Madras High Court
Gain-N-Nature Food Products Rep. By ... vs Union Of India (Uoi) Rep. By Secretary To ... on 27 March, 2008
Author: V. Ramasubramanian
Bench: A.P. Shah, V. Ramasubramanian
ORDER V. Ramasubramanian, J.
1. Challenging a notice issued under Section 13(2) of the SARFAESI Act 2002, one Mr. M.P. Balaji Prakasam carrying on business as sole proprietor of M/s. Gain-N-Nature Food Products, has come up with the Writ Petition W.P.No:31536 of 2007 seeking not only to quash the notice, but also to direct the Reserve Bank of India to take action against the Bank for not following the guidelines issued by the Reserve Bank of India.
2. Challenging a similar notice issued under Section 13(2) and a reply sent by the Bank in response to the legal notice issued by the counsel, a company by name M/s. Galaxy Amaze Kingdom Ltd., whose Managing Director M.Palanisamy is the father of the petitioner in the other Writ Petition, has come up with the Writ Petition W.P. No. 32688 of 2007 seeking to quash the notice dated 1.8.2007 and the reply dated 27.8.2007 and for a direction to work out a scheme in terms of their representation dated 18.9.2007.
3. We have heard Mr. S.N. Amarnath, learned Counsel for the petitioner in W.P. No. 31536 of 2007, Mr. M. Palanisamy, petitioner in person in W.P.No:32688 of 2007 and Mr. F.B. Benjamin George, learned Counsel for the United Bank of India, the respondents 5 to 7 in both the Writ Petitions.
4. The petitioner in the first Writ Petition availed a term loan of Rs. 1.30 crores, working capital limit of Rs. 2.50 crores, Cash Credit of Rs. 2 crores, Bill Discounting Facility of Rs. 50 lakhs and a Letter of Credit Limit of Rs. 50 lakhs, thus totalling to Rs. 4.30 crores. According to the Bank, the borrower defaulted in payment of the term loan installments and they also failed to furnish stock statements and other periodical statements. Therefore, the accounts were classified as "Non Performing Asset". As on 31.3.2006, a total sum of Rs. 2,84,28,281.98 was found due and the petitioner was offered a one time settlement in an amount of Rs. 2,70,00,000/=. But, the petitioner failed to avail the said opportunity and hence the Bank was compelled to issue the impugned demand notice under Section 13(2).
5. Similarly, the petitioner in the other Writ Petition availed a Bill Discounting Facility and failed to pay the dues, forcing the Bank to issue the notice under Section 13(2). The petitioner in the second Writ Petition is a limited Company whose Managing Director M.Palanisamy is also the father of the petitioner in the other Writ Petition. The wife, daughter and son of M.Palanisamy are also the Directors in the petitioner company in the second Writ Petition. Even the petitioner in the second Writ Petition approached the Bank for a one time settlement. The Bank accepted the same and gave a time limit upto 25.3.2007 and thereafter extended the same upto 30.6.2007. But the petitioner could not make payment before the said date, which forced the Bank to issue the notice under Section 13(2).
6. The challenge to the notices issued under Section 13(2) of the SARFAESI Act, 2002 is made by the petitioners in both the writ petitions, on the following grounds:
(a) that the mere non payment of a few installments would not make the accounts of the petitioner, a "Non Performing Asset";
(b) that the threat of the Bank, even at the stage of notice under Section 13(2), to publish the photographs of the defaulters in Newspapers, was oppressive;
(c) that the reply issued under Section 13 (3A) of the Act was not in accordance with the statutory requirements.
7. In so far as the first ground of attack is concerned, it is seen that the expression "Non Performing Asset" is defined under Section 2 (1) (o) of the SARFAESI Act, 2002 as follows:
non-performing asset" means an asset or account of a borrower, which, has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to asset classifications issued by the Reserve Bank.
