IFCI Ltd. And Ors. vs S.R. Resorts Pvt. Ltd.

S.N.H. Zaidi, J

This appeal impugns the judgment and order dated 19.1.2012 of the Presiding Officer of DRT-I, Chandigarh passed in S.A. No. 223/2011, S.R. Resorts Pvt. Ltd. v. Authorized Officer, IFCI Ltd. & Ors., setting aside the demand and possession notices issued under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, hereinafter referred to as the Act of 2002, and after holding the sale notice unsustainable directed the appellant F1 to handover possession of the movable and immovable assets of the respondent company to the receiver for handing them over to the respondent's authorized representative. The factual matrix of the case, in brief, is that the appellant F1 had sanctioned a term loan of Rs. 100 crores to M/s. JEG Hospitality Holdings Ltd., vide loan agreement dated 28.8.2008, out of which Rs. 89.05 crores were availed by it. The respondent, which was a 100% subsidiary of the aforesaid borrower company and running a hospitality unit under the name and style of 'Karnal Haveli' had created an equitable mortgage of its land and building measuring 64 Kanal 8 Maria, situate at village Jhanjari, Tehsil Nilokheri, District Karnal, (Haryana) in favour of the appellant as a security for the repayment of the said loan. The loan was repayable by one single payment (bullet payment) by 1.9.2010 and the interest at the agreed rate was payable on monthly basis. On 6.9.2010, another term loan of Rs. 8 crores was sanctioned to the said borrower company, which was fully availed, and was also repayable by bullet payment by 1.9.2011 and the interest was payable on similar monthly basis. The liability of repayment of the first term loan was later extended up to 1.9.2011. The borrower also pledged certain shares of a company with the appellant, however, as it committed default in payment of interest, the appellant de-pledged those shares and recovered certain amount by the sale of those shares and appropriated the sale proceeds against the overdue interest. Both the aforesaid loan accounts were classified as Non Performing Asset (NPA) on 14.6.2011 and the appellant issued a demand notice dated 1.7.2011 under Section 13(2) of the Act of 2002 to the borrower as well as to the mortgagor/respondent. On 30.9.2011, the District Magistrate, Karnal made order for taking the possession of the secured asset and the appellant after issuing the possession notice and publishing in the newspapers took the actual physical possession of the aforesaid mortgaged property and also published the notice for its auction sale.

The respondent challenging the measures taken by the appellant qua the secured asset filed application under Section 17 of the Act of 2002 (S.A. No. 223/2011) before DRT-1, Chandigarh, which had directed for the sale of the secured asset with certain directions. The sale, however, could not materialize as no bid/tender was received. The learned Tribunal below, after hearing the parties, allowed the S.A. and set aside the demand and possession notices by order dated 19.1.2012 and holding the sale notice unsustainable gave directions for handing over the possession of the secured asset back to the SA applicant/respondent, as stated above. Feeling aggrieved with that order, the secured creditor has filed this appeal.

I have heard the arguments of the appellant's Counsel as despite opportunities no arguments were advanced by the respondent's Counsel and further opportunity of oral arguments was declined to it with the liberty to file the written submissions which has, however, been availed by both the parties.

Mr. Rajeeve Mehra, the learned Senior Advocate appearing for the appellants, pointed out that the Tribunal below has allowed the SA, inter alia, on two main grounds, viz., that (i) the demand notice issued under Section 13(2) of the Act of 2002 was not served upon the mortgagor/respondent at its registered office address of T-59, DCM School Road, Karol Bagh, New Delhi mentioned in the loan documents, and (ii) the account was wrongly declared as NPA without following the guidelines of the Reserve Bank of India (RBI).

