*THE HON'BLE SRI JUSTICE P.S.NARAYANA +W.P.No.21610 of 2005 % 29-1-2008 # M/s. Pharmaida Pharmaceuticals Ltd., represented by its Managing Director .. Petitioner and $ Central Bank of India, Represented by its Chief Manager Gudimalkapuram Branch, Hyderabad and another .. Respondents <GIST: >HEAD NOTE: ! Counsel for petitioner : Sri Pinnikanti Lakshmi Prasad ^ Counsel for respondents : Sri Ch.Siva Reddy ?CASES REFERRED: 1. (2004) 4 SCC 311 2. 2007(4) ALT 317 THE HON'BLE SRI JUSTICE P.S.NARAYANA W.P.No.21610 of 2005 Date : 29-1-2008 Between : M/s. Pharmaida Pharmaceuticals Ltd., represented by its Managing Director .. Petitioner and Central Bank of India, Represented by its Chief Manager Gudimalkapuram Branch, Hyderabad and another .. Respondents THE HON'BLE SRI JUSTICE P.S.NARAYANA W.P.No.21610 of 2005 ORDER: 1. Heard Sri Pinnikanti Lakshmi Prasad, Counsel representing Smt.Veda Vani, the learned Counsel representing the writ petitioner and Sri Ch.Siva Reddy, the learned Counsel representing the 1st respondent. 2. This Court issued rule nisi on 7-10-2005 and granted interim stay in W.P.M.P.No.27746/2005 subject to the condition of the petitioner depositing a sum of Rs.10 lakhs within a period of four weeks from 7-10-2005 failing which the stay shall stand vacated without further reference to the Court. 3. The Writ Petition is filed for a writ of certiorari or any other appropriate writ by setting aside the notice dated 1-8-2005 issued under Section 13(2) of Securities and Reconstruction of Financial Assets (Enforcement of Security Interest) Act 2002 (in short hereinafter referred to as “Act” for the purpose of convenience) by the respondent-Bank and to pass such other suitable orders. 4. Sri Pinnikanti Lakshmi Prasad, the learned Counsel representing the writ petitioner had taken this Court through the contents of the impugned notice and would maintain that the impugned notice does not satisfy the ingredients of non-performing asset as defined under Section 2(o) of the Act. The learned Counsel also had drawn the attention of this Court to Section 13(2) and Section 13(4) of the Act and would maintain that the question of availing the further alternative remedy as specified under the Act would not arise unless the stage of Section 13(4) of the Act is reached in a particular given case. Hence, the learned Counsel would submit when the impugned notice is not in conformity with Section 2(o) of the Act, read along with the guidelines of the Reserve Bank of India, it may have to be taken that the said notice is without jurisdiction and hence the Writ Petition is perfectly maintainable. The learned Counsel also would submit that the Constitutional remedy under Article 226 of the Constitution of India cannot be taken away by an ordinary Legislative measure and when there is no other alternative remedy at all, till the stage of Section 13(4) of the Act is reached, definitely as against a notice under Section 13(2) of the Act, when the said notice is not in conformity with the provisions of the Act and also the guidelines of the Reserve Bank of India, the Writ Petition can be maintained and the said notice is liable to be quashed on this ground. The learned Counsel also pointed out to the respective pleadings of the parties and had drawn the attention of this Court to the relevant provisions of the Act and also the relevant Circulars of the Reserve Bank of India. 5. Per contra, Sri Ch.Siva Reddy, the learned Counsel representing the respondent would maintain that in a way this question already had been answered by the Apex Court in Mardia Chemicals Ltd. Vs. Union of India [1] and had placed reliance on the said decision in general and para-50 in particular. The learned Counsel also had further drawn the attention of this Court to Section 13(2) and Section 13(4) of the Act and respondent pointed out to Section 34 of the Act and would explain that the object and the spirit of the Act also may have to be kept in mind while interpreting the different provisions of the Act. Further, the learned Counsel would maintain that the circulars or the guidelines issued by the Reserve Bank of India are more concerned with the internal affairs in between the Reserve Bank of India and the Banking Institutions for the purpose of guidance and these are not enforceable by way of a Writ of Mandamus or otherwise. Even otherwise, in the light of the different provisions of the Act and the Scheme of the Act, if carefully examined, the discretion exercised while taking a decision relating to whether an asset is a non-performing or not by the Banking Institution, normally not to be interfered with by a writ Court. Further, the learned Counsel would submit that even otherwise it is not as though the petitioner is remediless. At the stage of Section 13(4) of the Act, definitely, the petitioner is having an effective remedy and all these factual issues definitely can be agitated before the concerned Debt Recovery Tribunal and hence the Writ Petition is not maintainable and normally the power of judicial review under Article 226 of the Constitution of India not to be exercised in such matters. The learned Counsel also placed strong reliance on the decision of this Court in Sri Srinivasa Rice and Flour Mill Vs. Authorised Officer, State Bank of India [2]. 