Mudrika Tiwari And Ors. vs Dhan Laxmi Bank

Ranjit Singh, J

Aggrieved against the order passed by the Tribunal below dismissing the SA filed by the appellants, they have filed the present Appeal to impugn the said order. Alakh Exports was granted PCL and PHL facilities: for Rs. 45 lacs which were subsequently enhanced to Rs. 80 lacs in the year 2008. The present two appellants along with Shri Udai Narain Tiwari and Shri Gian Parkash Tiwari stood as guarantors for the said credit facilities allowed in favour of Alakh Exports by the respondent Bank.

Both the appellants had mortgaged their respective 1/4th share measuring 378 sq. yards each out of the total plot measuring 1512 sq. yards situated in village Tilpat, Tehsil and District Faridabad. Two other guarantors namely Shri Udai Narain Tiwari and Shri Gian Parkash Tiwari owned 1/4th share each in the said land which had, however, not been mortgaged.

When the borrower failed to maintain the financial discipline, the Bank issued recall notice on 20th October, 2011 to the borrower as well as the guarantors including the appellants. The appellants were given three days time to make payment of a sum of Rs. 67,60,707.98 intimating that on failure to pay the amount, the Bank would take appropriate legal proceedings for recovery of the said amount. Soon thereafter the Bank issued addendum dated 24th October, 2011 correcting the amount of recovery due to be Rs. 80,42,402.55 instead of Rs. 67,60,707.98.

Apparently, when the appellants failed to make any payment thereafter, the Bank issued notice under Section 13(2) of the SARFAESI Act on 28th October, 2011 requiring the borrower and the appellants to pay a total sum of Rs. 89,53,783.48 with further interest as was disclosed in the notice. The appellants filed response to this notice on 29th October, 2011 admitting that the borrower had availed the credit facilities. In this reply the appellants had disclosed that the factory had caught fire as a result of which its stocks were destroyed completely. It is stated that the information in this regard had been supplied to the Bank and Insurance Company. The borrower and the appellants had made a grievance that the Bank did not render any help in this regard. Otherwise, the borrower and the appellants had stated that the claim was highly inflated.

Another response was filed when the Bank had issued addendum pleading that the inflated claim was without justification and reasoning and was not accompanied by any authentic proper statement of account. The Bank was accordingly requested to withdraw the recall notice.

When notice under Section 13(2) was issued by the Bank, the appellant had filed a response thereto as well. The Bank dealt with the objection raised by the appellants in its reply dated 22nd November, 2011. The appellants thereafter had filed the SA when the Bank had issued possession notice on 13th January, 2012. Plea in the SA was that no mortgage was created in favour of the respondent Bank. The borrower had claimed that it had sufficient products order from the overseas buyers but the Bank did not release the sanctioned limit and the borrower suffered losses for which even counter-claim had been filed. It was also pleaded that the factory of the principal borrower caught fire and that was the reason for which the principal borrower could net do better or execute order and suffered a great loss. Some other pleas were also raised like notice under Section 13(4) was contrary to the facts and law or that the action under the SARFAESI Act was unwarranted and uncalled for and that the default was on the part of the principal borrower.

On the basis of pleadings, the Tribunal below formulated the issues requiring decision. The Tribunal accordingly considered whether valid mortgage had been created by the appellants or whether the action under the SARFAESI Act was in accordance with the provisions of law. After due consideration, the Tribunal has found that the pleas raised in the SA were devoid of any merit and accordingly dismissed the same.

The Counsel for the appellants has mainly highlighted the fact of variance in the amount mentioned in the recall notice which was increased by almost Rs. 13 lacs. He would further submit that the amount claimed in the OA was Rs. 89 lacs approximately. The Counsel submits that the Bank had arbitrarily enhanced the amount due without showing justification.

The Counsel would even challenge the action of the Bank in classifying the account, as NPA. He submits that the account could be classified as NPA only once it was termed as sub-standard assets or doubtful assets or loss assets. Grievance is that the SA filed by the appellants has been dismissed without adverting to these pleas.