8. Section 13(2) of the Act enables the secured creditor (the bank or financial institution) to require the borrower, by a notice in writing, to discharge in full, his liabilities within 60 days, if the borrower makes any default in repayment and his account in respect of such debt is classified as a "Non Performing Asset". Thus Section 13(2) contemplates the fulfillment of two conditions for the issue of the notice, viz., (a) that the borrower must have committed a default in repayment of the secured debt or any installment thereof and (b) that his account in respect of such debt is classified by the secured creditor as "Non Performing Asset".
9. According to the respondent-Bank, both the conditions laid down under Section 13(2) are fulfilled in the present case. The petitioners in both the writ petitions do not dispute the fact that they have committed default in payment of a few installments. Therefore, the first condition for the invocation of Section 13(2) is satisfied even admittedly.
10. But, according to the petitioners, the value of the secured assets is far greater than their current liability and hence the debt cannot be classified as sub-standard, doubtful or loss asset, in accordance with the guidelines issued by the Reserve Bank of India, relating to asset classification. Therefore, the contention of the petitioners is that the second condition prescribed under Section 13(2) is not fulfilled, so as to enable the Bank to initiate action.
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.
13. In so far as the objection relating to the publication of photographs is concerned, the issue is already settled in K.J. Doraisamy v. Assistant General Manager, State Bank of India, Erode Branch and Anr. . Therefore, the said objection is also not tenable in law.
14. In so far as the third objection is concerned, the learned Counsel for the petitioners relied upon a decision of the Division Bench of the Karnataka High Court in W.P. No. 9694 of 2005, dated 23.3.2006 in Mrs.Sunanda Kumari and Anr. v. Standard Chartered Bank. It was held in the said decision, as follows:
Sub-section (3A) casts a duty on the secured creditor to consider the representation made or objection raised by the borrower and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he is bound to communicate to the borrower the reasons for non acceptance within one week of receipt of the representation or objection. Thus, Sub-section (3A) confers on the borrower a right to know the reasons for the non acceptance of his representation or objection by the secured creditor. Hence the secured creditor is statutorily bound to consider the borrower's representation or objection and if the representation or objection is not tenable or acceptable, he is also bound to communicate the reasons for such non acceptance. If the borrower does not receive any communication from the secured creditor conveying the reasons for non acceptance of the objection, he is entitled to presume that the secured creditor has found the representation acceptable and the objection tenable. Since the respondent-bank failed to discharge its statutory obligations under Sub-section (3A) of Section 13 of the Act, the action initiated by the respondent under Sub-section (4) of Section 13 and Section 14 is illegal and irregular.
15. The aforesaid decision is of no avail to the petitioners. In response to the notice under Section 13(2), the petitioners admittedly sent a reply, in the form of a legal notice, dated 13.8.2007. The respondent-Bank sent a reply dated 27.8.2007. Immediately thereafter, the petitioners have come to court. Therefore, this is not a case where the Bank has bye-passed the provisions of Section 13(3A) of the Act. A Division Bench of this Court (to which one of us, viz., The Chief Justice, was a party) has already held in Industrial Development Bank of India Ltd., v. Kamaldeep Synthetics Ltd. that by virtue of the proviso to Sub-section (3A) of Section 13, the reasons communicated shall not confer any right upon the borrower to prefer an application under Section 17. The basic object of Sub-section (3A) of Section 13 is to ensure an element of transparency and fair-play in the implementation of the provisions of the Act. Hence, the contention based upon Section 13(3A) of the Act is also unsustainable.
16. In any case, the petitioners have a statutory remedy of filing an application under Section 17 of the SARFAESI Act, 2002, if and when the respondent-Bank initiates an action under Section 13(4) of the Act. It is always open to the petitioners to agitate all these issues, in such an application. Therefore, the Writ Petitions are devoid of merits and are dismissed. It is left open to the petitioners to approach the Debts Recovery Tribunal as and when the respondent initiates action under Section 13(4) of the SARFAESI Act, 2002.
17. Consequently, connected Miscellaneous Petitions are also dismissed. No costs.