6. Heard the Counsel. 7. The petitioner-Company is incorporated in the year 1989 under the Companies Act 1956, having its registered office at 4-4-211/12, Inderbagh, Sultan Bazar, Hyderabad. The petitioner-Company is engaged in the business of manufacture and sale of Drugs and Pharmaceuticals, Vitamins, Anti-biotics, fine Chemicals etc., and it had been awarded GMP Certificate (Good Manufacturing practice) by the Government of Andhra Pradesh and its products are approved as W.H.O. Standard as they conformed to the norms specified by the said organization. It is further stated that the petitioner had been enjoying the credit facilities from the year 1995 onwards. In the year 1999, a policy decision had been taken by the Government of Andhra Pradesh to accept only those Companies, which were certified as “WHO GMP" (World Health Organisation Good Manufacturing Practice Companies), with strict implementation of Schedule-M. In order to reach the optimum standards required for such classification, it was absolutely essential for the petitioner to expand its infrastructure. It is further stated that to expand the infrastructure, the petitioner had approached the 1st respondent-Bank for enhancing the credit limit to Rs.1.5 crores. However, the 1st respondent- Bank after great persuasion, increased the credit limit only to Rs.60 lakhs and the amount so sanctioned was also not released at a time. With the result, the expansion undertaken by the petitioner suffered a major set back. The petitioner having undertaken the expansion activity had to inevitably borrow huge amount from other sources at a higher rate of interest and thereby burdened itself with recurring interest liability. Ultimately, the petitioner succeeded in securing W.H.O. GMP status, but however, suffered impairment in its activity on account of increased interest burden. Though the 1st respondent ostensibly agreed to the re-scheduled terms, the terms were so onerous to the petitioner that it could not confirm to the conditions. It is also further stated that the intrinsic worth of the petitioner-Company now is of the order of Rs.3 crores. If the 1st respondent is allowed to have its commercial operations without enforcing onerous re- scheduling terms, it would have been able to sustain itself and pay the entire amount due to the 1st respondent- Bank. Had the 1st respondent shown little more pragmatism and indulgence in the matter of sanctioning of loan at appropriate time and released the funds, the entire adverse situation could have been avoided. Suffice it to say that whatever predicament that the petitioner suffered, it is due to reasons beyond the control of the petitioner and solely attributable to the 1st respondent. It is further stated that on the ground that the re-scheduling terms were not honoured by the petitioner, the 1st respondent- Bank declared the petitioner industry as NPA and arbitrarily proceeded to foreclose the loan and got issued notice under Section 13(2) of the Act. The hassles created by the 1st respondent in the commercial operations of the petitioner-Company virtually satisfied the petitioner’s growth. As of date, the petitioner is able to carry on minimal operations. It is also further stated that the petitioner got issued reply to the notice dated 1-8-2005 under the Act on 27-9-2005. The petitioner-Company had not lost its viability which warrants the respondent-bank to initiate steps for recovery of the amounts forcibly by enforcing the creditors right under the Act. Neither the Company is a willful defaulter nor a chronic defaulter where in the guidelines of the Reserve Bank of India can be implemented and convert the account into NPA. The statement of accounts will show the repayments of the loan. Time and again, the petitioner made several requests and submitted the C.M.A. (data for enhancement of the limits/reschedulement of the loan in view of the changing circumstances in the business market). Further it is stated that after issuance of the notice under Section 13(2) of the Act, the borrower had an opportunity to ventilate its grievance confining to the liability and the repayment. Practically, by experience, under any circumstances, the respondent-Bank had not afforded any opportunity to its borrowers more pragmatism and indulgence in the matter of sanctioning of loan at appropriate time and released funds so that the entire adverse situation would have been avoided. In stead of showing indulgence