M/S Olive Tree Retail Private ... vs South Indian Bank Limited & Anr
2023 Latest Caselaw 604 Cal

                IN THE HIGH COURT AT CALCUTTA
                         Constitutional Writ Jurisdiction
                                   Appellate Side

Present :-

The Hon'ble Justice Moushumi Bhattacharya.


                                 WPA 11406 of 2022

                     M/s Olive Tree Retail Private Limited & Anr.

                                         Vs.

                         South Indian Bank Limited & Anr.


For the petitioner                             :    Mr. Deepan Kumar Sarkar, Adv.
                                                    Ms. Ananya Sinha, Adv.
                                                    Ms. Arti Bhattacharya, Adv.
                                                    Ms. Ashika Daga, Adv.


For the respondent Bank                        :    Mr. Siddhartha Banerjee, Adv.
                                                    Mr. Avishek Guha, Adv.
                                                    Ms. Debarati Das, Adv.
                                                    Ms. Akansha Chopra, Adv.


Last Heard on                                  :    22.12.2022

Delivered on                                   :    19.01.2023.
                                         2




Moushumi Bhattacharya, J.

1. The petitioners have assailed a Notice dated 27.4.2022 issued by the

respondent no. 1 South Indian Bank by which the petitioners' accounts with

the respondent Bank was classified as a Non Performing Asset (NPA). The

petitioners were asked to discharge their liabilities in full within 60 days from

the date of receipt of the impugned Notice beyond which the Bank threatened

to take the measures prescribed under the provisions of the SARFAESI Act,

2002. The impugned Notice was issued under section 13(2) of the Act. The

petitioners also seek a declaration that the Bank's failure to extend the

restructuring of the three loans of the petitioners is arbitrary and contrary to

the Resolution Framework (R.F) 2.0 dated 5.5.2021 issued by the Reserve Bank

of India.

2. The petitioner no. 1 claims to be a small enterprise within the meaning of

The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act)

and the petitioner no. 2 is a shareholder and Managing Director of the

petitioner no. 1.

3. The petitioners seek to enforce the RBI Circular R.F 2.0 and claim,

through learned counsel appearing for the petitioners, that the said Circular

casts a positive statutory duty on the Bank to grant restructuring to already

restructured loans of MSMEs. Counsel submits that the relief claimed in

respect of the impugned Notice dated 27.4.2022 is only consequential in nature

and that the cause of action with regard to the failure of the respondent Bank

arose prior to the 13(2) Notice. Counsel submits that the petitioners' loan

accounts would have remained a standard asset as on 31.3.2021 if the loans

would have been restructured in accordance with the R.F 2.0. Counsel refers to

several contemporaneous representations made by the petitioners to the Bank

on R.F 2.0 and the Emergency Credit Line Guarantee Scheme (ECLGS) Loan

prior to declaration of the petitioner's accounts as NPA. Counsel also relies on

representations made after the impugned declaration between 1.12.2021 and

10.2.2022 which were prior to the impugned Notice dated 27.4.2022 none of

which were considered by the Bank in terms of R.F. 2.0. Counsel submits that

the first petitioner satisfied all the conditions for obtaining effective

restructuring through a one-time measure in accordance with the R.F. 2.0. It is

submitted that the petitioners have submitted two plans, which if permitted by

the Bank, would clear all the existing loans and the petitioners do not intend to

continue with adversarial proceedings against the respondent Bank.

4. Learned Counsel appearing for the respondent no. 1 / South Indian

Bank urges that the writ petition is not maintainable since the petitioners have

challenged a Notice issued under the provisions of the SARFAESI Act and that

too against a private Bank. Counsel submits that the writ petition is in any

event premature as the Bank has not invoked any measures under section

13(4) of the Act. It is submitted that even otherwise on merits, the first writ

petitioner was not eligible to seek restructuring within the provisions of R.F.

