Telangana High Court
Gaurav Lubricants Private ... vs Tamilnadu Mercantile Bank ... on 12 October, 2022
Bench: P Naveen Rao, J Sreenivas Rao
HIGH COURT FOR THE STATE OF TELANGANA
********
WRIT PETITION NOs.24018 AND 24052 of 2019
W.P.No.24018 of 2019:
Between:
Gaurav Lubricants Private limited,
A Company registered under the Companies Act,
having its registered Office at Sy.No.15,
Balabhadrapuram Village, Biccavollu Mandal,
East Godavari, A.P., and having its Administrative
Office at 615, 6th Floor, Babukhan Estate,
Basheerbagh, Hyderabad, Telangna, Rep. by its
Director Mr. Niranjal Lal Agarwal,
S/o Sri Ramswaroop Agarwal, Aged 61 Years,
R/o. Hyderabad.
...Petitioner
and
Tamilnadu Mercantile Bank Limited
Siddembazar, Hyderabad, Rep. by Manager
and another.
....Respondents
JUDGMENT PRONOUNCED ON : 12.10.2022
HON'BLE SRI JUSTICE P.NAVEEN RAO
&
HON'BLE SRI JUSTICE J.SREENIVAS RAO
1. Whether Reporters of Local Newspapers may : YES
be allowed to see the Judgments ? :
2. Whether the copies of judgment may be marked: YES
to Law Reporters/Journals :
3. Whether their Ladyship/Lordship wish to : No
see fair Copy of the Judgment ? :
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
* HON'BLE SRI JUSTICE P.NAVEEN RAO
&
HON'BLE SRI JUSTICE J.SREENIVAS RAO
+WRIT PETITION NOs.24018 AND 24052 of 2019
% 12-10-2022
WP No.24018 of 2019:
Between:
# Gaurav Lubricants Private limited,
A Company registered under the Companies Act,
having its registered Office at Sy.No.15,
Balabhadrapuram Village, Biccavollu Mandal,
East Godavari, A.P., and having its Administrative
Office at 615, 6th Floor, Babukhan Estate,
Basheerbagh, Hyderabad, Telangna, Rep. by its
Director Mr. Niranjal Lal Agarwal,
S/o Sri Ramswaroop Agarwal, Aged 61 Years,
R/o. Hyderabad.
...Petitioner
and
$ Tamilnadu Mercantile Bank Limited
Siddembazar, Hyderabad, Rep. by Manager
and another.
....Respondents
!Counsel for the petitioner : Sri S.Ravi
Counsel for the Respondents : Sri G.Vidya Sagar
<Gist :
>Head Note:
? Cases referred:
(1982) 2 SCC 691
MANU/WB/0194/2021
MANU/KA/2455/2020
MANU/GJ/1417/2021
(2022) 5 SCC 345
(2004) 4 SCC 311
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
HON'BLE SRI JUSTICE P.NAVEEN RAO
&
HON'BLE SRI JUSTICE J.SREENIVAS RAO
WRIT PETITION NOs.24018 AND 24052 of 2019
COMMON ORDER: (Per Hon'ble Sri Justice P.Naveen Rao)
Heard learned senior counsel Sri S.Ravi for petitioners and
learned senior counsel Sri G.Vidyasagar for respondents.
2. Petitioners are classified as small enterprises under the Micro,
Small and Medium Enterprises (MSME) classification. They are
engaged in the business of extraction of crude petroleum and natural
gas. With an intention to set up units to be engaged in manufacture
of reclamation of used and waste oil, petitioners obtained term loan
of 5.37 crores and 2.76 crores respectively for construction of
factory buildings and term loan of 4.98 crores and 4.56 crores
respectively towards purchase of plant and machinery and a cash
credit amount of 4.63 crores and 7.35 crores respectively at the
rate of interest of 11.75 % per annum from first respondent bank.
There appears to be correspondence on restructuring the loan
accounts and charge of higher interest rate. Holding that consequent
to default committed in repayment of principal debt and interest
thereon, the loan accounts of petitioners were classified as Non
Performing Assets (NPA) as on 31.7.2019, the first respondent bank
issued notice dated 7.9.2019 calling upon the petitioners to discharge
the liabilities in full. Questioning the decisions to classify petitioners'
loan accounts as NPAs and issuing Section 13(2) notices, these writ
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
petitions are filed. This Court by orders dated 5.11.2019 made in
I.A.No.3 of 2019 in W.P.No.24018 of 2019 and in I.A.No.2 of 2019 in
W.P.No.24052 of 2019 granted interim directions as prayed for.
3. Extensive submissions are made by learned senior counsel for
petitioners and learned senior counsel for respondent bank touching
upon various aspects of reliefs sought in the writ petitions. However,
as reliefs sought in the writ petitions are against classifying petitioners'
accounts as NPA and notices under Section 13(2), the submissions of
learned senior counsel are considered on the aspect of maintainability
of the writ petitions.
4. Learned senior counsel for petitioners vehemently contended
that the respondent bank erroneously classified the petitioners'
accounts as NPAs. They are small enterprises. Having regard to
spread of Covid-19 virus impacting over all business and development
activity, petitioners' business also affected. He would submit that
Reserve Bank of India (RBI ) guidelines required the respondent bank
to restructure the accounts of small enterprises like petitioners but
illegally the benefits of restructure was not extended to them. He
would submit that as per RBI guidelines, he has a right to seek
enforcement of these measures and if these measures were properly
applied the petitioners' accounts could not have been declared as
NPAs. He would submit that issue of declaring petitioners' accounts as
NPA cannot be adjudicated by the Debts Recovery Tribunal and
therefore petitioners have no other efficacious remedy except to invoke
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
the extra ordinary jurisdiction of this Court. He would submit that
under Section 17 of the Act, 2002, the Tribunal can only go into the
aspect whether the bank/financial institution has complied with the
mandatory requirements of the Act, 2002 and therefore cannot go into
the decision to declare the petitioners' accounts as NPAs.
