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TMI Blog2015 (2) TMI 686X X X X Extracts X X X X X X X X Extracts X X X X ..... ns issued by the Reserve Bank of India. Held that- We are of the firm opinion that it is not necessary that legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. It has been the practice of the legislative bodies following the British parliamentary practice to define certain words employed in any given statute for a proper appreciation of or the understanding of the scheme and purport of the Act. But if a statute does not contain the definition of a particular expression employed in it, it becomes the duty of the courts to expound the meaning of the undefined expressions in accordance with the well established rules of statutory interpretation. Therefore, in our opinion, the function of prescribing the norms for classifying a borrower's account as a NPA is not an essential legislative function. The laying down of such norms requires a constant and close monitoring of the financial system demanding considerable amount of expertise in the areas of public finance, banking etc., and the norms may require a periodic revision. All that activity involves too much of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of our laws are outdated and legal procedures are cumbersome and time consuming. Even where Court decrees are obtained their enforcement has been marked by delays. Our experience with the Debt Recovery Tribunals has not been altogether satisfactory in view of the legal issues that have been raised. Our laws indeed seem marked by a basic asymmetry in their protection of creditors as distinct from borrowers which comes in the way of the proper and smooth functioning of banking and credit systems. [See: Introduction : The Issues, Report of the Committee on Banking Sector Reforms (April 1998), Ch.I page 6]. Huge amounts of money are lent by various banks and other financial institutions. Speedy recovery of the monies due to such institutions is an important element determining the efficiency not only of such institutions but also becomes an important factor for the financial health of the country. 4. In order to facilitate banks and financial institutions (hereinafter collectively referred to as "CREDITORS" for the sake of convenience) to speedily recover the monies due to them from the borrowers, Parliament made a law called 'The Recovery of Debts due to Banks and Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dure under Section 13 of the Act. Section 13(2) of the Act provides as follows: "(2) 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 instalment 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)." 6. It provides that the SECURED CREDITOR may call upon the borrower (Section 2(f) "borrower" means any person who has been granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the secured asset: PROVIDED that the right to transfer by way of lease, assignment or sale shall be exercised only where the substantial part of the business of the borrower is held as security for the debt: PROVIDED FURTHER that where the management of whole of the business or part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security or the debt. (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt.). 9. Another important aspect of the Act is that the activity of the Securitisation Companies (SC) and Reconstruction Companies (RC) are given a statutory recognition. Their activity is regulated under Sections 3 and 4 of the Act. Under Section 3 such companies are required to be registered with the RBI. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the guidelines laid down by the Reserve Bank of India for classifying the account of a borrower as a NPA would eliminate the possibility of the SECURED CREDITOR arbitrarily declaring the account of a borrower as a NPA. "37. Next we come to the question as to whether it is on the whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We find it not to be so. As a matter of fact a policy has been laid down by Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as "RBI's prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a circular dated 30-8-2001. It is mentioned in the said circular as follows: ** ** ** From what is quoted above, it is quite evident that guidelines as laid down by Reserve bank of India which are in more details but not necessary to be reproduced here, lay down the terms and conditions and circumstances in which the debt is to be classified as non-performing asset as clearly as possible. Therefore, we find no substance in the submission made on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se requires: (o) "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.- (a) In case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body; (b) In any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank. 18. It can be seen from the above, that prior to its amendment by Act 30 of 2004, NPA is defined as 'an account of a borrower which has been classified' by a CREDITOR either 'as a sub-standard asset or a doubtful asset or a loss asset' of the CREDITOR and such a classification is required to be made in accordance with the directions or guidelines relating to assets classification issued by the Reserve Bank. 19. But, under the amended definition, such a classification of the account of a borrower by the CREDITOR is required to be made in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that there is no delegated legislation involved in the case on hand. As discussed above, the power exercised by the Reserve Bank of India in a separate enactment has been taken note of by the Legislature in the subsequent one. It is only a definition clause, which has been adopted by the Legislature. This has been done to put its machinery into use towards its avowed object of activity - appropriate recovery. Therefore, we do not find any delegated legislation involved and therefore contentions raised on the power of delegation and thereafter it is excessive, has no force. We only observe for the sake of completion, that even assuming that there is a delegated legislation involved, the same is not excessive as there are sufficient guidelines available in the earlier enactment and based upon which the Circular has been issued by the Reserve Bank of India, being a specialized body.) "34.