1.0 as well as R.F. 2.0. Counsel submits that the petitioner no. 2 had also not

perfected his security interest with regard to the immovable property offered by

the wife of the petitioner no. 2. Counsel submits that upon the death of the

petitioner's wife the responsibility devolved upon the minor son and therefore

the petitioner no. 2 was obliged to take steps for perfecting the security which

was not done.

The Court's view on the point of maintainability:

5. The issue raised on behalf of the respondent Bank that the petitioners

should be before the Debts Recovery Tribunal is answered against the

respondent and in favour of the petitioners for the following reasons.

6. First, section 17(1) of the SARFAESI Act, 2002 entitles any person

including a borrower to make an application before the DRT having jurisdiction

in the matter within a certain timeframe against any of the measures taken by

a secured creditor under section 13(4) of the Act. Section 13(4) authorises a

secured creditor to take any one or more of the measures under 13(4) (a) to (d)

to recover the secured debt. In the present case, the Notice dated 27.4.2022

was issued under section 13(2) of the Act which would be evident from the

impugned Notice itself. Hence, the stage for approaching the DRT, which is the

statutory alternative remedy under the SARFAESI Act, had not arrived as on

the date of the impugned Notice. Phoenix Arc Private Limited vs. Viswa Bharati

Vidya Mandir.; (2022) 5 SCC 345 and United Bank of India vs. Satyawati

Tondon; (2010) 8 SCC 110 both cited by the Bank, involved Notices under

section 13(4) of the Act and hence are distinguishable from the facts of the

present case.

7. Second, prayer (c) of the writ petition which is for a declaration that the

Notice issued under section 13(2) namely of 27.4.2022 is liable to be set aside,

is consequential to prayers (a), (b), (e) and (f) which are for declarations that the

failure of the Bank in extending the benefit of restructuring of the three loans

of the petitioners is contrary to the spirit of Resolution Framework 2.0 of the

Reserve Bank of India. Prayers (e) and (f) are for a mandamus on the

respondent Bank to disburse the ECLGS Loan to the petitioner no. 1 and to

restructure the three loans of the petitioner Company in terms of R.F 2.0.

There is no doubt that if the loans of the petitioners had been restructured, the

impugned Notice issued under section 13(2) of the SARFAESI Act would not

have been issued at all. Moreover, the cause of action in respect of the failure /

inaction of the Bank to restructure the loans is prior to the declaration of the

petitioners' loan accounts as NPA and also prior to issuance of the Notice

under section 13(2) of the 2002 Act.

8. The cause of action pleaded in the writ petition persuades this Court to

hold that the writ petition is not a SARFAESI action simpliciter and is premised

on the statutory duty cast upon the respondent Bank to enforce the RBI

Circular R.F. 2.0. which was to be enforced in accordance with its object and

intendment and the respondent Bank was to exercise its discretion in the

matter of restructuring the petitioners' loans as an MSME. The writ petition

brings to the fore the failure of the respondent Bank to exercise its discretion in

accordance with the Circular on acceptable and transparent standards. The

decisions relied on by the Bank namely Sunitha Roy vs. Canara Bank; 2020

SCC OnLine Ker 5120, Katepalli Lavanya vs. Union of India, M/s. Digivision

Electronics Ltd. vs. Indian Bank; 2005 SCC OnLine Mad 478 do not apply to the

facts since all these decisions dealt with section 13(2) notices without any duty

on the part of the respondents to enforce an RBI Circular. Federal Bank Ltd. vs.

Sagar Thomas; (2003) 10 SCC 733 held specifically at paragraph 33 of the

Report that a writ petition is maintainable against a private Bank if it involves

enforcement of a statutory duty on the part of the Bank. In the facts of that

case however, Federal Bank was denied relief since it involved a private

contract of service between Federal Bank and one of its employees. The facts

did not involve a RBI Circular having statutory force as in the R.F 2.0 in the

present case. This Court holds that the writ petition is maintainable for the

above reasons.