I have considered the submissions made before me. I have minutely examined the pleadings. Neither in the response filed to the recall notice nor in subsequently replies, the appellants had ever pleaded that, the account was wrongly classified as NPA by the Bank. The Counsel even could not point out from the pleadings made in the SA if any such plea was raised. The SA was filed by the appellants, who were the guarantors. The principal borrower has never raised this plea. Even no such plea has been raised in the response filed to the OA filed by the Bank. The SA filed by the appellants was dismissed on 21st August, 2014 and on the same day, the OA filed by the Bank was also allowed by the same Tribunal. The issue whether the amount claimed in the OA was proper or not was required to be raised by the principal borrower while the OA was being adjudicated. The Tribunal after considering the pleadings has held the Bank entitled to recover a sum of Rs. 89,53,783/- with simple interest @ 20.75% p.a. with effect from 28th October, 2011 until recovery. Concededly, no Appeal has been filed against this determination.

In this OA, the principal borrower had filed a counter-claim of Rs. 6,19,53,783/-. While allowing the OA, the counter-claim filed by the principal borrower has been rejected. Since no Appeal is filed against this order determining the amount due and payable, it has become final. Thus, the plea by the appellants, who were the guarantors, that the account was wrongly classified as NPA is an exercise in futility and nothing but to flog a dead horse.

Even otherwise, the Counsel has not been able to make good his submission that the account of the principal borrower was wrongly classified as NPA. The statutory guidelines issued by the RBI have explained what NPA is and when does assets become as NPA. As per Para 2.1.2 of RBI guidelines, a non-performing asset is 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 of a term loan;

(ii) The account remains 'out of order' as indicated at Para 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) The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops;

(v) The instalment of principal or interest thereon remains overdue for one crop season for long duration crops;

(vi) The amount of liquidity facility remains outstanding for more than 90 days, in respect of securitization transaction undertaken in terms of guidelines on securitization dated 1st February, 2006;

(vii) In respect of derivative transactions, the overdue receivables representing positive mark to market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment."

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated a 'out of order'.

The plea that the account is NPA only when it is sub-standard or doubtful or loss asset is over stretched view advanced by the Counsel. Substandard assets or doubtful assets or loss assets are the categories of NPA. The Banks can classify the account as non-performing assets which is termed as substandard assets or doubtful assets or loss assets in terms of the RBI guidelines in the circular issued by the RBI.

The constitutional validity of the Act was examined by the Hon'ble Supreme Court in the case of Mardia Chemicals Ltd. v. Union of India, 110 (2004) DLT 665 (SC) : II (2004) BC 397 (SC) : II (2004) SLT 991 : (2004) 4 SCC 311. One of the grounds on which the Act was challenged in Mardia Chemicals Ltd. case (supra) was that the said Act enables the Secured Creditors to classify the account of a borrower as NPA at the whims and fancies of such Secured Creditor. The Hon'ble Supreme Court rejected the said submission for the reason that the guidelines laid down by the Reserve Bank of India for classifying the account of a borrower as NPA would eliminate the possibility of the Secured Creditor arbitrarily declaring the account of a borrower as a NPA. The constitutional validity of the Act except for Sub-section (2) of Section 17 of the SARFAESI Act was, thus, upheld.

Non-performing assets initially was defined in the SARFAESI Act, 2002 to mean "an asset or account of borrower" which has been classified by the Bank or Financial Institution as substandard, doubtful or loss assets, in accordance with the direction or guidelines relating to assets classification issued by the Reserve Bank. Definition of NPA was amended in the year 2004 to define the NPA to mean "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 assets classifications issued by the Reserve Bank."

