Telangana High Court

M/S Sri Krishana Industries vs Canara Bank on 2 November, 2021

Bench: P Naveen Rao, G Sri Devi

             THE HON'BLE SRI JUSTICE P. NAVEEN RAO
                              AND
                THE HON'BLE JUSTICE G. SRI DEVI


                     WRIT PETITION No.7784 of 2021

ORDER: (Per Hon'ble Justice G. Sridevi)


      This Writ Petition is filed seeking a Writ of Mandamus declaring

the action of the respondent-bank in issuing the possession notice, dated

09.03.2021, under Section 13 (4) of the Securitization and Reconstruction

of Financial Assets and Enforcement of Security Interest Act, 2002 (for

short 'the Act'), in relation to taking over the possession of the land and

buildings located at Plot No.3 in Sy.No.47 bearing Door Nos. 6-8-110,

6-8-111, admeasuring about Ac.1.00 gts., situated at Katedan IDA,

Rajendra Nagar, Ranga Reddy District, along with stocks, plant and

machinery of the petitioners' company, as arbitrary, illegal and

unconstitutional and consequently set aside the same.

Brief facts, which led to filing of the present Writ Petition, are as

under:-

The 1st petitioner company was incorporated in the year 2000 and

was engaged in the business of manufacturing MS Iron Wires, galvanized

steel wires and ropes, barbed wires and binding wires and that the

manufacturing unit of the 1st petitioner company is located at 6-8-110/A,

I.D.A., Katedan, Ranga Reddy District, forming part of the subject

property. The 1st petitioner company has been continuously engaged in

the manufacturing of wires and wire products and has been successfully

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operating as a going concern. In order to maintain its functioning and

have access to ready funds, the 1st petitioner company has been operating

a bank account with the Syndicate Bank, now merged into Canara Bank,

for the past nearly 21 years. It is further stated that one of the services

availed by the 1st petitioner company from the bank was a facility of SOD

(Standing Overdraft) and the said facility was extended to the 1st

petitioner for a sanctioned limit on the account of the 1st petitioner

company, based upon the financial transactions carried out by the 1st

petitioner company. The said facility was renewed and re-sanctioned in

the year 2019 with a credit limit of Rs.5,00,00,000/- to the 1st petitioner

company and the said sanction was provided based upon the

requirements of the 1st petitioner company for additional capital and

other expenses. While availing such service, the subject property was

provided as a security and the stocks, inventory and book debts of the 1st

petitioner company were also provided as security. An additional

Temporary Overhead facility of Rs.50.00 lakhs was availed by the 1st

petitioner company in the year 2019 in order to meet its working capital

and raw material needs. Subsequently, the 1st petitioner company

received a recall notice, dated 30.09.2019, stating that the account on

which Standing Overdraft was availed by the 1st petitioner company was

running in an irregular manner and as such the facility of Temporary

Overhead that was extended to the 1st petitioner company was being

recalled and the 1st petitioner company was asked to pay a sum of

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Rs.5,46,83,982/- to the bank within seven days of the recall notice. The 1st

petitioner company sent a reply to the said recall notice stating that the

Temporary Overdraft and Standing Overdraft issued by the bank were

secured by self-owned assets and considering the current state of the

industry, it was requested that the amount due to the bank be converted

into a term loan and a period of 60 months be provided for repayment of

the said loan. The said proposal was accepted by the bank and the 1st

petitioner company was asked to submit a form for the conversion of

temporary overdraft to term loan with the bank along with other

necessary documents vide letter, dated 02.11.2019. While the said request

was under consideration, the bank issued a notice under Section 13 (2) of

the Act, dated 22.11.2019, declaring the account of the 1st petitioner

company as a NPA with effect from 21.11.2019, stating that steps would

be taken by the Bank under Section 13 of the Act for recovery of the

amounts due by the 1st petitioner company. The 1st petitioner company

sent a reply to the said notice, vide a letter, dated 11.12.2019, wherein it

was stated that due to non-payment of the amount due under Temporary

Overdraft, the account of the 1st petitioner company had been classified

as NPA and the 1st petitioner company had the facilities for increase of

production and a good hold over the market and as such, the 1st

petitioner company requested the bank that the amount due by the 1st

petitioner company to the bank be converted and restructured into a

Fixed Interest Term Loan with repayment period of 10 years. However,

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no action was taken by the bank in relation to the restructuring of the

