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2019 (5) TMI 1948 - HC - Indian LawsClassification of account as Non-Performing Asset (NPA) - disbursing power sanction to a borrower can be altered/reduced or not - principles of natural justice in the form of an opportunity are required to be provided to the borrower - Position of cash credit or term loan - When can the disbursing power be altered/reduced and whether principles of natural justice in the form of an opportunity are required to be provided to the borrower before doing so? - HELD THAT - The disbursing power sanctioned to a borrower is the limit upto which the borrower can utilize the facility of the sanctioned loan. It is generally sanctioned on the basis of the value of the hypothecated stock and book debts which are taken as tangible secured asset. The borrower is obligated under the disbursing power to maintain minimum level of stocks and book debts to safeguard the financial interest of the financial/banking institution. It is required to submit its stock statements and other relevant information periodically and regularly for the verification of the lender. Any default on the part of the borrower to adhere to these norms entitles the creditor to alter/reduce the disbursing power - due opportunity of hearing and explaining the factual position alongwith documentary proof is required to be given to the borrower to support his claim. The decision is based on the principle enunciated in audi alterm partem. The principles of natural justice are required to be followed when a quasi judicial body engages in determining disputes between the parties or administrative action is taken which involves civil consequences. Further sub-section (2) of Section 13 of the SARFAESI Act provides for giving a notice by the secured creditor to the borrower in writing to discharge his liability to the secured creditor within 60 days from the date of notice failing which the provision has been made for entitling the secured creditor to exercise all or any of the rights under sub section (4) of Section 13 of the SARFAESI Act - In MARDIA CHEMICALS LTD. VERSUS UNION OF INDIA 2004 (4) TMI 294 - SUPREME COURT the Supreme Court clearly emphasized the need of serving a notice upon the borrower under sub-section (2) of Section 13 of the SARFAESI Act so that an opportunity is provided to the borrower for explaining the reasons within sixty days for not initiating action under sub-section (4) of Section 13 of the SARFAESI Act. It was observed that the objective of the issuance of notice under Section 13(2) of the SARFAESI Act and providing an opportunity to the borrower was to ensure that there was fair consideration of some meaningful objection raised by the borrower if any before affecting his rights. It is concluded that in view of the principles of equity and natural justice an opportunity is required to be provided to the borrower before the creditor modifies or reduces the disbursing power. Whether cash credit limit or term loan once declared NPA can it be restored as standard account? - HELD THAT - The Supreme Court in M/S SARDAR ASSOCIATES ORS. VERSUS PUNJAB SIND BANK ORS. 2009 (7) TMI 1274 - SUPREME COURT while examining the nature of supervisory power of Reserve Bank of India in the matter of functioning of Scheduled Banks concluded that a distinction must be made between statutory and non-statutory guidelines. Further the mandate of Banking Policy and directions issued by Reserve Bank of India in public interest or in the interest of the depositors are required to be followed by the Banking company. In other words they are equally bound to comply with all the guidelines issued by the Reserve Bank of India. Where the borrower expresses willingness for regularizing the loan account by discharging the arrears of interest and principal the Bank/financial institutions are obligated to accept the same as per mandate expressed in the Master Circular dated 01.07.2015 issued by the Reserve Bank of India in exercise of powers under the 1949 Act and declare the account to be Standard account. The action of the respondent is legally unsustainable. Undisputedly the petitioner had availed cash credit facilities from the respondent Bank since 2007 against the company stock statements and book debts. Collateral security was given in terms of factory land and building by the petitioner to fully secure the cash credit facility. The Bank was renewing the contract yearly. Suddenly on 27.6.2018 the Bank informed the petitioner that its account had been declared NPA by the statutory auditor and was directed to deposit the entire outstanding amount in the account. The reasons given by the Bank were that the company was incurring loss from its core activity for which the Bank had financed; the petitioner company was misusing the capital advanced to earn interests which was not directly related to the manufacturing activity of the company. The petitioner was not afforded any opportunity before reducing the disbursing power and declaring the account as NPA. Further as per clauses 4.2.4 and 4.2.5 of the Master Circular dated 01.07.2015 issued by the RBI the petitioner could remove the temporary deficiencies in the maintenance of account as standard and to upgrade the account so as to be out of NPA. The irresistible conclusion is that notice was required to be issued to the petitioner under the provisions of the SARFAESI Act by the Bank before declaring its account as NPA - Matter is remanded to the respondents to take a decision afresh in accordance with the guidelines issued by the Reserve Bank of India termed as RBI s prudential norms of income recognition asset classification and provisioning pertaining to advances after affording an opportunity to the petitioner - petition allowed by way of remand.