The amended definition of NPA in Section 2(1)(o) of the SARFAESI Act was made the subject-matter of challenge in bunch of matters before the various High Courts. The High Court of Gujarat by a common judgment dated 24th April, 2014 has held that the amended Section 2(1)(o) of the Act is unconstitutional. On the other hand, in another common judgment dated 18th May, 2014 in a batch of Writ Petitions, Madras High Court has rejected the challenge. Various Appeals, thus, came to be filed before the Hon'ble Supreme Court by the aggrieved parties, which were either borrowers or Secured Creditors by filing Writ Petitions under Section 32 of the Constitution. The Hon'ble Supreme Court has considered the issue by taking note of the reasons which had led to this amendment of the term NPA. The Court has taken note of the recommendations made by the Committee which were as follows:

"...The international practice is that an asset is treated as 'non-performing' when interest is overdue for at least two quarters. In respect of such non-performing assets interest is not recognized on accrual basis but is booked as income only when actually received. The Committee is of the view that a similar practice should be followed by Banks and Financial Institutions in India and accordingly recommends that interest on non-performing assets should not be booked as income on accrual basis. The non-performing assets. would be defined as an advance where, as on the balance sheet date--

(a) In respect of term loans, interest remains past due for a period of more than 180 days;

(b) In respect of overdraft and each credits, accounts remain out of order for a period of more than 180 days;

(c) In respect of bills purchased and discounted, the bill remains overdue and unpaid for a period of more than 180 days;

(d) In respect of other accounts, any amount to be received remains past due for a period of more than 180 days.

An amount is considered past due when it remains outstanding 30 days beyond the date.

xxx xxx xxx

The Committee is of the view that for the purposes of provisioning, Banks and Financial Institutions should classify their assets by compressing the Health Codes into the following broad groups:

(i) Standard,

(ii) Sub-standard,

(iii) Doubtful and

(iv) Loss.

The RBI should prescribe clear and objective definitions for these 4 categories to ensure a uniform, consistent and logical basis for classification of assets. Broadly stated, sub-standard assets would be those which exhibit problems and would include assets classified as non-performing for a period not exceeding two years. Doubtful assets are those non-performing assets which remain as such for a period exceeding two years and would also include loans in respect of which instalments are overdue for a period exceeding 2 years. Loss assets are accounts where loss has been identified but the amounts have not been written off."

The Court has also noticed that the report of the Committee on asset classification by the Creditors was accepted by the Reserve Bank of India and guidelines are issued from time-to-time. Different instructions culminating into different "Master Circulars" with respect to various classes of Banks and Financial Institutions came to be issued by the Reserve Bank of India from time-to-time. After taking note of all these developments, the Court has observed that such a classification is relevant and assumes importance in the decision making process of the Secured Creditor under Section 13(2} as to which one of the steps contemplated under Section 13(4) should be resorted in the case of a given defaulting borrower. The Court has further added that it may not be the only factor which determines the cause of action to taken by the Secured Creditor. The magnitude of the amount due and outstanding in a given case, the reasons which promoted the borrower to default in the repayment schedule, the nature of the business carried on by the defaulting borrower, the overall prospects of the defaulter's business, national and international market conditions are given as some other factors which are germane to a decision that action under Section 13(4) is required to be taken against a defaulting borrower. The Court has taken notice of the international practice as noticed in Narsimham Committee that "an asset is treated as non-performing when interest is overdue for at least two quarters". Such a practice of classifying that asset for the administrative purposes of the Banks only indicates that a borrower's account is not treated as a written off asset, the moment there is a default. Creditors keep a watch on such account and monitor the performance of the borrower's activity to ensure the recovery of the amounts due having regard to the needs of the industrial sector of the country and the importance of protecting the industry as far as possible in the large interest of the economy of the State. The Court thereafter has observed as under:

"48. The basic definition under the various circulars of the Reserve Bank of India and also other Regulators of a NPA is an asset which ceases to generate income for the Creditors (Banks or Financial Institution) i.e. a loan or advances made by the Banks on which interest and/or instalment or principal amount is overdue for a specified period depending upon the nature of the loan or advance whether the loan or advance is a term loan or agricultural loan, money advanced on bill discounting etc."