account of the 1st petitioner company, despite several assurances

provided by the officials of the Bank and repeated reminders by the 1st

petitioner company. It was merely informed by the Bank, in its letter,

dated 29.11.2019, that the request for conversion of the Temporary

Overdraft amount to FITL was transferred to the Regional office and the

same would be considered as per the merits/guidelines. While that

being so, the petitioners herein were served with another notice, dated

02.12.2020 under Section 13 (2) of the Act, stating that the account of the

petitioners' company was classified as N.P.A. Thereafter, the 1st petitioner

company issued a reply to the said notice on 16.02.2021 stating that as the

company was drastically affected by the lockdown imposed due to

COVID-19 pandemic, it was unable to pay the amounts outstanding to

the Banks and, therefore, six months time be provided to the petitioners'

company to settle its debts under One Time Settlement scheme as

proposed by the Bank. However, there was no response from the bank in

relation to its request. Subsequently, a possession notice under Section 13

(4) of the Act was pasted on the building of the petitioners' company on

09.03.2021 and a notice was also received by the petitioners' company on

12.03.2021 stating that the bank was taking possession of the stocks, plant

and machinery of the petitioners' company and also the subject property.

It is further stated that the respondent-bank, without considering any of

the options envisaged in Section 13 (4) of the Act, or considering the

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request for a One Time Settlement sought by the petitioners' company,

has directly sought to take over possession of the subject property

including the plant and machinery of the petitioners' company under

Section 13 (4) of the Act. It is pertinent to note that the Apex Court in

catena of cases has stated that any reply given to a notice issued under

Section 13 (2) of the Act, must be objectively considered and any

subsequent action must be taken only after due application of mind to the

reply issued to the notice under Section 13 (2) of the Act. It is further

stated that, in the present case, it is clear that there has been no

application of mind whatsoever to the reply issued by the petitioners'

company as the company vide its reply has specifically stated that the

petitioners' company is willing to clear the dues to the Bank by virtue of a

One Time Settlement. The said proposal for an OTS has not been

addressed by the respondent-bank in the notice, dated 09.03.2021, and a

mechanical notice has been issued to the petitioners' company under

Section 13 (4) of the Act and thus, the said notice is required to be set

aside on this ground alone. In Keshavlal Khemchand and sons v. Union

of India1, the Apex Court held that the obligation imposed on the Banks

under the Act, to declare an account as NPA and then take action

contemplated under Section 13 of the Act, is due to the fact that the

powers provided under Section 13 (4) of the Act were very wide and had

the result of stopping the business carried on by the debtor and could

(2015) 4 SCC 770

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therefore, impact the larger interests of the nation. Further, the Apex

Court went on to state that a lot of factors are required to be taken into

consideration before a step as drastic as the ones contemplated under

Section 13 (4) of the Act were to be taken. As per the scheme of the Act,

the respondent-bank must necessarily state the reasons for choosing any

mode of recovery as provided under Section 13 (4) of the Act. It is further

stated that a perusal of the notice received by the petitioners' company

under Section 13 (4) of the Act would reveal that the respondent-bank has

not provided any reasoning as to why the request of the petitioners for

One Time Settlement was not considered, and has mechanically taken

over the possession of the subject property including the stocks, plant

and machinery of the petitioners' company. Further, as per the

provisions of Section 13 (3-A) of the Act, the respondent-bank is required

to communicate its reasons for not accepting the representation or

objection issued by the petitioners company within a period of 15 days

and such communication must be issued after an objective examination of

the representation issued by the petitioners. In support of his

contentions, learned Counsel appearing for the petitioners relied upon

the judgment of the Apex Court in Mardia Chemicals Ltd. v. Union of

India2 and judgment of the Andhra Pradesh High Court in Sravan Dall

Mills P. Ltd., v. Central Bank3.