….In this case, the Legislature has left the job of defining "non-performing asset' in the hands of Reserve Bank of India. Therefore, when once the Legislature has approved the power of Reserve Bank of India on the classification of assets, the resultant consequence w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of any borrower as a NPA. The High Court therefore opined that the deviation from the original objects and reasons would be violative of Article 14 of the Constitution of India. 24. Learned counsel appearing for the borrowers argued that the amended Section 2(1)(o) is unconstitutional for the following reasons: (1) that the Parliament, by authorizing the various bodies to frame the guidelines in accordance with which the account of a borrower could be classified as a NPA abdicated its essential legislative function by making an excessive delegation; (2) that while the un-amended Section 2(1)(o) provided for a uniform standard by which an account of a borrower is to be classified as NPA of the CREDITOR by applying the guidelines issued by the Reserve Bank, the amended provision enables different CREDITORS to adopt different guidelines which prescribe different standards for arriving at a conclusion that the account of a borrower is NPA. Such a provision according to the borrowers, is violative of Article 14 of the Constitution of India as it amounts to a class legislation forbidden by Article 14; (3) Since the Act recognizes the possibility of acquisition of a "financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the classification of NPA is to be made on the basis of the guidelines framed by different bodies regulating the different CREDITORS is a constitutionally permissible classification having regard to the nature of the different credit facilities extended by the various CREDITORS to different categories of borrowers and on different terms and conditions. 3. The third submission made on behalf of the borrowers is sought to be repelled on two grounds: (i) that, it is a purely hypothetical submission in the context of the present set of cases as in none of the cases the original SECURED CREDITOR transferred the financial asset in favour of any other body; (ii) assuming for the sake of argument that there is a possibility of an asset of the SECURED CREDITOR being acquired either by a securitization company or a reconstruction company and therefore are governed by the guidelines (for the determination of the question whether an acquired asset has become a non-performing asset) other than those promulgated by the Reserve Bank of India, it has not been demonstrated in any one of these cases that such guidelines are less favourable to the borrowers than the guidelines of the Reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures trustees appointed by any bank or financial institution, (5) a securitisation company, (6) reconstruction company etc. Once again the expression 'bank' by definition takes within its sweep six categories of entities specified under Section 2(1)(c). The expression 'financial institution', by definition under the Act, takes within its sweep four categories of bodies specified under Section 2(1)(m). The activities of all the above mentioned categories of entities are primarily governed by some in-house managerial body which, in turn, are subject to the control and regulation either by the Reserve Bank of India or some other statutory body or authority, which are also subject to the overall supervisory control of the Reserve Bank of India. For example, the National Housing Bank, a bank established under the Act No.53 of 1987 of the Parliament, though is an autonomous body "to operate as a financial agency to promote housing finance institutions" with vast powers to regulate the housing finance activity in the country, it is still obliged under Section 5(5) of the Act 53 of 1987 to be guided by the directions given by the Reserve Bank of India. The National Housing Bank Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed certain capital adequacy standards to be followed by commercial banks and these standards have been accepted for implementation by several countries. The BIS standard, as it is popularly known, seeks to measure capital adequacy as the ratio of capital to risk weighted assets. It has prescribed weightages for different categories of assets which include certain off-balance sheet items as well. The Committee believes that it is necessary that banks in India also conform to these standards in a phased manner. [See: Capital Adequacy, Accounting Policies and Other Related Matters, Report of the Committee on the Financial System (November 1991), Ch.V page 51]) and opined that it is necessary that the Indian banks also conform to those standards. But as a prelude to the compliance with the BIS standards, the Committee opined that the banks should have their assets revalued on a more realistic basis and on the basis of their realizable value. 