4.2. According to learned senior counsel appearing for petitioners, a
writ under Article 226 of the Constitution of India is maintainable
against private entities when petitioners are seeking enforcement of
RBI guidelines.
4.3. Learned senior counsel relied on Andi Mukta Sadguru Shree
Muktajee Vandas Swami Suvarna Jayanti Mahotsav Smarak Trust and
others Vs V.R.Rudani and others1; Pearson Drums & Barrels Pvt. Ltd., Vs
The General Manager, Consumer Education & Protection Cell of Reserve
Bank of India and others2; Velankani Information Systems Limited Vs
Secretary, Ministry of Home Affairs, Government of India and others3;
and Bharat Navnitlal Shah Vs Punjab National Bank4.
5.1. Per contra, according to learned senior counsel for respondent
bank writ petitions are not maintainable for two reasons. Firstly, first
respondent is a private mercantile bank and was not discharging any
statutory duty while extending loans and taking measures to recover
the amounts due. It was only enforcing the terms of contract. By
relying on judgment in Phoenix ARC (P) Ltd Vs Vishwa Bharati Vidya
(1982) 2 SCC 691
MANU/WB/0194/2021
MANU/KA/2455/2020
MANU/GJ/1417/2021
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
Mandir5, he submitted that writ petitions are not maintainable against
private banks/financial institutions. Secondly, what is challenged is
only declaring the petitioners' accounts as NPAs and such an issue
cannot be raised in a writ petition. If further steps are taken by the
respondent bank under the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (for short,
'Act, 2002'), the aggrieved person has to avail the remedy provided by
Section 17 of the Act, 2002 and therefore writ remedy is not available.
5.2. Learned senior counsel for first respondent bank further
contended that petitioners never made correspondence with the RBI to
bring to its notice the alleged violation of the guidelines. He would
contend that petitioners have filed complaint before the RBI
Ombudsman but those complaints were rejected. He would submit
that in view of the opinion expressed by two Division Benches of this
Court holding that classifying a loan account as NPA and issuing
demand notice under Section 13 (2) of the Act, 2002 does not give rise
to a cause of action, these Writ Petitions are not maintainable.
6. Issue for consideration is whether petitioners should be relegated
to avail remedy under Section 17 of the Act, 2002?
7. In the following decisions, the scope and object of the Act, 2002
and remedies provided under the Act, 2002 were considered:
(2022) 5 SCC 345
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
7.1. In Mardia Chemicals Ltd and others Vs Union of India and
others6, validity of the SARFAESI Act, 2002 was challenged. Hon'ble
Supreme 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 with 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,
overruling the objections of the borrower, must also be communicated to
the borrower by the secured creditor. It will only be in fulfilment 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 unsavoury 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 for not accepting the objections taken by the secured
borrower may not be taken to give 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 Debts
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.
......................
50. It has also been submitted that an appeal is entertainable before the
Debts Recovery Tribunal only after such measures as provided in sub-
(2004) 4 SCC 311
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WP Nos.24018 & 24052 of 2019
section (4) of Section 13 are taken and Section 34 bars to entertain any
proceeding in respect of a matter which the Debts Recovery Tribunal or
the Appellate Tribunal is empowered to determine. Thus before any action
or measure is taken under sub-section (4) of Section 13, it is submitted
by Mr Salve, one of the counsel for the respondents that there would be
no bar to approach the civil court. Therefore, it cannot be said that no
remedy is available to the borrowers. We, however, find that this
contention as advanced by Shri Salve is not correct. A full reading of
Section 34 shows that the jurisdiction of the civil court is barred in
respect of matters which a Debts Recovery Tribunal or an Appellate
Tribunal is empowered to determine in respect of any action taken "or to
be taken in pursuance of any power conferred under this Act". That is to
say, the prohibition covers even matters which can be taken cognizance of
by the Debts Recovery Tribunal though no measure in that direction has
so far been taken under sub-section (4) of Section 13. It is further to be
noted that the bar of jurisdiction is in respect of a proceeding which
matter may be taken to the Tribunal. Therefore, any matter in respect of
which an action may be taken even later on, the civil court shall have no
jurisdiction to entertain any proceeding thereof. The bar of civil court thus
applies to all such matters which may be taken cognizance of by the Debts Recovery
Tribunal, apart from those matters in which measures have already been taken
under sub-section (4) of Section 13.
68. The main thrust of the petitioners as indicated in the earlier part of
this judgment to challenge the validity of the impugned enactment is that
no adjudicatory mechanism is available to the borrower to ventilate his
grievance through an independent adjudicatory authority. Access to
justice, it is submitted, is the hallmark of our system..................
...........
76. In regard to the submission made by the parties as indicated in the
preceding paragraphs, we would like to make it clear that issue of a notice
to the debtor by the creditor does not attract the application of the
principles of natural justice. It is always open to tell the debtor what he
owes to repay. No hearing can be demanded from the creditor at this
stage. So far as the provision of appeal is concerned, we have already
discussed in the earlier part of the judgment that proceedings under
Section 17 of the Act have been wrongly described as appeal before the
Debts Recovery Tribunal. It is in fact a forum where proceedings are
originally initiated in case of any grievance against the creditor in respect
of any measure taken under sub-section (4) of Section 13 of the Act.
Hence, the decisions on the point as to whether provision for an appeal is
essential or not are not of any assistance in the facts of the present case.
77. It is also true that till the stage of making of the demand and notice under
Section 13(2) of the Act, no hearing can be claimed for by the borrower.............
..............