According to Mr. Mehra so far as the first ground is concerned, since the appellant had received a letter dated 15.12.2010 of the respondent company from its registered office address of J-5/126, Rajouri Garden, New Delhi showing its intention to sell the movable and immovable properties of Karnal Haveli and asking the appellant to identify a suitable buyer for the same, therefore, the demand notice was sent to it at its aforesaid address by Speed Post as well as through courier, besides sending the notices to the borrower company and its Directors, who were common in both the companies, calling upon them to pay the balance amount of Rs. 1,01,60,33,308/- within 60 days. He further contended that though the notice sent by Speed Post to the respondent was returned with the remark of "Left", but the notices sent to it through courier was received, vide receipt (Page 379), and it were also received by its Directors viz., D.P.S. Kohli, G.S. Sawhney and B.S. Sawhney, vide courier receipts (Page 378). He also contended that since the borrower company was holding 100% shares of the mortgagor company and the Directors of both the companies were common, therefore, service of demand notice upon the respondent company was sufficient through its Directors. According to Mr. Mehra, under Rule 2 of Order 29, CPC, summons in respect of a suit filed against a corporation can be served either on any of its Directors or by sending it through post at its registered office and since the respondent is a body corporate, therefore, the demand notices received by its Directors as well as served at its registered office address of Rajouri Garden through courier was a sufficient service thereof upon it.

He further contended that though resolution dated 12.12.2011 of the Board of Directors of the respondent company (Page 75) showed that it was passed at its registered office at T-59, DCM School Road, Karol Bagh, New Delhi authorizing its Directors Mr. D.P.S. Kohli and/or Mr. G.S. Sawhney to file/institute legal proceedings for and on behalf of the company, yet Mr. Kohli had filed the S.A. with the company's registered office address of J-5/126, Rajouri Garden, New Delhi, which was a clear case of dishonest pleading, as the respondent while filing the S.A. with the Rajouri Garden address of its registered office had taken the plea that demand notice was not served at the Karol Bagh address of its registered office, without filing any evidence to show as to when its registered office address was changed from Karol Bagh to Rajouri Garden and whether the change was notified to the Registrar of Companies.

The respondent, on the other hand, has contended in its written submissions that its registered office address of Karol Bagh was available in the records of the appellant, i.e., in the declaration and undertaking for the mortgage dated 23.9.2010, but no notice under Section 13(2) of the Act of 2002 was sent to it at the said address and was allegedly sent at Rajouri Garden address, which was never served upon the respondent. It has been pointed out that the copy of the Board's Resolution dated 13.9.2010 (page No. 365) and memorandum of mortgage recorded by the appellant in its books (Page 368) fully prove the respondent's address at Karol Bagh and the learned Tribunal below has rightly relied upon those documents for taking the view that the demand notice was not served at that address. It has further been contended that, according to the appellant, the demand notice sent by Speed Post at the respondent's Rajouri Garden address was received back with the remark of 'Left' (Page 376-377) which goes to show that the respondent company had no address at Rajouri Garden and the demand notice allegedly sent through courier at that address was also not served as the courier receipt (Page 378) showed that it was not delivered and returned to the sender as it bears the stamp of Nehru Place Pin Code 110019, where the office of the appellant is situated, and the Pin Code of Rajouri Garden is 110027. It has also been pointed out that in the affidavit dated 9.1.2012 (Page 372) filed before the Tribunal below, the officer of the appellant company had only said about sending the demand notice without saying about its service upon the respondent. It has been urged that the appellant's contention has no force that the respondent was served with the demand notice through the Directors of the borrower company, which has 100% shareholding of the respondent, as the respondent is an independent legal entity having its independent Board of Directors and business and the borrower company is only a shareholder of the respondent and any notice served upon the shareholder cannot be held to be service upon the company.

It has also been contended by the respondent that Rule 3(1) of the Security Interest (Enforcement) Rules, 2002 provides for the manner in which a demand notice issued under Section 13(2) of the Act is to be served and, according to it, service should be made by delivering or transmitting or sending by registered post with acknowledgement due or by speed post or by courier or by any other means of transmission of document like fax message or electronic mail service at the place where the borrower or its agent actually and voluntarily resides or carries on business or personally works for gain and since it is an admitted case of the appellant that the demand notice sent by speed post was returned with the remark of 'Left' and similarly the notice sent by courier was also not served, therefore, the Tribunal below has rightly held that the demand notice was not served upon the respondent at its Karol Bagh address. In support of its contention the respondent has cited the judgments in Krushna Chandra Sahoo v. Bank of India & Ors. State of Bihar v. J.A.C. Saldanna, AIR 1980 SC 324, Prabha Shankar Dubey v. State of Madhya Pradesh, I (2004) CCR 61 (SC) : I (2004) SLT 131 : AIR 2004 SC 486 and Indian Banks' Association v. Devkala Consultancy Service, III (2004) BC 1 (SC) : III (2004) SLT 488 : AIR 2004 SC 2615, wherein it has been held that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner and following the other course is not permitted.