Merits of the case urged on behalf of the parties :

9. Certain facts are required to be stated before assessing the weight of the

competing submissions.

The undisputed facts :

10. The petitioner no. 1 is an MSME and sells handlooms and handicrafts

through retail stores and online platforms. The petitioner no. 2 is a shareholder

and the Managing Director of the petitioner no. 1. The petitioner no. 1 availed

of loan facilities from the respondent Bank for about Rs. 5.9 crores from 2013.

There was no default between 2013 - 2021. The petitioner no. 1 was

constrained to seek restructuring of loans from the Bank by reason of the

downturn in retail business after demonetisation. The request for restructuring

was made on the basis of future apprehension and without any actual default

in the payment. The restructuring was granted with effect from January, 2020

and the loan was segregated into three separate loans; i) Cash Credit Open

Loan (CCOL), ii) Working Capital Term Loan (WCTL) and iii) Funded Interest

Term Loan (FITL). The petitioners gave a two-storied building at Bangur Avenue

jointly owned by second petitioner and his mother and a flat in Delhi jointly

owned by the second petitioner and his wife as security for restructuring. The

petitioner complied with the obligations of restructuring from January, 2020

onwards. The Covid 19 Pandemic started from March, 2020 and the petitioner's

physical stores shut down due to the ensuing lockdown. Although the

petitioners incurred huge financial losses, the petitioners continued to service

the CCOL loan. The WCTL and FITL loans were under a moratorium period

during the Pandemic and were due to end in August, 2020. The petitioner

could not service the loans from 2021 onwards due to the continuing Pandemic

related lockdown.

The RBI Circulars :

11. The RBI (respondent no. 2 before this Court) issued a statutory Circular

under the Banking Regulation Act, 1949 namely Resolution Framework 1.0. on

6.8.2020 to help preserve long term viability of firms. The intended object was

to alleviate Covid 19-related stress. A revised statutory Circular was issued

namely Resolution Framework 2.0 dated 5.5.2021 for Resolution of Covid-19

related stress of MSMEs which is relevant to the present case since the

petitioner no. 1 is an MSME.

12. R.F. 2.0 permitted Banks including the respondent no. 1 Bank to grant

further restructuring as a one-time measure of already restructured loans of

MSMEs. This would be evident from Clauses 2 and 4 of R.F. 2.0.

The petitioner's case :

13. The first petitioner satisfied all the requirements under R.F. 2.0 for

availing the benefit of a one-time restructuring of its three loans; the petitioner

was an MSME as on 31.3.2021 and was GST-registered. The aggregate loan

exposure of the petitioner no. 1 was below Rs. 25 crores. The petitioners'

eligibility would appear from Clause 2 of R.F. 2.0.

14. Most important, all the three loan accounts of the petitioner no. 1 were

"standard assets" as of 31.3.2021 (Clause 2(iv)). The restructuring of the

borrower's account was to be invoked by 30.9.2021 and the restructuring was

to be treated as invoked when the lending institution and the borrower agreed

to proceed with the efforts towards finalising restructuring plans to be

implemented in respect of the borrower (Clause 2 (vi)). The first petitioner

invoked this clause by making an application on 6.7.2021 and an e-mail dated

15.7.2021. The respondent Bank was bound by the RBI Circular of R.F. 2.0.

and was statutorily mandated to consider the application of petitioner no. 1 in

accordance with the requirements in Clauses 2 and 4 of R.F. 2.0. The

respondent no. 1 Bank failed in its duty to do so.

15. Several representations were made by the petitioner in this regard. The

respondent Bank however failed to consider the applications or representations

in terms of the R.F. 2.0 and rejected the application of the first petitioner on

the ground of the security interest involving the son of the petitioner no. 2 not

being perfected. The representations made by the petitioners on 17.9.2021,

27.11.2021 and 1.12.2021 were also not considered by the respondent Bank in

accordance with the parameters of R.F. 2.0.