80. Under the Act in consideration, we find that before taking action a
notice of 60 days is required to be given and after the measures under
Section 13(4) of the Act have been taken, a mechanism has been provided
under Section 17 of the Act to approach the Debts Recovery Tribunal. The
abovenoted provisions are for the purpose of giving some reasonable
protection to the borrower. Viewing the matter in the above perspective,
we find what emerges from different provisions of the Act, is as follows:
81. In view of the discussion held in the judgment and the findings and directions
contained in the preceding paragraphs, we hold that the borrowers would get a
reasonably fair deal and opportunity to get the matter adjudicated upon before the
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WP Nos.24018 & 24052 of 2019
Debts Recovery Tribunal. The effect of some of the provisions may be a bit harsh for
some of the borrowers but on that ground the impugned provisions of the Act cannot
be said to be unconstitutional in view of the fact that the object of the Act is to
achieve speedier recovery of the dues declared as NPAs and better availability of
capital liquidity and resources to help in growth of the economy of the country and
welfare of the people in general which would subserve the public interest."
(Emphasis supplied)
7.2. In Transcore Vs Union of India7 Hon'ble Supreme Court
analyzed in-depth the object behind bringing Debts Recovery Tribunal
Act, 1993 (Act, 1993) and SARFAESI Act, 2002, scope and application
of the enactments. The Hon'ble Supreme Court held as under:
"Reasons for enactment of the NPA Act, 2002
12. The NPA Act, 2002 is enacted to regulate securitisation and
reconstruction of financial assets and enforcement of security interest
and for matters connected therewith. The NPA Act enables the banks and
FIs to realise long-term assets, manage problems of liquidity, asset-
liability mismatch and to improve recovery of debts by exercising powers
to take possession of securities, sell them and thereby reduce non-
performing assets by adopting measures for recovery and reconstruction.
The NPA Act further provides for setting up of asset reconstruction
companies which are empowered to take possession of secured assets of
the borrower including the right to transfer by way of lease, assignment or
sale. The said Act also empowers the said asset reconstruction companies
to take over the management of the business of the
borrower.........................
..........
14. There is one more reason for enacting the NPA Act, 2002. When
the civil courts failed to expeditiously decide suits filed by the banks/FIs,
Parliament enacted the DRT Act, 1993. However, DRT did not provide for
assignment of debts to securitisation companies. The secured assets also
could not be liquidated in time. In order to empower banks or FIs to
liquidate the assets and the secured interest, the NPA Act was enacted in
2002. The enactment of the NPA Act is, therefore, not in derogation of the
DRT Act. The NPA Act removes the fetters which were in existence on the
rights of the secured creditors. The NPA Act is inspired by the provisions of the
State Financial Corporations Act, 1951 ("the SFC Act"), in particular Sections 29 and
31 thereof. The NPA Act proceeds on the basis that the liability of the borrower to
repay has crystallised; that the debt has become due and that on account of delay
the account of the borrower has become substandard and non-performing. The object
of the DRT Act as well as the NPA Act is recovery of debt by non-adjudicatory process.
These two enactments provide for cumulative remedies to the secured creditors. By
removing all fetters on the rights of the secured creditor, he is given a right to
choose one or more of the cumulative remedies. The object behind Section 13 of the
NPA Act and Section 17 r/w Section 19 of the DRT Act is the same, namely, recovery
of debt. Conceptually, there is no inherent or implied inconsistency between the two
remedies. Therefore, as stated above, the object behind the enactment of the NPA Act
is to accelerate the process of recovery of debt and to remove deficiencies/obstacles
in the way of realisation of debt under the DRT Act by the enactment of the NPA Act,
2002. ....................."
(emphasis supplied)
(2008) 1 SCC 125
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
8. According to Section 2(o), Non Performing Asset (NPA) means an
asset or account of borrower classified by bank/financial institution as
substandard, doubtful or loss asset. Account of the borrower in the
books of the bank/Financial Institution is classified as substandard,
doubtful or a loss and the debt has become due (Transcore case).
9. According to RBI Guidelines dated 30.8.2001 a credit facility
becomes an NPA where interest and/or instalment of principal remain
overdue for a period of more than 180 days in respect of term loan. It
mandates the banks to establish appropriate internal systems to
eliminate the tendency to delay or postpone the identification of NPA.
10. In Mardia Chemicals (supra), Hon'ble Supreme Court
considered the issue of classification of asset as NPA. It was contended
that on the whims and fancies of the financial institutions, the assets
are classified as NPAs. The Hon'ble Supreme Court negatived said
contention. It has looked into the policy notified by RBI known as
"RBI's Prudential Norms On Income Recognition, Asset Classification and
Provisioning-Pertaining To Advances" and rejected the contention that
there are no guidelines for treating the debt as NPA.
11. On NPA, in Transcore (supra), Hon'ble Supreme Court noted as
under:
"13. Non-performing assets (NPA) are a cost to the economy. When the
Act was enacted in 2002, the NPA stood at Rs 1.10 lakh crores. This was
a drag on the economy. Basically, NPA is an account which becomes non-
viable and non-performing in terms of the guidelines given by RBI. As
stated in the Statement of Objects and Reasons, NPA arises on account of mismatch
between asset and liability. The NPA account is an asset in the hands of the bank or
FI. It represents an amount receivable and realisable by the banks or FIs. In that
sense, it is an asset in the hands of the secured creditor. Therefore, the NPA Act,
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WP Nos.24018 & 24052 of 2019
2002 was primarily enacted to reduce the non-performing assets by
adopting measures not only for recovery but also for reconstruction.
Therefore, the Act provides for setting up of asset reconstruction
companies, special purpose vehicles, asset management companies, etc.
which are empowered to take possession of secured assets of the
borrower including the right to transfer by way of lease, assignment or
sale. It also provides for realisation of the secured assets. It also provides
for takeover of the management of the borrower company."