Considering the respective contentions of the parties, I found that it is not in dispute that a letter dated 15.12.2010 (Page 229) was sent to the appellant by the respondent from its registered office address of Rajouri Garden. It is pertinent to note that the respondent had also filed the S.A. with its same registered office address. The respondent has, however, not clarified that how and why the S.A. was filed with its Rajouri Garden address if it had its registered office at Karol Bagh. There is also no dispute that the demand notices sent through courier were served upon Messrs D.P.S. Kohli, G.S. Sawhney and B.S. Sawhney, who were the Directors of the respondent company. Since Rule 3(1) of the Security Interest (Enforcement) Rules provides for service of demand notice by speed post or through courier upon the borrower or his agent empowered to accept notice or document on behalf of the borrower and the Director of a company is indisputably empowered to accept the notice or document on behalf of the company as its agent, therefore, receipt of the demand notices by the Directors of the respondent company, vide courier receipts (Page No. 378) dated 2.7.2011 was the sufficient service thereof upon the respondent as it is not in dispute that the above-named persons were the Directors of the respondent company.

I am also of the view that the letter dated 15.12.2010 (Page No. 229) sent by the borrower company to the appellant with its registered office address of Rajouri Garden was a clear pointer to the change of its registered office address from Karol Bagh to Rajouri Garden and if at the time of the sanctioning of loan and creation of mortgage the respondent was having its registered office at Karol Bagh, it appears to have changed to Rajouri Garden, which is also corroborated from the circumstance that the S.A. and the affidavit of Mr. Kohli were also filed with the registered office address of Rajouri Garden, as such the demand notice was rightly sent to the respondent at that address. Though the demand notice sent through speed post at the Rajouri Garden address was not served, yet the said notices sent to the respondent's Directors through courier were sufficiently served. In view of above, 1 have no hesitation to say that since the demand notices were served upon the Directors of the respondent company, therefore, it was duly served upon the borrower as well as upon the mortgagor/respondent as per the requirement of Rule 3(1) of the Enforcement Rules and the contrary finding of the Tribunal below is not sustainable.

The other ground on which the S.A. has been allowed is that the declaration of the loan accounts as NPA on 14.6.2011 was not in accordance with the guidelines issued by the RBI. According to Mr. Mehra, the availed sum of Rs. 89.05 crores of the first term loan was repayable by bullet payment initially by 1.9.2010 but it was later extended up to 1.9.2011 and the subsequent term loan of Rs. 8 crores, was also to be repaid in the similar manner by 1.9.2011 and interest qua both the term loans, which was about Rs. 1.5 crores per month, was to be serviced on monthly basis. He further pointed out that since the borrower company had defaulted in servicing the interest, as per the loan agreement, and had deposited only Rs. 25 lacs towards the interest and had also failed to furnish additional security to restore the security cover up to the stipulated level, therefore, the borrower company was intimated about that, vide letter dated 23.2.2011 but since the payment of interest remained overdue for more than 90 days, therefore, the account was duly classified as NPA on 14.6.2011, as per RBI guidelines. He also pointed out that, vide another letter dated 23.3.2011, the borrower was intimated that as the overdue interest was not cleared and security cover was also not restored to the stipulated level, the appellant, on 22.3.2011, had de-pledged and sold 13.30 lac shares of Koutons Retail (India) Ltd. in the open market on 3.3.2011 and 22.3.2011 and appropriated the sale proceeds towards the overdue interest.