34. It also took note of the fact that the banks and development financial institutions (DFIs) had not been following a universal practice with regard to the income recognition, valuation of investments or provisioning against doubtful debts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and financial institutions came to be issued by the Reserve Bank from time to time. For example, the Reserve Bank of India issued instructions dealing with the Non Banking Financial Companies (NBFCs) (Section 45-I(f) ''non-banking financial company'' means- (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.) and also the Securitisation Companies and Reconstruction Companies. Originally such guidelines were meant only to enable the CREDITORS to have a rational view of their "assets"/"financial assets" for the better administration of their funds and the banking business. The Parliament thought it fit to adopt the above-mentioned guidelines issued by the Reserve Bank of India even for the purpose of identifying NPAs under the Act. 36. Now, we proceed to examine what exactl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d outstanding from the borrower. Normally such term loans are also accompanied by some 'security interest' in a 'secured asset' of the borrower. Such a recovery is to be made normally by instituting a suit for recovery of the amounts by enforcing the 'security interest'. The Recovery of Debts due to Banks and Financial Institutions Act, 1993 created an exclusive forum for a speedy ascertainment of the amounts actually due from the defaulting borrower and also provided for a mechanism for speedy recovery of the amounts so ascertained from such borrowers. 40. Since such a system was also found to be inadequate for the speedy recovery of the monies due from the borrowers to the CREDITORS, the Parliament made the Act under which the process of ascertainment of the amounts due from a borrower by an independent adjudicatory body is dispensed with. The SECURED CREDITOR is made the sole judge of the amount due and outstanding from a borrower subject to an appeal under Section 17 of the Act. 41. Be that as it may, such an ascertainment of amount due and outstanding is not the only criteria on the basis of which the SECURED CREDITOR is entitled to initiate proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ass. Their characters vary depending on the length of time for which they remained NPAs. 46. In our view, such a classification is relevant and assumes importance in the decision making process of the SECURED CREDITOR under Section 13(2) as to which one of the steps contemplated under Section 13(4) should be resorted to in the case of a given defaulting borrower. We hasten to add that it may not be the only factor which determines the cause of action to be taken by the SECURED CREDITOR. The magnitude of the amount due and outstanding in a given case, the reasons which prompted the borrower to default in the repayment schedule, the nature of the business carried on by the defaulting borrower, the overall prospects of the defaulter's business, national and international market conditions relevant to the business of a defaulter - in our opinion, are some of the factors which are germane to a decision that action under Section 13(4) is required to be taken against a defaulting borrower. Even in a case where on rational and objective consideration of all the relevant factors including the representations/objections referred to under Section 13(3A), the CREDITOR comes to a conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Bank of India, National Housing Bank, which are though bodies created under different laws of Parliament enjoying a large amount of autonomy, are still subject to the overall control of the Reserve Bank of India. 51. Regulation of monetary system and banking business is one of the fundamental responsibilities of any modern State and essential for the economic and political stability of the State. The vast increase of commerce both national and the international made easy by the tremendous developments of technology, renders such regulation a very complicated matter with complex variables. The span of each variable could vary from minutes to years. Therefore, it requires constant monitoring on daily basis sometime even on minute to minute basis. In lieu of the importance and complexities, the Reserve Bank, the prime regulator of the Indian economy and banking system, has been issuing guidelines and directions from time to time not only to the banks but to various other financial institutions which are amenable to its jurisdiction. Such instructions given from time to time are consolidated annually and published in the form of "Master Circulars". One of such circular da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied enactments, the reasoning in each case was different, and it is difficult to say that any particular principle has been laid down by the majority which can be of assistance in the determination of other cases.". 54. In the case of B. Shama Rao v. Union Territory of P ondicherry, AIR 1967 SC 1480, J.M. Shelat, J. speaking for majority (3) of a Constitution Bench of 5 Judges, after summarizing the views of the 7-Judges who delivered the judgment in Delhi Laws Act's case opined; "5. …….In view of the intense divergence of opinion except for their conclusion partially to uphold the validity of the said laws it is difficult to deduce any general principle which on the principle of stare decisis can be taken as binding for future cases. It is trite to say that a decision is binding not because of its conclusion but in regard to its ratio and the principle laid down therein. The utmost, therefore, that can be said of this decision is that the minimum on which there appears to be consensus was (1) that legislatures in India both before and after the Constitution had plenary power within their respective fields; (2) that