(2004) 4 SCC 311

(2009) 6 ALD 615

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A detailed counter-affidavit has been filed by the respondent-bank

stating that the bank has taken symbolic possession of the mortgaged

property on 09.03.2021 as provided under Section 13 (4) of the Act and as

such the writ petition has become infructuous and that it may be

dismissed on that ground. It is also stated that the petitioners have an

efficacious alternative remedy under the Act and without availing the

same, they have approached this Court and as such the writ petition is

liable to be dismissed. It is further stated that the petitioners made a false

statement on oath before this Court that they filed objections on

16.02.2021 against the demand notice issued under Section 13 (2) of the

Act by the bank and that the bank has not properly considered their

objections. The petitioners stated the following in the letter, dated

16.02.2021:-

"We request your good self to give us an opportunity for settling the account under 'one time settlement'. Please let us know the amount at which your good self will be able to accept the OTS proposal giving around 3-6 months to make the payment.

We will also request you to not to take any action such as possession notice, etc. which will spoil out credibility in market place, which will later decrease the value of the properties than expected and eventually affect both of us.

In view of the good record with you, we will be highly obliged if you will not proceed any further actions giving the OTS settlement request favourably at the earliest".

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It is further stated that the petitioners have suppressed the fact of a

reply sent by the bank via email to its so- called objections on 04.03.2021

itself, but for reasons best known this has not been brought on record in

the writ petition. The bank has in fact proposed OTS, but the petitioners

have shown their disinclination to settle the account. Respondent-bank

officials have called the 2nd petitioner umpteen times, but the petitioners

were not willing to settle the account. Therefore, it can be presumed that

the petitioners have approached this Court with unclean hands. It is also

stated that subsequent to the letter, dated 04.03.2021, the bank has sent

another mail to the petitioners on 09.03.2021. This was also not brought

on record by the petitioners. It is further stated that the statement made

by the petitioners in their affidavit that the bank may sell the mortgaged

property for lesser value than the market value is absolutely false. It is

stated that, at present, the bank has taken symbolic possession and there

are some other steps to be followed to sell the property, but the

petitioners right now talk about the sale of mortgaged property. A sum

of Rs.5,45,71,551.40 ps., is due from the petitioners as on 01.04.2021 with

further interest due. The petitioners did not pay the said amount in spite

of several requests and they are trying to put obstacles in the way of the

bank to realize its lawful dues under due process of law. It is also stated

that the petitioners categorically admitted in the affidavit that they have

taken loans from the bank and defaulted in repayment. It is further

stated that the bank is entitled to take steps to recover its lawful dues

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from defaulting borrowers under the provisions of the Act and the Rules

made thereunder. Therefore, it is prayed that the Writ Petition may be

dismissed with exemplary costs.

Heard the learned Counsel appearing for the petitioners as well as

the learned Standing Counsel for the respondent-bank and perused the

entire material available on record.

In Mardia Chemicals Ltd v. Union of India (2 supra), the Apex

Court held as under:-

"45. In the background we have indicated above, we may consider as to what forums or remedies are available to the borrower to ventilate his grievance. The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13 in case of non-

compliance of notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons,

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overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavory steps contained under sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non- acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debt Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub- section (4) of Section 13 of the Act.

46. We are holding that it is necessary to communicate the reasons for not accepting the objections raised by the borrower in

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reply to notice under Section 13(2) of the Act more particularly for the reason that normally in the event of non- compliance with notice, the party giving notice approaches the court to seek redressal but in the present case, in view of Section 13 (1) of the Act the creditor is empowered to enforce the security himself without intervention of the Court. Therefore, it goes with logic and reason that he may be checked to communicate the reason for not accepting the objections, if raised and before he takes the measures like taking over possession of the secured assets etc.