Mr. Mehra had contended that the letter dated 9.4.2011 was issued by the appellant only for requiring the borrower company to confirm the outstanding liability as on 31.3.2013 and on the basis of the said letter the borrower company cannot be allowed to say that the outstanding liability of the interest up to that date was fully discharged and the account had become regular, as with the sale proceeds of the pledged shares the security interest created in favour of the appellant was depleted to some extent and since thereafter the borrower company failed to clear the overdue interest and also did not restore the security cover and the payment of interest remained overdue for more than 90 days, therefore, the loan accounts were duly classified as NPA on 14.6.2011. It had been contended that the respondent had also admitted in Para 5(ix) of its S.A. that there had been default in repayment and account of the borrower company had become irregular, therefore, default in payment of the interest liability was sufficiently proved and since the loan accounts failed to generate income, therefore, it were rightly classified as NPA. In this regard, reference has been made to Clause 2.1.2 of the Master Circular dated 1.7.2010 of the Reserve Bank of India, which provides that in respect of a term loan a non-performing asset shall inter alia be a loan or an advance where interest and/ or instalment of principal remain overdue for a period of more than 90 days. It was pointed out that Clause 2.2 thereof provides that the treatment of an account as NPA should be based on the record of recovery and the Banks should not treat an advance as NPA merely due to existence of some deficiencies which are temporary in nature such as non availability of adequate drawing power, balance outstanding exceeding the limit, non submission of stock statement and the non renewal of the limits on the due date, etc., but where there is a threat of loss or the recoverability of the advance is in doubt, the asset should be treated as NPA. According to the appellant, in view of the said guidelines the accounts in question were rightly classified as NPA and the contrary finding of the Tribunal below is not tenable.

It was also contended on behalf of the appellant that the borrower company or the respondent did not make any representation/objection to the demand notice dated 1.7.2011, which clearly showed that it had no grievance qua that notice, as such the respondent cannot be allowed to challenge the correctness of the classification of account as NPA. In this regard, it was also contended that the respondent could not assail such classification in the S.A. after the expiry of the limitation period of 45 days.

The respondent has, per contra, contended in its written submissions that before taking any measure under Section 13(4) of the Act of 2002 to enforce its security interest, the secured creditor is mandatorily required to first classify the account of the borrower as NPA as per the RBI guidelines and then to issue a demand notice under Section 13(2) thereof to the borrower requiring him to discharge his liability within 60 days from the date of the service of notice and as such the classification of the account as NPA is a sine qua non for taking the measure, It has further been contended that in the present case the account of the borrower was allegedly classified as NPA on 14.6.2011, whereas on the said date neither the payment of the principal sum of the term loans was overdue, as it were to be repaid by bullet payment by 1.9.2011, nor the payment of the interest had become overdue for a period of more than 90 days because, as per the balance confirmation letter dated 9.4.2011 (Page No. 472) issued by the appellant itself, no amount of interest was shown as due on to 31.3.2011. It has also been contended that the amount of interest for the month of April 2011 had become due on 30.4.2011 and, according to the RBI guidelines, it had to remain overdue for 90 days, as such the account could not have been classified as NPA before 30.7.2011 whereas it was classified as such on 14.6.2011 against the specific guidelines of the RBI. The respondent has also contended that as per Clause 5 of the facility agreement dated 28.8.2008 (Pages 79-114), titled as "Default Interest", the failure to pay interest would in no manner lead to the automatic withdrawal of the facility. Similarly, Clause 7.2 thereof provides for service of ten clear Banking days' notice to the borrower declaring the cancellation of the facilities and demanding immediate repayment of the outstanding obligations and Clause 15.1 also mandatorily requires that if the appellant wants to cancel the facility of loan on the ground of default, it must give a prior notice to the borrower categorically stating that the facility stands cancelled whereas in the instant case it was not the case of the appellant that any such notice was issued to the respondent. Consequently, the agreement had remained continued and the account could not be declared as NPA.