the respondent-Bank may proceed under Section 14 of the Act for possession of the property with the help of police or under Section 5 of the Act may transfer the financial assets to the Securitisation Company by creating a third party interest over the property and as such the petitioner is put to irreparable loss and will lose the entity which tantamount to winding up of the Company. The cumulative effect on a plain reading of the annexures is that the 1st respondent is expected to be flexible in view of the circumstances stated. Further, the material which is furnished is already placed before the 1st respondent. The 1st respondent had not disputed the authority of the material placed before it which are filed as annexures before this Court. On the other hand the respondent had not verified the material in respect of its viability, securities given for the advancement of the loan and in such circumstances it is legitimately expected by the petitioner that the 1st respondent will enhance the credit limit as requested by it. But unfortunately, the 1st respondent had taken the extreme arbitrary step by invoking the power under Section 13(2) of the Act which is illegal, arbitrary and capricious. Further it is stated that the respondent-Bank failed to explain the reason to treat the petitioner account as NPA on account of doubtful, substandard or loss assets so as to enable to respondent- Bank to enforce the security by invoking the deterrent provisions of the Act. In view of the material placed before the respondent-Bank, it is impossible to conclude that the petitioner’s account is a non-performing asset. On the other hand, the authority must take into consideration of the facts, material and circumstances placed before it and exercise the discretion to declare the account as NPA and such discretion has to be exercised judicially, objectively but not subjectively. On a plain reading of the impugned order, it is evident that the authority under the Act had not exercised its discretion vested in it properly, but it exercised mechanically and as such the order is violative of Article 14 of the Constitution of India and is liable to be set aside. The 1st respondent-Bank is empowered to initiate steps for recovery of the amount by invoking the provisions of R.D.B. Act 1993 by filing an application to the concerned authority. Apart from that, the present Act had been legislated without the intervention of the Court and the powers given under the Act ensuring the Bank for speedy recovery by safeguarding the interest of the Banks and to avoid procedural wrangles. As such the authority which is empowered under the Act should strictly adhere to the object and the provisions of the Act judicially and objectively. The power exercised should not be deterrent to the borrower but it should always safeguard interest of the borrower while ensuring the recovery of the sums advanced. Further, it is stated that the amounts advanced by the respondent-Bank are sufficiently secured by way of mortgage, hypothecation and receivables. In view of the present situation, the respondent-Bank resorted to the arbitrary action while exercising the power under Section 13(2) of the Act. Particularly, none of the ingredients of Section 13(2) of the Act are satisfied and hence the impugned notice is without jurisdiction. 8. The impugned notice dated 1-8-2005 reads as hereunder : CENTRAL BANK OF INDIA GUDIMALKAPURAM BRANCH 1-8-2005 BY RGD.POST ACK.DUE WITHOUT PREJUDICE NOTICE U/S 13(2) OF THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS/AND ENFORCEMENT OF SECURITY INTEREST ACT 2002 1) We have at your request, granted to you various credit facilities for an aggregate amount of Rs.70,00,000 and we give below full details of various credit facilities granted by us: Facility Limit Outstanding as on 1- 8-2005 a) Cash credit (H) Rs.40,00,000 Rs.42,90,947.00 (DR) b) Term loan Rs.30,00,000 Rs.25,96,514.00 We inform you that out of total amount of Rs.68,87,461/- due to us as on 1-8-2005 you have defaulted in repayment of entire amount of Rs.68,87,461/- (which represents the principal + interest due to the date of this notice). 2) As you have defaulted in repayment of your liabilities, we have classified your dues as NON PERFORMING ASSET in accordance with the directions or guidelines issued by the Reserve Bank of India. 3) We also inform you that in spite of our repeated demand notices and oral requests for repayment of the entire amount due to us, you have not so far paid the same. 4) You are aware that the various limits granted by us are secured by the following assets/security agreements (SECURED ASSETS) A) HYPOTHECATION OF STORES/STOCKS B) EXCLUSIVE CHARGE ON PLANT AND MACHINERY C) COLLATERAL SECURITY OF FACTORY LAND AND BUILDING SITUATED AT SURVEY No.33, KONDAMADUGU VILLAGE, BIBINAGAR MANDAL, NALGONDA DISTRICT. C-1) All that portion of land bearing survey No.533, admeasuring Ac:1-22½ guntas, Hectares 0-62½ situated at Kondamadugu (V) Rev. Mandal Bibinagar District, Nalgonda, Regn. Sub-District. Bhongir, Regn. District. Nalgonda, G.P. Kondamadugu, M.P.P. Bibinagar, ZPP. C-2) All that portion of land bearing survey No.533, admeasuring Ac.0-21 guntas hectares 0.21, dry land situated at Kondamadugu village, Rev. Mandal, Bibi Nagar, District. Nalgonda, Regn. Sub-Dist. Bhongir, Regn. Dist. Nalgonda, G.P.Kondamadugu, M.P.P., Bibinagar, Z.P.P. Nalgonda. 