The Court has also held that an attempt to define the expression 'non-performing asset' valid for the millions of cases of loan transactions of various categories of loans and advances, lend or made by different categories of Creditors for all time to come would not only be an impracticable task but could also simply paralyse the entire Banking system thereby producing results which are counter productive to the object and the purpose sought to be achieved by the Act. It is due to this reason that the Parliament has left it to the RBI and other Regulators to prescribe guidelines from time-to-time in this regard. The RBI is the expert body to which the responsibility of monitoring the economic system of the country is entrusted under various enactments like RBI Act, the Banking Regulation Act, National Housing Bank, etc. The Hon'ble Supreme Court has accordingly held the amended definition of NPA under Section 2(1)(o) of the Act to be constitutionally valid.

The view taken by Gujarat High Court did not find favour with the Hon'ble Supreme Court whereas the one expressed by Madras High Court has been accepted. The Madras High Court had expressed itself to say that the Legislature has left the job of defining "non-performing asset" in the hands of Reserve Bank of India. Therefore, when once the Legislature has approved the power of Reserve Bank of India on the classification of assets, the resultant consequence would be that a subsequent amendment pertaining to such a classification would apply with its vigour and force the new Act as well. It may call for notice here that in both the unamended and amended definitions of classification of the NPA was to he made in accordance with the direction or under the guidelines relating, to the assets classification issued by the RBI. Under such classification, any such Bank or Financial Institution administered or regulated by any authority or body established, constituted or appointed by any law can be in terms of the directions or guidelines relating to assets classification issued by such authority and in any other case in accordance with the directions or guidelines relating to assets classification issued by the RBI.

The Hon'ble High Court of Delhi in the case of Holyaster Natural Resources v. Union of India, III (2014) BC 233 : 207 (2014) DLT 396 (DB)=W.P. (C) No. 7505/2013 : C.M. Appl. No. 16064/2013, decided on 17th January, 2014 has also considered this issued in bunch of Writ Petitions while upholding that the constitutional validity of the amended definition of NPA. On the basis of law laid down in this case, the Tribunal had the occasion to consider this issue while deciding Misc. Appeal No. 310/2013, titled as Punjab National Bank v. Shree Balaji Educational Trust, decided on 24th February, 2014. The submission that the account could net declared NPA only if the same had become substandard as per the definition given in the circular issued by the RBI was held to be over stretched view expressed by the Tribunal. The view which could be formed on the various judgment is that the RBI guidelines are to be taken into consideration while considering the definition of NPA as given in Section 2(1)(o) of the SARFAESI Act. It has consistently been held that the power to issue guidelines has rightly been vested in the regulator of that particular institution as the said regulator would understand the need of the institution. The Reserve Bank of India makes amply clear that every NPA would fall either in the category of substandard or default or loss asset. Thus, the submission that the substandard account may not fall within the definition of NPA is not correct as in such cases where there has been default in the payment of interest or the principal amount beyond 90 days, the account would be substandard and would also be covered by the definition of NPA. Thus, the submission made by the Counsel for the appellant that the account in this case was wrongly declared as NPA is misplaced and, thus, is rejected.

This Tribunal in Appeal No. 347 of 2012 titled as Satya Bhama Gupta v. HDFC Bank, decided on 30th June, 2014 along with the connected Appeals has taken note of the different provisions of RBI circular under which the account is declared as NPA. The relevant observations are as under:

"Clause 4.2.4(H) of RBI circular on NPA for the year 2009-2010 relates to mandated review of the accounts with temporary deficiencies. As per this clause, three months is the time to regularize the account and in any case not more than 180 days are mandated to review the position where ad hoc limits are given. On this basis, the Counsel would plead that from 30th June, 2009, 180 days maximum tenor had finished on 27th December, 2009 itself. Hence the Bank was entitled to declared the account as NPA on 27th December, 2009. Clause 4.2.4(H) of RBI Circular 2009-10 is as under:

"4.2.4. Accounts with temporary deficiencies--The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. in the matter of classification of accounts with such deficiencies Bank may follow the following guidelines--

(i) Banks should ensure that drawings in the Working Capital account are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relief upon by the Banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular.