23. ...... On 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 FI is classified as
substandard, doubtful or a 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. Therefore, there is no scope of any dispute
regarding the liability. There is a difference between accrual of liability,
determination of liability and liquidation of liability. Section 13(2) deals
with liquidation of liability.
24. ...... After classification of an account as NPA, a last opportunity is
given to the borrower of sixty days to repay the debt. Section 13(3-A) was
inserted by amending Act 30 of 2004 after the judgment of this Court
in Mardia Chemicals [(2004) 4 SCC 311] whereby the borrower is
permitted to make representation/objection to the secured creditor
against classification of his account as NPA. He can also object to the
amount due if so advised. Under Section 13(3-A), if the bank/FI comes to
the conclusion that such objection is not acceptable, it shall
communicate within one week the reasons for non-acceptance of the
representation/objection. A proviso is added to Section 13(3-A) which
states that the reasons so communicated shall not confer any right upon
the borrower to file an application to DRT under Section 17. The scheme
of sub-sections (2), (3) and (3-A) of Section 13 of the NPA Act shows that
the notice under Section 13(2) is not merely a show-cause notice, it is a
notice of demand. That notice of demand is based on the footing that the
debtor is under a liability and that his account in respect of such liability
has become substandard, doubtful or a loss. The identification of debt
and the classification of the account as NPA is done in accordance with
the guidelines issued by RBI. Such notice of demand, therefore,
constitutes an action taken under the provisions of the NPA Act and such
notice of demand cannot be compared to a show-cause notice. In fact,
because it is a notice of demand which constitutes an action, Section
13(3-A) provides for an opportunity to the borrower to make
representation to the secured creditor. Section 13(2) is a condition
precedent to the invocation of Section 13(4) of the NPA Act by the
bank/FI. Once the two conditions under Section 13(2) are fulfilled, the
next step which the bank or FI is entitled to take is either to take
possession of the secured assets of the borrower or to take over
management of the business of the borrower or to appoint any manager
to manage the secured assets or require any person, who has acquired
any of the secured assets from the borrower, to pay the secured creditor
towards liquidation of the secured debt."
(emphasis supplied)
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
12. From the discussion on relevant statutory provisions and opinion
expressed by Hon'ble Supreme Court in Mardia Chemicals, and
Transcore, it is clear as crystal that once a loan account becomes
substandard, doubtful or loss asset, in the book of a bank/financial
institution it is classified as NPA. The RBI Guidelines clearly specify
when a loan account reaches that stage to be classified as NPA. The
steps taken leading to classifying a loan account as NPA is an internal
matter within the bank/financial institution. The Bank/financial
institution notifies the same in Section 13 (2) of the Act, 2002 notice
and calls upon the borrower to clear the loan within sixty days. At that
stage, it is open to borrower to respond and place before the bank/
financial institution his point of view. He can also oppose declaring his
account as NPA. He can rely on RBI Guidelines on various aspects.
The Bank/Financial institution is required to consider the objections
objectively and to take a decision. It is also required to communicate
the decision to the borrower.
13. As analyzed by Hon'ble Supreme Court in Mardia Chemicals
and Transcore, there is a statutorily prescribed restraint in taking
legal course by a borrower before Section 13 (4) of the Act, 2002 stage.
Statute prescribed this course having regard to accumulation of debts
to banks stifling the banking/financial sector. It is in public interest to
fast track the recovery of dues by banks/financial institutions. Thus,
in Mardia Chemicals, Hon'ble Supreme Court held that scheme of
SARFAESI Act, 2002 does not envisage any remedy till Section 13(4)
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WP Nos.24018 & 24052 of 2019
stage is reached. It has gone to the extent of saying that borrower has
no right of hearing at the stage of Section 13(2) and he can only file
objections under Section 13(3-A) of the Act, 2002. Therefore, upto
Section 13(4) no remedy is provided to a borrower/guarantor. It is the
statutory scheme that must be respected by all, more so when the
scheme stood the test of judicial scrutiny.
14. After Section 13(4) notice, it is open to borrower to approach
Debts Recovery Tribunal under Section 17 of the Act, 2002. The Debts
Recovery Tribunal is competent to go into all aspects leading to bank/
financial institution taking recourse under Section 13(4) of the Act,
2002. Perforce, when the Debts Recovery Tribunal examines the claim
of borrower/guarantor/person aggrieved opposing measures taken
under Section 13(4) of the Act, 2002 such as taking symbolic
possession, notice of sale of secured asset, taking physical possession
etc, the borrower/guarantor/person aggrieved can plead before the
Debts Recovery Tribunal his defence against such action including
alleged violation of RBI Guidelines leading to illegally classifying his
account as NPA.
15. Further, classifying loan account as NPA can be challenged
before RBI alleging that its guidelines are violated. A complaint can be
filed before the Ombudsman. In fact petitioners have filed complaints
before the Ombudsman. Therefore, taking recourse to writ remedy
before reaching Section 13(4) of the Act, 2002 stage defeats the
statutory scheme and scuttles the very object in creating special
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WP Nos.24018 & 24052 of 2019
dispensation to recover the debts by banks/financial institutions. The
object and purpose of these two Acts have to be kept in mind while
considering a writ petition filed against classifying an account as NPA.
It is not for no reason the legal remedy is differed till Section 13(4) of
the Act, 2002 stage is reached. Till this stage, as consistently held by
Hon'ble Supreme Court, no cause of action arises to the borrower/
guarantor to seek legal remedy. He has to wait till further steps are
taken under Section 13(4) of the Act, 2002.
16. Time and again, the Constitutional Courts are repelling the
resort to writ remedy against classifying a loan account as NPA and
various measures taken by Banks/Financial Institutions under
SARFAESI Act and relegating parties to avail remedy under Section 17
of the Act, 2002.