5) For the reasons stated above, we hereby call upon you to discharge in full your liabilities to us within a period of 60 days from the date of receipt of notice, failing which we will be exercising the powers under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Act) against the secured assets mentioned above in accordance with the law. The powers available to us under Section 13 of the Act, inter alia, includes (i) power to take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset, (ii) take over the management of the secured assets including the right to transfer by way of lease, assignment or sale and realize the secured asset, and any transfer of secured asset by us shall vest in the transferee all rights, in, or in relation to the secured asset transferred as if the transfer has been made by you. 6) The amount realized from the exercising of the powers mentioned above, will first be applied in payment of all costs, charges and expenses which in the opinion of us have been properly incurred by us or any expenses indicated thereto, and secondly applied in discharge of the dues of us as mentioned above with contractual interest from the date of this notice till the date of actual realization, and the residue of this money, if any shall be paid to you. 7) Please take note that after receipt of the notice, you shall not transfer by way of sale, lease or otherwise any of the secured assets referred in this notice, without prior written consent of the secured creditor. 8) We also inform you that, if the dues of us are not fully satisfied with the sale proceeds of the secured assets or even otherwise, we reserve our right to proceed against you before DEBTS RECOVERY TRIBUNAL., Courts for recovery of the balance amount from you. Sd/- Regional manager Authorised Signatory 9. In the counter affidavit filed by the 1st respondent-Banking Institution it is stated that the petitioner approached the 1st respondent-Bank for financial assistance for its business activity during 1995 and the 1st respondent-Bank after assessing the credit requirement as per the banking norms had sanctioned Rs.75 lakhs as under: 1. Cash Credit (Hypothecation) limits Rs. 30.00 lakhs 2. L.C. Limit Rs. 20.00 lakhs 3. Bills purchase Rs. 20.00 lakhs 4. Bank Guarantee Rs. 5.00 lakhs ------------------- Rs. 75.00 lakhs =========== But the petitioner failed to achieve even half of the projected turn over for 1997-1998 and has not utilized documentary bills. The petitioner maintained the stock inventory level on high side and sundry debtors dues as on 25-9-1998 were Rs.75 lakhs due to lack of distributors. The petitioner failed to run the business at expected level. Therefore the 1st respondent-Bank revised the limits and converted the loan facility into cash credit hypothecation of Rs.50 lakhs and bills purchase limits of Rs.10 lakhs. As the petitioner could not run the business and repay the loan, the 1st respondent-Bank rescheduled the loans by reducing cash credit limit to Rs.40 lakhs and converted the balance amount outstanding into working capital term loan of Rs.30 lakhs for repayment of the loans easily. In spite of the help extended by the Bank, the petitioner failed to repay the loans as agreed upon. But the 1st respondent-Bank does not know about the petitioner getting certificate of W.H.O. Good Manufacturing Practice companies and outside borrowings by the petitioner-Company etc. Further it is stated that the 1st respondent-Bank sanctioned the loan and rescheduled the same in accordance with Rules and practice of the Bank. The allegation that had the 1st respondent shown little more pragmatism and indulgence in the matter of sanctioning of loan at the appropriate time and released the funds, the entire adverse situation could have been avoided, is frivolous and baseless. It is also further stated that to maintain the international standards in accounting system in the Banking and Financial matters, the Reserve Bank of India introduced prudential norms for income recognition, asset classification and provisioning for the advances. Before introducing the prudential norms, the Government had taken recommendations of Narasimham Committee on Financial Reforms, which recommended for setting up of Recovery Tribunals for expeditious adjudication and speedy recovery of Bank dues. As per the recommendations of Tiwari