Emergency Credit Line Guarantee Scheme (ECLGS) Loan :

16. The respondent Bank offered to grant ECLGS Loan to the first petitioner

under the Scheme formulated by the Ministry of Finance, Government of India

through the National Credit Guarantee Trustee Company Limited of 23.5.2020

which was formulated to help Banks for extending emergency credit facilities

during Covid-19 crisis to MSMEs like the petitioner no. 1. The representatives

of the Bank assured the petitioners that the ECLGS Loan would be provided to

the petitioner no. 1 and the petitioner no. 1 hence wrote to the Bank on

30.8.2021 requesting sanction of loan on account of the financial stress

suffered by the petitioner no. 1 due to the Pandemic. The petitioner no. 1 could

not avail of the loan in 2020 since the petitioner no. 1 was servicing the CCOL

Loan at that time. The respondent Bank however agreed to grant the ECLGS

Loan to the petitioner no. 1 on 30.7.2021 and 11.8.2021. The petitioner no. 1

accordingly applied for the ECLGS Loan on 30.8.2021, 3.11.2021 and

6.11.2021. The second petitioner's wife passed away during the Covid-19

Pandemic and the Delhi Flat which was given as a security for the three loans

and was jointly owned by the petitioner no. 2 and his wife, devolved upon the

petitioner no. 2 and his minor son. The respondent Bank asked the petitioner

no. 2 to obtain guardianship of his minor son from a competent Court in order

to get the ECLGS Loan. The petitioner no. 2 complied with this requirement

and filed appropriate proceedings before the Court in Delhi on 2.9.2021. The

respondent Bank however rejected the petitioner's request for ECLGS Loan on

9.11.2021 on the ground of "non-perfection of security interest involving minor

interest..."

The primary grievance of the petitioners :

17. All the three loan accounts of the petitioner no. 1 were declared NPAs on

26.11.2021 and 30.11.2021 by the respondent Bank. (The 26.11.2021

declaration related to the Funded Interest Term Loan (FITL) and the

30.11.2021 related to the Cash Credit Open Loan (CCOL) and Working Capital

Term Loan (WCTL)). The impugned declaration was despite the first petitioner

not committing any default in respect of the CCOL which was also declared as

NPA on 30.11.2021. The second petitioner also submitted a viability plan on

28.12.2021 as per the request of the respondent Bank. The viability plan was

not considered by the respondent Bank and the impugned Notice under section

13(2) of the SAFAESI Act, 2002 was issued by the respondent Bank on

27.4.2022.

Conclusions of the Court :

18. The fact that the petitioner no. 1 was eligible for restructuring both

under R.F. 1.0 and R.F. 2.0 would appear from Clause 2(iv) of the R.F. 2.0; and

further that the petitioner no. 1's accounts were "standard assets" as on

31.3.2021. It is significant that the loan accounts of the first petitioner were

declared NPA only on 29.11.2021. Second, the respondent Bank's failure to

consider the petitioner's applications is contradictory to the purpose for which

R.F. 2.0 was structured and conceptualized by RBI, namely for a one-time

measure of restructuring. Third, the petitioner no. 1 was well within the time

limit contemplated under clause 2(vi) of R.F. 2.0 which mentioned that the

restructuring was to be invoked within 30.9.2021; petitioner no. 1 invoked R.F.

2.0. on 6.7.2021 and 15.7.2021 which was also well within the time frame.

Fourth, none of the representations filed with regard to R.F. 2.0 or ECLGS

Loan were considered by the respondent Bank prior to the declaration of the

accounts as NPA. All these representations were sent before the impugned

declaration on 29.11.2021. Further representations made by the petitioners

between 1.12.2021 and 10.2.2022 were also not considered by the respondent

Bank in accordance with the R.F. 2.0. All these representations were made

before the impugned Notice under section 13(2) of the SARFAESI Act, which

was issued on 27.4.2022.

