2010 (7) TMI 1153 - HC - Companies Law

Summary

Issues Involved:
1. Classification of accounts as Non-Performing Assets (NPA).
2. Compliance with Reserve Bank of India (RBI) guidelines.
3. Validity of the notice issued under Section 13(2) of the SARFAESI Act.
4. Borrowers' right to representation and objection under Section 13(3A) of the SARFAESI Act.
5. Judicial scrutiny of the bank's discretion in declaring NPAs.

Issue-Wise Analysis:

1. Classification of Accounts as Non-Performing Assets (NPA):
The petitioners, two companies engaged in the manufacture and export of readymade garments, challenged the classification of their accounts as NPAs by the respondent-bank. The court emphasized that for an account to be classified as an NPA, there must be a debt by a borrower from a secured creditor under a security agreement, a default in repayment, and the account must be classified by the secured creditor as an NPA. The court noted that the petitioners had overdue liabilities significantly exceeding their credit limits, justifying the bank's classification of their accounts as NPAs.

2. Compliance with Reserve Bank of India (RBI) Guidelines:
The court highlighted the importance of compliance with RBI guidelines in the classification of NPAs. It referred to the Supreme Court's judgment in Mardia Chemicals Ltd. v. Union of India, which stressed the need for transparency and adherence to RBI guidelines. The court noted that the RBI's prudential norms on income recognition, asset classification, and provisioning must be followed by banks. The court found that the respondent-bank had acted in accordance with these guidelines, as the petitioners' accounts had not produced income for more than 180 days, and there were defaults in repayment.

3. Validity of the Notice Issued Under Section 13(2) of the SARFAESI Act:
The petitioners contended that the notice issued under Section 13(2) of the SARFAESI Act was premature, as they were given time until 15.01.2010 to clear their liabilities, but the notice was issued on 04.01.2010. The court rejected this argument, noting that the overdue liabilities justified the bank's action. The court emphasized that the notice under Section 13(2) must provide details of the amount payable and the secured assets intended to be enforced, which the respondent-bank had done.

4. Borrowers' Right to Representation and Objection Under Section 13(3A) of the SARFAESI Act:
The court discussed the borrowers' right to make representations or objections to the notice issued under Section 13(2) of the SARFAESI Act. It referred to the Supreme Court's observation in Mardia Chemicals Ltd. v. Union of India, which led to the insertion of Section 13(3A) in the SARFAESI Act. This provision allows borrowers to make representations or objections, and the secured creditor must consider and communicate the reasons for non-acceptance within one week. The court found that the petitioners had made representations, but the respondent-bank had not accepted them, justifying its actions based on the overdue liabilities.

5. Judicial Scrutiny of the Bank's Discretion in Declaring NPAs:
The court emphasized that the bank's discretion in declaring an account as an NPA must be exercised judicially and supported by materials. It referred to the Supreme Court's judgment in Sardar Associates v. Punjab & Sind Bank, which held that RBI guidelines are binding on banks. The court found that the respondent-bank had acted reasonably and transparently in classifying the petitioners' accounts as NPAs, based on the available materials and adherence to RBI guidelines.

Conclusion:
The court dismissed the writ petitions, finding no merit in the petitioners' arguments. It upheld the respondent-bank's classification of the petitioners' accounts as NPAs and the issuance of notices under Section 13(2) of the SARFAESI Act. The court emphasized the importance of compliance with RBI guidelines and the judicial scrutiny of the bank's discretion in declaring NPAs. The court concluded that the respondent-bank's actions were neither arbitrary nor unreasonable.