A further contention of the respondent is that the appellant, in Clause 'D' of the Grounds of Appeal (Page 21), has stated that it had recovered Rs. 938.65 lacs in March 2011 by the sale of the pledged shares and the balance confirmation certificate dated 9.4.2011 (Page 472) issued by the appellant had very categorically said that liability towards interest was zero as on 31.3.2011, as such when the account was classified as NPA on 14.6.2011, neither the principal amount nor the interest had become overdue for more than 90 days, therefore, classification of the account as NPA on that date was clearly against the guidelines of the RBI and the measure of taking the possession of the property in question under Section 13(4) of the Act was illegal and the Tribunal below has rightly quashed the same. It has been pointed out that the Supreme Court in Transcore v. Union of India & Anr., VIII (2006) SLT 617 : I (2007) BC 33 (SC) : 135 (2006) DLT (SC) 151 : (2008) 1 SCC 125 has held that 'twin conditions are to be satisfied prior to issuance of a notice under Section 13(2) of the Act, 2002 (i) borrower is under a liability and (ii) his account in the books of the secured creditor is classified as substandard, doubtful or loss" According to the respondent, classification of the account as sub-standard, doubtful or loss is a stage subsequent to the classification of the asset as NPA, which must have been classified as such on or before the date of the issuance of the demand notice under Section 13(2) of the Act of 2002 [Sarvan Dal Mills Pvt. Ltd. v. Central Bank of India, AIR 2010 AP 35, M/s. N.D. Mercantile Pvt. Ltd. v. UCO Bank, Kolkata Regional Office & Ors., 2007 (2) Banks CLR 261 (CAL)].

I have given my anxious thoughts to the respective submissions of the parties and on perusal of the record I found that the parties are not in conflict with this proposition of law that before issuing the demand notice to the borrower under Section 13(2) of the Act of 2002, the account must have been classified as NPA in accordance with the guidelines issued by the RBI. It is also not in dispute that as per Clause 2.1.2 of the Master Circular dated 1.7.2010 of the RBI. in respect of a term loan, a non-performing asset shall inter alia be a loan or an advance where interest and/or instalment of principal remain overdue for a period of more than 90 days The loan account in the instant case was classified as NPA on 14.6.2011. It is not in dispute that repayment of the principal amount qua both the term loans had not become due on that date as it was to be made by a bullet payment by 1.9.2011. The balance confirmation certificate dated 9.4.2011, (Page 472), issued by the appellant shows zero liability towards interest in respect of both the term loans as on 31.3.2011 The learned Tribunal below has thus rightly held that since according to the balance confirmation certificate dated 9.4.2011, no payment of interest was due on 31.3.2011, the classification of the account as NPA on 14.6.2011 was against the RBI guidelines as the overdue period of interest on that date was much less than 90 days and I do not find any legal infirmity or error in this finding.

The appellant F1, in its written submissions, has stated that after adjusting the amounts realized from the sale of pledged shares on 3.3.2011 and 22.3.2011 towards the overdue interest, the certificate dated 9.4.2011 confirming the balance was issued. The said certificate, as already stated, does not show any liability towards interest as on 31.3.2011. In view of this, the contention of the appellant that by the sale of pledged shares the outstanding liability towards interest was only depleted and not fully discharged cannot be accepted. The said certificate shows the status of the account as on 31.3.2011 and since it does not show any liability towards the interest and the liability of repayment of the principal amount had admittedly not become due on 14.6.2011 and was payable by 1.9.2011, therefore, the classification of the account as NPA on 14.6.2011 was definitely not in accordance with the guidelines of the RBI, as the overdue period qua the payment of interest on that date had not reached the stipulated period of 90 days. I also find force in the contention of the respondent that as no interest liability was outstanding on 31.3.2011 and the interest for the month of April 2011 had become due only on 30.4.2011 and since it was not paid by that date, it became overdue on 1.5.2011, therefore, the account could not have been classified as NPA before 30.7.2011 when the 90 days' period from 30.4.2011 was to expire. A demand notice, under Section 13(2) of the Act of 2002, can be issued by a secured creditor to the borrower requiring him to discharge his liability within 60 days of the service of notice, only if the borrower makes default in repayment of the secured debt in full and his account in respect of such debt has been classified as NPA. A 'non performing asset', as per its definition in Clause (o) of Section 2 of the Act of 2002, means such an asset or account of the borrower which has been classified by the Bank or the financial institution as substandard, doubtful or loss in accordance with the directions or guidelines relating to the asset classification issued by the Reserve Bank. The RBI has issued prudential norms/guidelines for the asset classification in its Circulars from time-to-time.. It has already been found in the instant case that the classification of the account as NPA by the appellant on 16.4.2011 was not in accordance with the guidelines of the RBI issued vide Master Circular dated 1.7.2010. In my opinion, since the repayment of the principal amount was to be made by the bullet payment by 1.9.2011 and had not become due, what to say overdue and the overdue interest had been adjusted by the sale proceeds of the pledged shares in March 2011 and liability of payment of interest up to 31.3.2011 had become nil and neither the principal amount nor any interest was overdue on 14.6.2011, therefore, the classification of the account as NPA on that date was bad in law. I am also of the considered view that the demand notice dated 1.7.2011 issued under Section 13(2) of the Act of 2002 on the basis of such classification was not tenable in the eye of law as it was not satisfying any of the conditions specified by the Hon'ble Supreme Court in Transcore v. Union of India & Anr. (supra) because neither the borrower was under any liability of repayment of the principal amount nor the payment of the interest had become overdue on that date and the account was also not classified as NPA as per the RBI guidelines. The action of the appellant in taking the possession of Karnal Haveli under Section 13(4), pursuant to such demand notice dated 1.7.2011 is, therefore, not sustainable and the finding of the Tribunal below on this issue, therefore, does not warrant any interference.