Committee, Debts Recovery Tribunals were established in the country under the provisions of the Recovery of Debts due to Banks and Financial Institutions Act 1993 but it did not bring the desired results. Therefore, the Government of India thought it fit to bring the Economic Legislation for effective recovery of the mounting Non-Performing Assets and as per the recommendations of Narasimham Committee and Andhyarujina Committee the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 was enacted giving powers to the Banks and Financial Institutions to sell the secured interest without intervention of the Courts for recovery of the loans and to proceed under the Act the account should be classified as Non Performing Asset. It is also further stated that as per the latest guidelines of the Reserve Bank of India, interest in the loan accounts shall be charged every month and if interest is not serviced for three months continuously, the accounts shall be classified as Non Performing Assets and proceed under the Act for recovery of the Bank dues. Therefore, the account of the petitioner had become non-performing asset as the interest was not serviced nor the instalments were paid as per the norms of the Reserve Bank of India and hence the respondent-Bank had issued notice under Section 13(2) of the Act. It is also further stated that the notice under Section 13(2) of the Act is a preliminary notice under the Act demanding the secured debtors to pay the amount within 60 days. Therefore, the petitioner had sent the notice under Section 13(2) on 1-8-2005. The petitioner-Company did not repay the amount due but got issued a representation or objection dated 27-9-2005 for the notice which was received by the respondent on 3- 10-2005. Even though the petitioner got issued the representation/objection on receipt of the notice under Section 13(2) of the Act to complete the formality, the representation does not give any hope of recovery of the amount due. As the said representation was not tenable and not acceptable to the respondent-Bank, reply was sent to the said representation on 7-10-2005. In stead of repaying the loans and bringing the account into performing asset, the petitioner had filed the Writ Petition and obtained the interim order, which reads :”There shall be interim stay subject to condition of petitioner depositing a sum of Rs.10,00,000/- (Rupees ten lakhs) within a period of four weeks from today failing which the stay shall stand vacated without further reference to the court”. But the petitioner had not deposited the said amount of Rs.10 lakhs as per the directions of this Court and hence the interim stay stood vacated. The writ petitioner is not interested in repaying the loan amounts with intention to delay and to avoid the repayment and the petitioner- Company filed the present Writ Petition without any ground and immaturely. Further, it is stated that the Writ Petition is not maintainable on the ground that the respondent-Bank may proceed against the petitioner under Section 13(4) of the Act. When the writ petitioner failed to comply with the interim orders of this Court, the respondent-Bank is entitled to take action under law. The petitioner had failed to repay the amount on receipt of notice under Section 13(2) within 60 days and failed to comply with the interim directions of this Court and has no right to seek any kind of relief. As per the guidelines of the Reserve Bank of India, if the interest is not serviced for three months continuously, the account shall be classified as Non Performing Asset. The Bank cannot exercise any discretion in classifying the NPA. The value of the securities given by the borrower or false promises made by the borrower cannot be taken into consideration for classifying the account as NPA and the question of explaining the reasons for classifying the account is also not required in law. The material papers filed in the Writ Petition do not contain any material to show that the petitioner is not liable for the action under the Act. The borrower cannot direct the Bank under what provision of law the Bank should proceed for recovery of the dues. In fact, the Parliament was well aware of the existence of the R.D.B. Act while enacting the Act of 2002. The petitioner had borrowed loans from the 1st respondent-Bank for running its business activity and failed to repay the loans as agreed upon. The 1st respondent-Bank had reviewed the account from time to time and converted the loans into working capital terms loan to enable the petitioner to repay the amount easily. Still, the petitioner failed to repay the loan except giving false promises and asking for enhancement of the limits. The turnover of the Company, the business activity, stock inventory level etc., show that the Company does not deserve or entitled for any loan enhancement. The Company also had failed