47. This will also be in keeping with the concept of right to know and lender's liability of fairness to keep the borrower informed particularly the developments immediately before taking measures under sub-section (4) of Section 13 of the Act. It will also cater the cause of transparency and not secrecy and shall be conducive in building an atmosphere of confidence and healthy commercial practice. Such a duty, in the circumstances of the case and the provisions is inherent under Section 13(2) of the Act."

In M/s. Tanscore v. Union of India4 the Apex Court held as under:-

"23...On reading Section 13(2), which is the heart of the controversy in the present case, one finds that if a borrower, who is under a liability to a secured creditor, makes any default in repayment of secured debt and his account in respect of such debt is classified as non-performing asset then the secured creditor may require the borrower by notice in writing to discharge his liabilities within sixty days from the date of the notice failing which the secured creditor shall be entitled to exercise all or any of the rights given in Section 13(4). Reading Section 13(2) it is clear that the said sub-section proceeds on the basis that the borrower is already under a liability and further that, his account in the books of the bank or

Manu/SC/5319/3006

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FI is classified as substandard, doubtful or loss. The NPA Act comes into force only when both these conditions are satisfied. Section 13(2) proceeds on the basis that the debt has become due. It proceeds on the basis that the account of the borrower in the books of bank/ FI, which is an asset of the bank/FI, has become non-performing.".

In Sravan Dall Mill P. Ltd., v. Central Bank (3 supra), a coordinate

bench of composite State of High Court of Andhra Pradesh held as

under:-

"23. The right of the borrower to have a due consideration of objections is, therefore, an important right of the borrower where the bank is bound to apply its mind and inform the borrower of its reasons as to why and how the account is classified as NPA, particularly, when the borrower raises specific objections in that regard. The reply of the bank must indicate application of mind by the bank that the decision of the bank in classifying the account as NPA was fully in conformity with the prudential norms of RBI. Non- consideration of the said objection by mere statements in the reply that the bank has considered the same cannot be said to be the fulfillment of the obligation of the bank under Sections 13(2) and 13(3)(A) of the Act. It also cannot be disputed that even assuming that particular had become NPA, the subsequent payments by the borrower entitled a borrower to upgrade the said account and may come out of the said classification of his account as NPA. Therefore, it is incorrect to presume that once an NPA is always an NPA and it is precisely for the said reason that the clause 4.2.4 of the prudential norms specifically states that if interest and principal are paid by the borrower in case of loans classified as NPA, the said account should no longer be treated as NPA and may be classified as sub-standard account. Consequently, therefore, the action under the Act with regard to the said account would not

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be tenable, as jurisdictional fact under Section 13(2) of the SARFAESI Act would remain unsatisfied.

24. For the above reasons, therefore, we are of the view that the petitioner's objections have not been considered by the bank by due application of mind keeping in view the aforesaid guidelines and norms of the RBI and the decision of the Supreme Court in MARDIA CHEMICALS's case (2 supra) and other decisions referred to herein above."

On examination of the pleadings of both the parties, certainly, the

subject regarding declaration of the accounts as NPA and also the

communication of the offer given by the bank for a One Time Settlement

appear to be disputed and in case of disputed facts, it would be difficult

for this Court to exercise its writ jurisdiction. It is settled law that

disputed facts may not be settled while exercising power under Article

226 of the Constitution of India. Moreover, in Mardia Chemicals Ltd. Case

(2 supra), it has been already clarified that even dispute regarding

declaring the asset/account as NPA can be raised by the borrower under

Section 17 of the Act at appropriate stage. Considering the fact that the

petitioner even after issuance of possession notice under Section 13(4) of

the Act can raise such grievance before the Debts Recovery Tribunal