17. Few of the decisions, availing writ remedy against declaring loan
account as NPA and scope of remedy under Section 17 of the Act, 2002
are noted hereunder:
17.1. In Dr.Yashwant Singh vs. Indian Bank8, the Division Bench of
Delhi High Court reviewed the decisions of other High Courts on the
issue. The learned Division Bench held as under:
"(Y) We draw strength for the aforesaid proposition from Section 2(o) of
the SARFAESI Act which vests the secured creditor with the power to
classify an account as an NPA. The authority of the secured creditor in
this regard cannot be questioned. Such authority of the secured creditor
to classify the account of a borrower as an NPA has been recognized
in Mardia Chemicals Ltd. and in Transcore v. Union of India (2008) 1
SCC 125. All that was observed in Mardia Chemicals Ltd. was that there
must exist a specified internal channel which should settle the doubts in
2015 SCC Online Del 9625
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
asset classification. The introduction of Section 13(3A) has fulfilled the
said requirement also. We find a Single Judge of the Calcutta High Court
in Core Ceramics Ltd. v. Union of India AIR 2008 Cal 88 also to have
taken a view that once the bank authorities have classified an account as
NPA, the writ Court would have little or no role to play in deciding such
an issue in view of the complete autonomy of the Banks and financial
institutions in asset classification under the SARFAESI Act and upheld
in Mardia Chemicals Ltd. and Transcore. Similarly, a Division Bench of
Madras High Court in Gain-N-Nature Food Products v. Union of
India has held that if a Bank or financial institution forms an opinion
that an account of a borrower has become an NPA, such opinion is not
justiciable in a Court exercising jurisdiction under Article 226 of the
Constitution because Section 13(2) does not use the expression "and his
account in respect of such debt has become a Non Performing Asset" but
uses the expression "and his account in respect of such debt is classified
by the secured creditor as Non Performing Asset".
17.2. In Devi Ispat Limited vs. SBI9, on 18.1.2013 the bank
informed Devi Ispat that the loan account was classified as NPA on
16.1.2013 and requested to regularize the account. This was contested
by Devi Ispat. But bank proceeded to issue notice under Section 13(2)
of the Act, 2002. Devi Ispat filed writ petition challenging the decision
of the bank classifying its account as NPA and also the letters issued
by the bank. Holding that petitioner has alternative statutory remedy
under Section 13(3A) learned single Judge dismissed the writ petition.
Appeal preferred thereon also dismissed. Devi Ispat then filed SLP
before the Hon'ble Supreme Court. Hon'ble Supreme Court held that
since Devi Ispat had an alternative remedy to make representation to
the bank under Section 13 (3A) there was no reason to by-pass the
statutory mechanism.
17.3. In N.A.K.G Cotfibres Private Ltd Vs The Zonal Manager, UCO
Bank and another, the petitioner was aggrieved by classifying his
account as NPA and filed writ petition challenging Section 13(2) of Act
(2014) 5 SCC 762
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
2002 notice dated 9.5.2011. It was contended that classification of
their account as NPA was unreasonable in as much as 90 lakhs was
paid on 31.3.2011 and such classification was not in accordance with
guidelines issued by RBI. It was also contended that even though
explanation was filed in response to Section 13(2) notice no reply was
given. The learned Division Bench of madras High Court held:
"14. In the present case, admittedly, no notice under Section 13(4) of the
Act was issued by the respondents bank. The only grievance of the
petitioner is without giving a reply as required under Section 13(3)(A) of
the Act, the bank cannot proceed further by issuing notices either under
Section 13(4) of the Act or under Section 14 of the Act. Thus, it is clear
that the petitioner, by preempting the action of the bank, had filed the
present writ petition. Such a course is not open to the petitioner
especially under the writ jurisdiction. Even assuming that there is a
violation in respect of the procedures contemplated under Section 13(2),
13(3)(A) by the bank, the only remedy available to the petitioner is to
approach the Debt Recovery Tribunal as contemplated under Section 17
of the Act. Therefore, we hold that this writ petition is not maintainable
and the petitioner ought to have approached the Debt Recovery Tribunal
for relief instead of filing the present writ petition. As mentioned above,
the petitioner has filed the present writ petition premature and therefore
also the writ petition is not maintainable and it cannot be entertained by
us."
17.4. In M/s Tandra Impax Pvt Ltd Vs Punjab National Bank10, the
petitioner prayed to declare the action of respondent bank declaring
the petitioner account as NPA without following RBI guidelines and
guidelines issued in Aatmanirbhar Bharat Scheme dated 13.5.2020 as
arbitrary, illegal and against SARFAESI Act, 2002 and to set aside the
classification of account as NPA on 31.3.2020 and the Demand Notice
dated 31.7.2020. The learned Division Bench relied on earlier decision
in W.P.Nos.23643 of 2020 and 20046 of 2021, dated 9.2.2022 to hold
that petitioner ought to avail remedy under Section 17 of the Act,
2002.
WP No. 23268 of 2020 dt 3.3.2022
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
17.5. In common judgment in M/s.NECX Private Limited vs. Union
Bank of India and another (W.P.No.23643 of 2020 and W.P.No.20046 of
2021, dated 09.02.2022), learned Division Bench held as under:
"30. Thus, on a careful consideration of the statutory language employed
in the proviso to Sub-Section (3A) of Section 13 of the SARFAESI Act read
with the Explanation to Sub-Section (1) of Section 17 of the SARFAESI
Act, it is crystal clear that a notice under Section 13 (2) of the SARFAESI
Act or the rejection of the objection raised to it including the reasons in
support thereof would not give rise to a cause of action for instituting an
action in law. To that extent, we find sufficient force in the contention
advanced by the respondents that the writ petition filed is premature. The
statute does not contemplate any intervention at this preliminary stage.