Issues Involved:
1. When can the disbursing power be altered/reduced, and whether principles of natural justice in the form of an opportunity are required to be provided to the borrower before doing so? 2. Whether a cash credit limit or term loan once declared NPA can be restored as a standard account? Issue-wise Detailed Analysis: Re: (i) Alteration/Reduction of Disbursing Power and Natural Justice: The court examined the statutory provisions under the SARFAESI Act, specifically Sections 2(1)(j), 2(1)(o), and 13, which define "default" and "non-performing asset" (NPA). The Act mandates a notice to the borrower before enforcing security interest, ensuring an opportunity to respond within 60 days. The court emphasized that the principles of natural justice, particularly audi alteram partem (no one should be condemned unheard), must be adhered to before altering or reducing the disbursing power. This principle is rooted in common sense justice and aims to prevent arbitrary decisions that affect borrowers' rights. The court cited the Supreme Court's decision in Canara Bank v. V.K. Awasthy, which underscored the importance of natural justice in administrative actions involving civil consequences. The court also referred to Mardia Chemicals Limited v. Union of India, which highlighted the necessity of serving a notice to borrowers under Section 13(2) of the SARFAESI Act to ensure fair consideration of objections before taking adverse actions. The Jharkhand High Court’s decision in Stan Commodity Pvt. Limited v. Punjab and Sind Bank was also noted, which stressed the need for informing borrowers and providing an opportunity to explain or represent against the intended classification of their account as NPA. The court concluded that an opportunity must be provided to the borrower before modifying or reducing the disbursing power, in line with the principles of equity and natural justice. Re: (ii) Restoration of NPA to Standard Account: The court examined Section 35A of the Banking Regulations Act, 1949, which empowers the Reserve Bank of India (RBI) to issue binding directions to banking companies in the interest of banking policy. The court also referred to Section 21 of the same Act, which allows the RBI to control advances by banking companies. The court cited the Supreme Court’s decision in Central Bank of India v. Ravindra, which affirmed that RBI's guidelines issued under Sections 21 and 35A are binding. The court also noted the Supreme Court’s decision in M/s Sardar Associates v. Punjab and Sind Bank, which differentiated between statutory and non-statutory guidelines and emphasized compliance with RBI directives. The RBI’s Master Circular on Prudential Norms dated 01.07.2015 was discussed, which outlines the classification of NPAs and conditions for their upgradation. Clause 4.2.5 of the Circular allows for the reclassification of an NPA to a standard account if arrears of interest and principal are paid. The court highlighted that temporary deficiencies should not lead to NPA classification and that banks must follow guidelines to address such deficiencies. The Andhra Pradesh High Court’s decision in Sravan Dall Mill P. Limited v. Central Bank of India was cited, which held that NPAs can be reclassified as standard accounts upon payment of arrears, and the classification must comply with RBI guidelines. The court concluded that banks must accept borrowers' efforts to regularize loan accounts and reclassify NPAs as standard accounts, as mandated by the RBI’s Master Circular. Conclusion: The court found the respondent Bank’s action of declaring the petitioner’s account as NPA without providing an opportunity to be legally unsustainable. The petitioner was not afforded a chance to address temporary deficiencies before the account was declared NPA. The court set aside the impugned letter/email dated 27.6.2018 and all consequential actions, remanding the matter to the respondent Bank for a fresh decision in accordance with RBI guidelines after providing the petitioner an opportunity to be heard. The writ petition was allowed.
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