The contention of the appellant that as neither the borrower company nor the mortgagor/respondent had filed any objection/representation under Section 13(3A) of the Act of 2002 qua the demand notice dated 1.7.2011, therefore, they cannot be allowed to dispute it now has no substance, because if the classification of the account by the appellant was not in accordance with the directions or guidelines issued by the RBI in this regard then the demand notice issued on the basis of such classification would be per se bad in law and cannot be held legal or valid merely on the ground that no representation or objection under Section 13(3A) was made against it. Similarly, the plea that the challenge to the classification of account as NPA is barred by limitation, is also not tenable as the S.A. challenging the measure of taking the possession of the secured asset was filed within the period of limitation and since the said measure was taken pursuant to the demand and possession notices issued on the basis of the classification of the account as NPA, therefore, while adjudicating the legality of the measure taken under Section 13(4) of the Act, the question qua the classification of the account as NPA, if disputed, is bound to be looked into, I am also of the view that looking to the circumstances of the case, it could not be said to be such a case where there was any threat of loss or the recoverability of the advance was in doubt so that the asset could be treated as NPA in view of Clause 2.2 of the Master Circular dated 1.7.2010 of the RBI, when it was not falling within the parameter of Clause 2.1.2 of the said Circular.

This contention of Mr. Mehra is also not acceptable, being against the pleadings, that by the sale of the pledged shares only an amount of Rs. 403.65 lacs was recovered, as in ground D of the 'Grounds of Appeal' (Page 21) it has been averred that a sum of Rs. 938.65 lacs was recovered by the sale of pledged shares in the month of March 2011.

Mr. Mehra had also submitted that despite the fact that the order impugned is not sustainable in the eye of law, but the appellant is ready to release the charge on the property on payment of Rs. 62.5 crores or, in the alternative, to settle without insisting on payment of interest if Rs. 97.05 crores is paid. It however appears that there Is no taker of this offer of the appellant from the respondent's side as nothing has been said in this regard in the written submission filed on its behalf.

In view of the above discussion, I have come to the conclusion that the classification of the loan accounts on 14.6.2011 as NPA and issuance of demand notice dated 1.7.2011 under Section 13(2) of the Act of 2002 on the basis of such classification were not in accordance with the RBI guidelines and the provisions of the said Act and as such the subsequent measure of issuing the possession notice and taking the possession of the secured asset pursuant to such demand and possession notices was also not in accordance with the provisions thereof. The order impugned setting aside the said notices and directing the restoration of the secured asset to the appellant does not suffer with any infirmity and this appeal being devoid of any force is liable to be dismissed. The appeal is accordingly dismissed leaving the parties to bear their own cost. The appellant is directed to restore back the possession of all the movable and immovable properties of the respondent company to it through the Receiver in terms of the order impugned within four weeks.

Copy of this order be furnished to the parties as per law.