Only when the process ripens into a definitive action taken by the secured
creditor under Sub Section (4) of Section 13 of the SARFAESI Act, the
aggrieved person can avail the statutory remedy under Section 17 of the
SARFAESI Act by filing securitization application before the jurisdictional
Debts Recovery Tribunal.
31. This aspect was highlighted by the Supreme Court in Punjab
National Bank Vs. Imperial Gift House11. In that case, the High Court
had interfered with the notice issued under Section 13 (2) of the
SARFAESI Act and quashed the proceedings initiated by the Bank.
Setting aside the order of the High Court, Supreme Court held that the
High Court was not justified in entertaining the writ petition before any
further action could be taken by the Bank under Section 13 (4) of the
SARFAESI Act."
17.6. In M/s. Tandra Impex Pvt Ltd., (supra), Division Bench of this
Court further held:
"14. We have already noticed above that classification of loan account by
the secured creditor is at a stage prior to issuance of the demand notice
under Section 13(2) of the SARFAESI Act. If at the stage of issuance of
demand notice, interference by the Court and Tribunal is not to be made,
we fail to understand as to how such intervention can be made at a stage
prior to issuance of demand notice under Section 13(2) of the SARFAESI
Act."
17.7. The Madras High Court in Gain N-Nature Food Products and
others Vs Union of India12 and the Madhya Pradesh High Court in
Samarath Infrabuild (I) Pvt Ltd Vs Bank of India13, have held that
(2013) 14 SCC 622
MANU/TN/0555/2008
2016 SCC OnLine MP 9024
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
once an account is classified as NPA by the bank/financial institution
such classification is not justiciable by the writ Court exercising
jurisdiction under Article 226 of the Constitution of India. The Division
Bench of Madras High Court in Gain-N-Nature Food Products held as
under:
"11. But as seen from the definition of the expression "Non Performing
Asset", extracted above, it includes within its fold, either an asset or an
account of the borrower. If a Bank or financial institution, forms an
opinion that a particular asset or account of a borrower has become a
"Non Performing Asset", such opinion may not be justiciable,
especially in a Court exercising jurisdiction under Article 226 of the
Constitution. It may not be open to this Court to conduct a roving
enquiry to find out if an account or asset of a borrower could be
classified as a "Non Performing Asset", with reference to the
guidelines issued by the Reserve Bank of India. Section 13(2) is
carefully worded. It does not use the expression "and his account in
respect of such debt has become a "Non Performing Asset". Instead, the
Section uses the expression "and his account in respect of such debt is
classified by the secured creditor as "Non Performing Asset". Section 13(2)
reads as follows:
"Where any borrower, who is under a liability to a secured
creditor under a security agreement, makes any default in repayment
of secured debt or any installment thereof, and his account in respect
of such debt is classified by the secured creditor as non-performing
asset, then, the secured creditor may require the borrower by notice
in writing to discharge in full his liabilities to the secured creditor
within sixty days from the date of notice failing which the secured
creditor shall be entitled to exercise all or any of the rights under
Sub-section (4)."
12. Therefore, the stress under Section 13(2) is basically on the
classification of the account as a "Non Performing Asset" by the secured
creditor and not on whether the account has actually become a "Non
Performing Asset" or not. In other words, the Section does not leave any
scope for a court to adjudicate as to whether an account has become a
"Non Performing Asset" or not, with reference to the guidelines issued by
the Reserve Bank of India. Therefore, the first objection taken by the
petitioners is not sustainable in law." (emphasis supplied)
17.8. In Samarath Infrabuild (I) Pvt. Ltd., (supra), the Madhya
Pradesh High Court following the decision of Madras High Court
referred to above and held as under:
"14. On due consideration of the aforesaid, we are of the view that law
on the subject is well settled by the Apex Court in the case of Mardia
Chemicals Ltd. V/s. Union of India &Ors. (Supra), as well as by the Delhi
High Court in the case of Dr. Yashwant Singh &Anr. V/s. Indian Bank
&Anr. (Supra) and Madras High Court in the case of Gain-N-Nature Food
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
Product V/s. Union of India (Supra). The classification of NPA is not
subject to judicial review. Once the Bank authorities have classified
account as NPA, the writ court would have no role to play in deciding
such any issue/suit. The proper course of the appellant is to
challenge the action by filing a statutory appeal as directed under
Section 17 of SARFAESI Act, 2002.
15. For the above mentioned reasons, we hold that once the bank
authorities have classified an account as NPA, the writ court would have
little or no role to play in deciding such an issue in view of the complete
autonomy of the Banks and financial institutions in asset classification
under the SARFAESI Act and upheld in Mardia Chemicals Ltd. V/s.
Union of India &Ors. reported as MANU/SC/0323/2004 : 2004 (4) SCC
311. Similarly, a Division Bench of Delhi High Court and Madras High
Court have held that if a Bank or financial institution forms an opinion
that an account of a borrower has become an NPA, such opinion is not
justiciable in a Court exercising jurisdiction under Article 226 of the
Constitution. Further the question whether the account has been
correctly classified as a NPA or not is a factual dispute and appellant has
an alternative efficacious remedy of appeal available under Section 17 of
the SARFAESI Act, we do not find any merit in this appeal.
W.A.No.575/2015, has no merit and is, accordingly, dismissed"
(emphasis supplied)
18. In Union Bank of India Vs Satyawati Tandon14, Hon'ble
Supreme Court cautioned High Courts from entertaining writ petitions
when statute prescribes detailed mechanism. It has also cautioned
against passing interim orders. Hon'ble Supreme Court said as under:
"43. Unfortunately, the High Court overlooked the settled law that the High
Court will ordinarily not entertain a petition under Article 226 of the
Constitution if an effective remedy is available to the aggrieved person and
that this rule applies with greater rigour in matters involving recovery of
taxes, cess, fees, other types of public money and the dues of banks and
other financial institutions. In our view, while dealing with the petitions
involving challenge to the action taken for recovery of the public dues, etc.
the High Court must keep in mind that the legislations enacted by
Parliament and State Legislatures for recovery of such dues are a code
unto themselves inasmuch as they not only contain comprehensive
procedure for recovery of the dues but also envisage constitution of quasi-
judicial bodies for redressal of the grievance of any aggrieved person.