they were never the delegates of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Corporation of Delhi v. Birla Cotton, Spinning and Weaving Mills, Delhi & Another, AIR 1968 SC 1232 considered the question whether Section 150 of the Delhi Municipal Corporation Act (66 of 1957) is unconstitutional on the ground that it provided for impermissible delegation of the 'essential legislative function'. On an examination of the abovementioned authorities, apart from others, Chief Justice Wanchoo, speaking for himself and Justice Shelat, held as follows: "28. …… The legislature must retain in its own hands the essential legislative functions and what can be delegated is the task of subordinate legislation necessary for implementing the purposes and objects of the Act. Where the legislative policy is enunciated with sufficient clearness or a standard is laid down, the courts should not interfere. :What guidance should be given and to what extent and whether guidance has been given in a particular case at all depends on a consideration of the provisions of the particular Act with which the Court has to deal including its preamble. Further it appears to us that the nature of the body to which delegation is made is also a factor to be taken into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, the blessing not necessarily unmixed. We do not wish, in this case, to search for the precise principles decided in the Re Delhi Laws Act case, nor to consider whether M.K. Papiah v. Excise Commissioner beats the final retreat from the earlier position. For the purposes of this case we are content to accept the "policy" and "guidelines" theory and seek such assistance as we may derive from cases where near identical provisions have been considered." This Court declined "to consider whether M.K. Papiah & Sons v. The Excise Commissioner, (1975) 3 SCR 607, beat the final retreat from the earlier position" but proceeded to examine the case before it on the theory of "policy" and "guidelines" propounded in some of the cases. 61. We can safely state that none of the judgments of this Court so far has laid down any principle indicating as to what exactly constitutes "essential legislative function". 62. While the Delhi Laws Act's case dealt with the delegation of power to the Executive by the Legislature of applying certain laws with or without modification to new territories, the other cases essentially dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not an essential legislative function. The laying down of such norms requires a constant and close monitoring of the financial system demanding considerable amount of expertise in the areas of public finance, banking etc., and the norms may require a periodic revision. All that activity involves too much of detail and promptitude of action. The crux of the impugned Act is the prescription that a SECURED CREDITOR could take steps contemplated under Section 13(4) on the "default" (Section 2(1) (j) "default" means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor ;) of the borrower. The expression "default" is clearly defined under the Act. Even if the Act were not to be on the statute book, under the existing law a CREDITOR could initiate legal action for the recovery of the amounts due from the borrower, the moment there is a breach of the terms of the contract under which the loan or advance is granted. The stipulation under the Act of classify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk loans are generally in foreign currencies. Similarly, loans granted by Housing Finance CREDITORS which are in turn regulated by the National Housing Bank are loans which are term loans for relatively longer periods than other loans. There is nothing uniform about these CREDITORS or their activities. 69. It is submitted by learned counsel for the RBI- "Prior to the amendment in 2004, NPA was defined as sub-standard, doubtful or loss asset in accordance with the directions or under guidelines relating to assets classification issued by the Reserve Bank. Irrespective of whether the financial entity was regulated by RBI or not, for the purposes of SARFAESI Act, the asset classification stipulated by RBI was applicable. Though the regulator concerned of the financial entity had stipulated different standards for regulatory purposes, the entities had to apply the criteria stipulated by RBI for asset classification so far as SARFAESI Act was concerned. The amendment brought about in 2004 addresses this issue and brings in uniformity in the classification of assets by financial entities, both for the purposes of complying with the directions issues by their own regulations and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s where factually the SECURED ASSETS have been transferred by the ORIGINAL CREDITORS. Those cases have been de-tagged from this batch to be heard separately. 73. Coming to the fourth submission of the borrower, it must fail on the basis of express language of Section 13(3A) (Section 13(3A). If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the secured creditor comes to the conclusion that such representation or objection is not acceptable or tenable, he shall communicate within fifteen days of receipt of such representation or objection the reasons for non-acceptance of the representation or objection to the borrower. Provided that the reasons so communicated or the likely action of the secured creditor at the stage of communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.) which obligates the SECURED CREDITORS to examine the representation/objection, if any, made by the borrower on the receipt of notice ..... X X X X Extracts X X X X X X X X Extracts X X X X
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