A Working Capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory.

(ii) Regular and ad hoc credit limits need to be reviewed/regularized not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of final statements and other data from the borrowers, the branch should furnish evidence to show that renewal/review of credit limits is already on an would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence an account where the regular/ad hoc credit limits have not been renewed within 180 days from the due date/date of ad hoc sanction will be treated as NPA.'

The Counsel would then make reference to Clause 2.1.1 of the above circular which states that an asset becomes non-performing when it ceases to generate income for the Bank. As per Clause 2.1.2(ii), a non-performing asset is a loan or an advance where the account remains but of order'.---

Clause 2.1.1 and Clause 2.1.2(H) of the circular are as under--

Definitions

2.1 Non performing Assets

2.1.1 An asset, including a leased asset, becomes non performing asset when it ceases to generate income for the Bank.

2.1.2 A non-performing asset (NPA) is a loan or an advance where--

(i) interest and/or instalment of principal remain overdue for a period or more than 90 days in respect of term loan,

(ii) the account remains 'out of order' as indicated at. Para. 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC)

An overdraft/Cash Credit Account is indicated in para. 2.2 of the circular according to which an account achieves the status of 'out of order' and is required to be treated as such if--

(i) the outstanding balance remains continuously in excess of the sanctioned limit/drawing power, and

(ii) in case where the outstanding balance in the principal operating account is less then the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of the balance sheet or credits are not enough to cover the interest debited during the said period.

The Counsel would contend that 'out of order' status is achieved in either of the above two situations noted above. The first situation, as per Counsel, does not require any period of 90 days but a situation where the account must remain continuously in excess of the sanctioned limit/drawing power, the account has to be taken as 'out of order'.

In additional to above eventualities, under Para. 2.1.3 the account has to be classified as NPA if the interest due and charged during the quarter is not serviced fully within 90 days from the end of the quarter. It is pleaded by the Bank that interest in this case was debited on 30th September, 2009. It was to be serviced on the same date. Counting the period of 90 days would mean one day of September, 31 days of October, 30 days of November and 28 days of December. 90th day was, therefore, 28th December, 2009 and accordingly the account was rightly classified as NPA on 29th December, 2009. Clause 2.1.3 is reproduced below for ready reference--

'2.1.3. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter'."

The Counsel would plead further that the 4th event for declaring the account as NPA is articulated in Clause 4.2.4 of the circular (reproduced above) for which period of 180 days was to commence on 301h June, 2009. To count 180 days, one day of June, 31 days of July, 31 days of August, 30 days of September, 31 days of October, 30 days of November and would complete 180 days on 26th December, 2009. Accordingly, classification of the account as NPA on 29th December, 2009 would be well within the purview of Clause '..2.4 of the circular as well. On this basis, the Counsel would contend that the Bank was fully justified on all the four counts to classify the account of the Borrower Company as NPA.

No submission has been made before me to show that this account was declared as NPA ignoring these guidelines issued by the RBI. Thus, there is no merit in the submissions made by the Counsel in this regard. The account can be classified as NPA when even interest is not paid for continuous period of 90 days.

Thus, the submission raised by the appellants is neither made out and otherwise may not call for consideration as it was never so raised or pleaded before the Tribunal below either during the time when the SA was decided or even in the OA filed by the Bank. Once the principal borrower has not come forward to challenge the determination made in the OA and the appellants/guarantors have also not filed any Appeal against the order passed in the OA, they cannot be heard to complain about the amount mentioned in the recall notice or changed amount mentioned in the addendum or subsequently in the notice under Section 13(2). The amount mentioned in the notice under Section 13(2) was on the date when notice was issued, whereas the amount claimed in the OA would be with interest which may have become due by the time, the OA came to be filed. The grievance made by the appellant, thus, in this regard is without any merit. There is otherwise also no merit and in any of the pleas raised by the appellants. The Appeal is accordingly dismissed.