Therefore, in all such cases, the High Court must insist that before availing
remedy under Article 226 of the Constitution, a person must exhaust the
remedies available under the relevant statute.
.........
45. It is true that the rule of exhaustion of alternative remedy is a rule of
discretion and not one of compulsion, but it is difficult to fathom any
reason why the High Court should entertain a petition filed under Article
(2010) 8 SCC 110
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
226 of the Constitution and pass interim order ignoring the fact that the
petitioner can avail effective alternative remedy by filing application,
appeal, revision, etc. and the particular legislation contains a detailed
mechanism for redressal of his grievance.
46. It must be remembered that stay of an action initiated by the State
and/or its agencies/instrumentalities for recovery of taxes, cess, fees, etc.
seriously impedes execution of projects of public importance and disables
them from discharging their constitutional and legal obligations towards
the citizens. In cases relating to recovery of the dues of banks, financial
institutions and secured creditors, stay granted by the High Court would
have serious adverse impact on the financial health of such
bodies/institutions, which (sic will) ultimately prove detrimental to the
economy of the nation. Therefore, the High Court should be extremely
careful and circumspect in exercising its discretion to grant stay in such
matters. Of course, if the petitioner is able to show that its case falls
within any of the exceptions carved out in Baburam Prakash Chandra
Maheshwari v. Antarim Zila Parishad [AIR 1969 SC 556] , Whirlpool Corpn.
v. Registrar of Trade Marks [(1998) 8 SCC 1] and Harbanslal Sahnia v.
Indian Oil Corpn. Ltd. [(2003) 2 SCC 107] and some other judgments, then
the High Court may, after considering all the relevant parameters and
public interest, pass an appropriate interim order."
(emphasis supplied)
19. From the statutory scheme and precedent decisions noted above
it is clear that this Court can not go into the decision of respondent
bank in classifying the petitioners' accounts as NPAs. If the respondent
bank proceeds further and reaches Section 13(4) of the Act, 2002
stage, the aggrieved person can file application under Section 17 of the
Act. The Debts Recovery Tribunal can go into the aspect of classifying
the accounts as NPAs and also whether RBI guidelines are violated on
any aspect leading to declaring the accounts as NPAs and taking
recourse under the Act. On the contrary, as consistently opined by
Constitutional courts, the aspect of classifying an account as NPA is
not justiable in exercise of power of judicial review under Article 226 of
the Constitution. We are therefore of the opinion that these writ
petitions are not maintainable.
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
20. One other aspect is maintainability of writ petition against
private bank/financial institution on matters concerning the declaring
a loan account as NPA and taking measures under the SARFAESI Act.
This aspect was considered by the Hon'ble Supreme Court in Phoenix
ARC (P) Ltd., (supra).
20.1. In Phoenix ARC (P) Ltd (supra), the Hon'ble Supreme Court held
as under:
"18. Even otherwise, it is required to be noted that a writ petition against
the private financial institution -- ARC -- the appellant herein under
Article 226 of the Constitution of India against the proposed
action/actions under Section 13(4) of the SARFAESI Act can be said to be
not maintainable. In the present case, the ARC proposed to take
action/actions under the SARFAESI Act to recover the borrowed amount as
a secured creditor. The ARC as such cannot be said to be performing
public functions which are normally expected to be performed by the
State authorities. During the course of a commercial transaction and
under the contract, the bank/ARC lent the money to the borrowers herein
and therefore the said activity of the bank/ARC cannot be said to be as
performing a public function which is normally expected to be performed by
the State authorities. If proceedings are initiated under the SARFAESI Act
and/or any proposed action is to be taken and the borrower is aggrieved by
any of the actions of the private bank/bank/ARC, borrower has to avail the
remedy under the SARFAESI Act and no writ petition would lie and/or is
maintainable and/or entertainable. Therefore, decisions of this Court in
Praga Tools Corpn. [Praga Tools Corpn. v. C.A. Imanual, (1969) 1 SCC 585]
and Ramesh Ahluwalia [Ramesh Ahluwalia v. State of Punjab, (2012) 12
SCC 331 : (2013) 3 SCC (L&S) 456 : 4 SCEC 715] relied upon by the
learned counsel appearing on behalf of the borrowers are not of any
assistance to the borrowers.
............
21. Applying the law laid down by this Court in Mathew K.C. [State Bank
of Travancore v. Mathew K.C., (2018) 3 SCC 85 : (2018) 2 SCC (Civ) 41] to
the facts on hand, we are of the opinion that filing of the writ petitions by
the borrowers before the High Court under Article 226 of the Constitution of
India is an abuse of process of the court. The writ petitions have been filed
against the proposed action to be taken under Section 13(4). As observed
hereinabove, even assuming that the communication dated 13-8-2015
was a notice under Section 13(4), in that case also, in view of the
statutory, efficacious remedy available by way of appeal under Section 17
of the SARFAESI Act, the High Court ought not to have entertained the writ
petitions. Even the impugned orders passed by the High Court directing
to maintain the status quo with respect to the possession of the secured
properties on payment of Rs 1 crore only (in all Rs 3 crores) is absolutely
unjustifiable. The dues are to the extent of approximately Rs 117 crores.