19. It is also relevant that R.F. 2.0 has been described as a "Circular" at

Clause 2(x) of R.F. 2.0. R.F. 2.0 describes itself as a stress-reliever for MSMEs

in view of the uncertainties created in the resurgence of the Covid-19 Pandemic

in India. Clause 2 of R.F. 2.0 states that keeping the above reality in mind, the

RBI has decided to extend the facilities of restructuring of existing loans to

MSME borrowers without a downgrade in the asset classification subject to the

conditions in R.F. 2.0. There is little doubt that R.F. 2.0 was issued in public

interest having regard to the financial crunch faced by MSMEs in the wake of

the Pandemic.

20. It is also without dispute that RBI Circulars have statutory force having

been issued by the RBI under The Reserve Bank of India Act, 1934. These

Circulars are binding on the constituent Bank and banks are under a statutory

obligation to comply with the mandate of the Circulars. This was recognised in

Central Bank of India vs. Ravindra; (2002) 1 SCC 367 where the Supreme Court

held that the power conferred by sections 21 and 35-A of the Banking

Regulation Act, 1949 is coupled with a duty to act and further that the Reserve

Bank of India, as the prime banking institution in the country, is entrusted

with a supervisory role and is conferred with the authority of issuing binding

directions having statutory force in the interest of the public.

21. The allegations of the respondent Bank that the rejection of

disbursement of further credit facilities to the petitioner no. 1 on 9.11.2021

was on the ground of non-perfection of security interest is sufficiently belied by

the facts before the Court. The petitioner's wife passed away on 11.10.2020

during the Pandemic and the petitioner no. 1 applied for the loan in July 2021.

The petitioner no. 2 thereafter filed appropriate proceedings before the Court in

New Delhi under the Guardian and Wards Act, 1890 which was allowed on

11.7.2022. This was done at the direction of the respondent Bank and for the

purpose of perfecting the security interest since the Flat in Delhi, which was

given as security for the restructuring, was in the name of the petitioner no. 2

and his wife. In any event, the petitioner no. 2's son attained majority on

8.8.2022 and the petitioners can therefore take appropriate steps in respect of

the Delhi Flat to clear the loans. The stand of the respondent Bank is patently

unreasonable in view of the aforesaid facts.

22. The conclusions of the Court are strengthened by a broader view of both

the parties being benefited if the respondent Bank permits the petitioners to

service their loans which the petitioners are admittedly in a position to do in

the changed circumstances. This Court is unable to comprehend as to why the

respondent Bank would invoke proceedings where the respondent Bank would

not only have to engage in adversarial proceedings but also wait for a

considerable time before the loan accounts of the petitioners are clear or settled

or closed. The facts and the materials placed before the Court persuade the

Court to hold that the respondent no. 1 Bank precipitated the events

culminating in the issue of the impugned Notice under the SARFAESI Act

without proper application of mind and due exercise of discretion.

23. This Court is inclined to grant the relief claimed for the above reasons.

24. WPA 11406 of 2022 is accordingly allowed by a declaration that the

impugned Notice dated 27.4.2022 is liable to be quashed restraining the

respondents from proceeding in accordance with the said impugned Notice as

also the letter dated 30.11.2021. The respondent no. 1 Bank is directed to

consider the restructuring of the three loans of the petitioner no. 1 afresh in

terms of the Resolution Framework 2.0 subject to the petitioner no. 1 fulfilling

all the conditions contained therein. The eligibility of the petitioners shall be

considered strictly in accordance with R.F. 2.0. The respondent no. 1 Bank

shall also consider whether the petitioners are entitled to the ECLGS Loan in

view of the changed circumstances which have been placed before the Court.

The respondent no. 1 Bank shall complete the entire exercise as directed within

a period of 10 weeks from the date of this judgment.

Urgent photostat certified copies of this judgment, if applied for, be

supplied to the respective parties upon fulfillment of requisite formalities.

(Moushumi Bhattacharya, J.)