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Judgment
Ashok Menon, Chairperson
The State Bank of India & Ors. constituting a consortium of banks are in appeal impugning the judgment and order dated 20.02.2018 allowing the Securitisation Application (S.A.) No. 171 of 2017 by the Debts Recovery Tribunal-II, Ahmedabad (D.R.T.) quashing the entire Sarfaesi measures taken by the banks for recovery of debt under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”, for short).
The S.A. was allowed mainly because the banks had wrongly classified the borrowers' account as a non-performing asset (NPA) with effect from 25.03.2013 in violation of the prudential norms of the Reserve Bank of India concerning asset classification. Based on the principles of sublato fundamento cadit opus which translates to, “remove the foundation and structure falls”, the Ld. Presiding Officer quashed the entire Sarfaesi measures starting from the issuance of the demand notice under Sec. 13(2). The appellants are aggrieved and hence in appeal.
The only question that arises for determination in this appeal is, therefore, the interpretation of the Master Circular No. DBOD No. BP.BC.9/21.04.048/2014-15 dated 01.07.2014 consolidating instructions/ guidelines issued to banks till 30.06.2014 on matters relating to prudential norms on income recognition, asset classification, and provisioning on advances.
The D.R.T. in the impugned order confined itself to norms Nos. 17. 2.1 and 17.2.2 and concluded that the banks could only have classified the account as substandard and not as NPA and therefore, issuance on the demand notice based on a wrong classification of the account as NPA was unsustainable and required to be quashed and set aside.
The facts essential for the disposal of this appeal could be encapsulated thus:
The first respondent is a company named M/s Parth Foils Pvt. Ltd. (presently under liquidation represented by the Official Liquidator, High Court of Bombay) which is the principal borrower. Respondents Nos. 2 and 3 were directors of the company, and are the guarantors/mortgagors. The third respondent died pending this appeal and the second respondent who is her husband, was been brought on record as her legal representative. The respondents had availed several facilities from a consortium of banks in 2009 for running a factory. They suffered a setback due to a major fire accident in their factory premises at Silvasa resulting in a loss of ₹22 crores. Insurance claim was settled for ₹14.97 crores leaving a huge gap with the actual loss. ₹12.37 crores was paid by the company to the secured creditors and ₹1.32 crores was paid to the employees towards settlement of their dues.
Unable to pay off the entire dues, the company approached the banks to restructure the loan. The banks agreed and the debt was restructured vide sanction letter dated 20.03.2013. A moratorium from repayment for 24 months was also given. To the surprise of the respondents, three demand notices were issued to them under Sec. 13(2) of the SARFAESI Act. The demand notice dated 29.09.2015 demanded ₹59,40,92,435.51, the notice dated 13.10.2015 demanded ₹19,26,80,602.84 and the third notice dated 16.10.2015 demanded ₹17,62,44,000/- from them. Consequent to that, symbolic possession of the secured assets was taken on 30.05.2016. Notice was published in newspapers on 03.06.2016. Thereafter, an order to take physical possession of the assets was obtained on 26.04.2017 from the District Magistrate, Silvasa.
The debtors filed the S.A. on 08.06.2017 challenging the demand notice under Sec. 13(2) on the ground that the NPA classification was improper and contrary to the RBI Guidelines. It was also contended that the notice did not meet the requirements of Sec. 13(3) of the SARFAESI Act. The order of the District Magistrate was impugned on the ground that no opportunity was given to the borrowers to be heard before the orders were passed. The Ld. Presiding Officer after examining the materials available, allowed the S.A. for the reasons stated above.
The relevant prudential norms about the classification of accounts as NPA consequent to the restructuring of debt reads thus:
“17.2 Asset Classification norms
Restructuring of advances could take place in the following stages:
(a) before commencement of commercial production/operation;
(b) after commencement of commercial production/operation but before the asset has been classified as ‘sub-standard’;
(c) after commencement of commercial production/operation and the asset has been classified as ‘sub-standard’ or ‘doubtful’.
17.2.1 The account classified as ‘standard assets’ should be immediately reclassified as ‘sub-standard assets’ upon restructuring.
17.2.2 The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule.
17.2.3 Standard accounts classification as NPA and NPA account retained in the same category on restructuring by the bank should be upgraded only when all the outstanding loan/facilities in the account perform satisfactorily during the ‘specified period’(Annex-5), i.e. principal and interest on all facilities in the account are serviced as per terms of payment during that period.
17.2.4 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification on the structured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.”
The Ld. Presiding Officer had referred only to norms Nos. 17.2.1 and 17.2.2 but the most important of the norms was 17.2.4 which was never referred to. The said norm specifically indicates that in the case of non-performance after restructuring the said classification of restructured loan would be governed as per the applicable prudential norms regarding the pre-restructuring payment schedule.
The grouse of the borrower is that the account was classified as NPA with effect from 25.03.2013, five days after restructuring was sanctioned on 20.03.2013 despite there being a moratorium of 24 months. The demand notices were issued on 29.09.2015, 13.10.2015, and 16.10.2015. The debt was never demanded during the period of moratorium. Given the prudential norm No. 17.2.4, in case of failure to pay the amount the classification of NPA has to be with reference to the pre-restructuring payment schedule. Hence, there does not appear to be any infirmity in classifying the account as NPA with effect from 25.03.2013. The Ld. Presiding Officer seems to have arrived at an erroneous finding in this regard. The Latin maxim referred to above and relied upon by the Ld. Presiding Officer has profound significance in the realm of law but in the instant case, it has been applied inappropriately.
As regards the objection raised by the borrowers about not being given a notice by the District Magistrate before passing orders under Sec. 14 of the SARFAESI Act, It has to be observed that the proceedings before the Magistrate, under Sec. 14 are not adjudicatory. What is required is the satisfaction of the Magistrate based on the nine-pointer affidavit accompanying the application filed by the creditor. In this case, notice before symbolic possession was served. The Hon’ble High Court of Allahabad has in Shipra Hotels Ltd & Ano vs. State of UP and Ors 2022 SCC OnLine All 801 held that the CMM or the DM are not required to give notice to the borrower before taking possession of the secured asset. Hence, the objection on that ground is unsustainable. None of the other objections raised by the borrowers were proved and there is also no finding by the D.R.T. Hence, I find that the impugned order quashing the Sarfaesi measures initiated by the appellants is unsustainable. The appeal is therefore allowed and the impugned judgment and order are set aside and S.A. No. 171 of 2017 on the files of the D.R.T. is dismissed