enforcement of the security interest, the obligation of the borrower is to discharge in full the liability to the Bank or the financial institution becomes operational and is not liable to be whittled down by an artifice of subsequent payment of some moiety by the borrower to the bank. Such a construction is negatived by the clear provisions of the Act and this Court as an interpretator of legislative purposes guided by the grammatical construction of the language, cannot contrive a legislative purpose, contrary to the clear language of Section 13 of the Act. Determination of a debt is under the scheme of the Act, a threshold requirement, for initiation of processes under the Act and clearly not an ongoing requirement. On the aforesaid analysis, the observations in paragraph No.23 of the judgment in Sravan Dall Mill (supra) do not bear the meaning as propounded by the petitioner, as that would do violence to the clear provisions of the Act and subvert the purposes for which the Legislation has been enacted. It would also introduce a continuing uncertainty in the processes to be put in motion for enforcement of the security interest and defeat the legislative purposes of the Act. No other contention is urged in support of the plea of the petitioner, to interdict the processes under the Act. For the aforesaid reasons, the contention of the petitioner does not commend acceptance by this Court nor is a case made out for grant of the relief sought herein. The writ petition is misconceived and is accordingly dismissed at the stage of admission. No costs. _____________________________ JUSTICE GODA RAGHURAM ___________________________ JUSTICE NOUSHAD ALI Dated: 22-03-2010 PVKS