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
The ad interim relief has been continued since 2015 and the secured
creditor is deprived of proceeding further with the action under the
SARFAESI Act. Filing of the writ petition by the borrowers before the High
Court is nothing but an abuse of process of court. It appears that the
High Court has initially granted an ex parte ad interim order
mechanically and without assigning any reasons. The High Court ought
to have appreciated that by passing such an interim order, the rights of
the secured creditor to recover the amount due and payable have been
seriously prejudiced. The secured creditor and/or its assignor have a
right to recover the amount due and payable to it from the borrowers. The
stay granted by the High Court would have serious adverse impact on the
financial health of the secured creditor/assignor. Therefore, the High
Court should have been extremely careful and circumspect in exercising
its discretion while granting stay in such matters. In these circumstances,
the proceedings before the High Court deserve to be dismissed."
(emphasis supplied)
21. The first respondent-Bank is a private mercantile bank. It was
not discharging any public duty while sanctioning the money and in
dealing with loan accounts. In view of the law laid down in Phoenix
ARC (P) Ltd case, writ petitions against first respondent bank are not
maintainable.
22. The remedy under Article 226 of the Constitution of India is
extraordinary and knows no bounds. Wherever injustice is caused to a
person writ Court extends its long arm of justice and reaches out to a
person in need. Though, Article 226 is very wide, the constitutional
Courts have imposed self-imposed restraint on exercising its
extraordinary jurisdiction. Statutes and Administrative orders dealing
with a particular aspect do provide mechanism to redress grievances
arising out of a statute or administrative order. Some times, more
than one remedy is provided, like Original Authority, Appellate
Authority and Revisional Authority. They also create statutory
Tribunals with layers of redressal mechanism. Such forums are
effective and efficacious to dress the grievance of a person. Whenever
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
the Court notices that the grievance ventilated before the Court can be
addressed by a duly constituted administrative authority/quasi-
judicial body, it relegates the person to avail the said remedy before
knocking its doors. In the following decisions, Hon'ble Supreme Court
succinctly stated the need to avail statutorily engrafted remedy before
availing the remedy under Article 226 of the Constitution of India.
22.1. In Union Bank of India Vs Satyawati Tandon15 Hon'ble
Supreme Court cautioned High Courts from entertaining writ petitions
when statute prescribes detailed mechanism. It has also cautioned
against passing interim orders. Hon'ble Supreme Court said as under:
"43. Unfortunately, the High Court overlooked the settled law that the High Court
will ordinarily not entertain a petition under Article 226 of the Constitution if an
effective remedy is available to the aggrieved person and that this rule applies with
greater rigour in matters involving recovery of taxes, cess, fees, other types of public
money and the dues of banks and other financial institutions. In our view, while
dealing with the petitions involving challenge to the action taken for recovery of the
public dues, etc. the High Court must keep in mind that the legislations enacted by
Parliament and State Legislatures for recovery of such dues are a code unto
themselves inasmuch as they not only contain comprehensive procedure for recovery
of the dues but also envisage constitution of quasi-judicial bodies for redressal of the
grievance of any aggrieved person. Therefore, in all such cases, the High Court must
insist that before availing remedy under Article 226 of the Constitution, a person
must exhaust the remedies available under the relevant statute.
.........
45. It is true that the rule of exhaustion of alternative remedy is a rule of
discretion and not one of compulsion, but it is difficult to fathom any reason why
the High Court should entertain a petition filed under Article 226 of the
Constitution and pass interim order ignoring the fact that the petitioner can avail
effective alternative remedy by filing application, appeal, revision, etc. and the
particular legislation contains a detailed mechanism for redressal of his grievance.
46. It must be remembered that stay of an action initiated by the State and/or its
agencies/instrumentalities for recovery of taxes, cess, fees, etc. seriously impedes
execution of projects of public importance and disables them from discharging
their constitutional and legal obligations towards the citizens. In cases relating to
recovery of the dues of banks, financial institutions and secured creditors, stay
granted by the High Court would have serious adverse impact on the financial
health of such bodies/institutions, which (sic will) ultimately prove detrimental to
the economy of the nation. Therefore, the High Court should be extremely careful
and circumspect in exercising its discretion to grant stay in such matters. Of
course, if the petitioner is able to show that its case falls within any of the
exceptions carved out in Baburam Prakash Chandra Maheshwari v. Antarim Zila
(2010) 8 SCC 110
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
Parishad [AIR 1969 SC 556] , Whirlpool Corpn. v. Registrar of Trade Marks [(1998)
8 SCC 1] and Harbanslal Sahnia v. Indian Oil Corpn. Ltd. [(2003) 2 SCC 107] and
some other judgments, then the High Court may, after considering all the relevant
parameters and public interest, pass an appropriate interim order."
(emphasis supplied)
23. As held by Hon'ble Supreme Court in L.Chandra Kumar Vs
Union of India16, the Debts Recovery Tribunal is a duly constituted
Tribunal vesting jurisdiction on matters arising out of SARFAESI Act,
2002 and is the Court of first instance. When a person has a
statutorily engrafted remedy available to redress his grievance, the writ
Court does not entertain the writ petition and relegates him to avail
the said remedy. Thus, even otherwise writ petitioners have to avail
remedy under the Act, 2002.
24. The Writ Petitions are accordingly dismissed, leaving open to
petitioners to avail the remedy under Section 17 of the Act, 2002 as
and when Section 13(4) of Act, 2002 is invoked by the first respondent
bank. It is made clear that there is no expression of opinion on merits
and all issues are left open to be urged before the Debts Recovery
Tribunal. Pending miscellaneous applications, if any, shall stand
dismissed.
______________________
P.NAVEEN RAO,J
______________________
J.SREENIVAS RAO,J
Date: 12.10.2022
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(1997) 3 SCC 261
PNR,J & JSR,J
WP Nos.24018 & 24052 of 2019
HON'BLE SRI JUSTICE P.NAVEEN RAO
&
HON'BLE SRI JUSTICE J.SREENIVAS RAO
WRIT PETITION NOs.24018 & 24052 of 2019
Date : 12.10.2022
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