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TMI Blog2010 (7) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... e outstanding without any progress and therefore, the company was advised to clear the liabilities in full with up-to-date interest within fifteen days from the date of the said notice. The petitioner was further informed that in the event it failed to clear the liabilities on or before 15.01.2010, the respondent-bank would initiate appropriate steps for recovery including legal measures. Even before the time for payment, viz., 15.01.2010, was expired, the respondent-bank issued notice dated 04.01.2010 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which is being challenged in this writ petition. 2. The petitioner in W.P. No. 5314 of 2010, M/s. Signal Export, Tiruppur, commenced its production in the year 2007 and it began to avail credit facilities from the very same first respondent-bank and it also had good track record of banking till May 2009. The petitioner was issued with a recall notice dated 31.12.2009 by the respondent-bank wherein the company had been directed to clear the liabilities on or before 15.01.2010. Even before the expiry of the time, the respondent-bank issued the impugned not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .. (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). (3) The notice referred to in sub-section (2) shall give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor in the event of non-payment of secured debts by the borrower. By the above provision, the right of the banks/financial institutions to resort to the provisions of the Act would arise only in the event where any borrower, who is under liability to a secured creditor under a security agreement, makes any default in payment of a secured debt or any instalment thereof and his account in respect of such debt is classified by the secured creditor as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entation or objection to the borrower. By that provision, a right is conferred on the borrower to make a representation or objection to the notice under sub-section (2) of Section 13 and a corresponding duty upon the secured creditor to communicate the conclusion if such representation or objection is not acceptable or tenable. In the event, no communication is received by the borrower within a week from the date of receipt of the representation or objection, it could be considered that the secured creditor had accepted such representation or objection and would not proceed further pursuant to the notice under sub-section (3) of Section 13. In the event, the conclusion that the representation or objection is not acceptable or tenable is communicated, that communication is only for the purpose of bringing the same to the notice of the borrower and the borrower has no right to question such conclusion at that stage. This law has been laid down by a Division Bench of this Court in the judgment reported in AIR 2007 Madras 173 (Industrial Development Bank of India Ltd., Chennai v. Kamaldeep Synthetics Ltd.). 9. In the event of failure by the borrower to discharge in full the liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise of the power under Section 17 would be available to the borrower only after the proceedings under Section 13(4) and that power of appeal is also denied in the event the secured creditor straight away approaches the Chief Metropolitan Magistrate or District Magistrate under Section 14, strict compliance of provision of Section 13(2) assumes importance which is mandatory. 11. Section 2(o) defines non-performing asset as hereunder: 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 of 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. Non-performing Asset means that an asset or account of a borrower, which does not either generate income from the bank on actual realisation basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys. Nonetheless, dues or disputes regarding classification of NPAs should be considered and resolved by some internal mechanism. In our view, the above position suggests the safeguards for a borrower, before a secured asset is classified as NPA. If there is any difficulty or any objection pointed out by the borrower by means of some appropriate internal mechanism it must be expeditiously resolved. Subsequently, the Apex Court in Transcore v. Union of India AIR 2007 SC 712, in paragraph 45, has once again reiterated as follows: 45.Therefore, when Section 13(4) talks about taking possession of the secured assets or management of the business of the borrower, it is because a right is created by the borrower in favour of the bank/FI when he takes a loan secured by pledge, hypothecation, mortgage or charge. For example, when a company takes a loan and pledges its financial asset, it is the duty of that company to see that the margin between what the company borrows and the extent to which the loan is covered by the value of the financial asset hypothecated is retained. If the borrower company does not repay, becomes a defaulter and does not keep up the value of the financial asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rforming asset , the Apex Court had observed in paragraph 37 as follows: 37. Next we come to the question as to whether it is on 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 the 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 August 30, 2001. It is mentioned in the said Circular as follows: 1.1 In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. 2.1 Non-performing Assets: 2.1.1 An asset, including a leased asset, becomes non-performing when it ceases to gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details but not necessary to be reproduced here, laying down the terms and conditions and circumstances in which the debt is to be classified as non-performing asset as early as possible. Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a non-performing asset. 14.The Apex Court has held in categorical terms that there must be transparency in the conclusion arrived by the secured creditor and for such transparency, the guidelines of the Reserve Bank of India lay down the terms and conditions and circumstances in which the debt is to be classified as non-performing asset as early as possible. The Reserve Bank of India has come up with revised guidelines dated 01.07.2009 and they read as under: 3. Asset Classification 3.1 Classification 3.1.1 Banks should classify their assets into the following broad groups. (i) Standard Assets (ii) Sub-standard Assets (iii) Doubtful Assets (iv) Loss Assets 3.2 Definitions 3.2.1 Standard Assets Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partly. In other words, such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 3.3. Guidelines for Classification of Assets 3.3.1 Basic Considerations (i) Broadly speaking, classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation of dues. (ii) In respect of accounts where there are potential threats to recovery on account of erosion in the value of security and existence of other factors such as, frauds committed by borrowers, it will not be prudent for the banks to classify them first as sub-standard and then as doubtful after expiry of 12 months from the date the account has become NPA. Such accounts should be straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA. 3.3.2 Advances Granted under Rehabilitation Packages Approved by BIFR/Term Lending Institutions (i) Banks are not permitted to upgrade the classification of any advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In that sense, the bank must strictly follow the directions or guidelines relating to the asset classification issued by the Reserve Bank of India from time to time. The Apex Court in the judgment rendered in Sardar Associates v. Punjab Sind Bank, reported in 2009 (2) DRTC 409 (SC), has held that the Reserve Bank of India is a statutory authority and it exercises supervisory powers in the matter of functioning of the scheduled banks. The matter relating to supervision of scheduled banks is also governed by the R.B.I. Act and for the enforcement of the aforementioned purpose, it is entitled to issue guidelines from time to time. With the above observation, the Apex Court ultimately held that such guidelines issued by the Reserve Bank of India is binding on the every banking company. Hence, it is mandatory for the bank to strictly follow the guidelines or directions issued by the administering or regulatory authority of such bank or the Reserve Bank, as the case may be and a breach of such directions or guidelines would invalidate the classification itself and can render illegal the further steps towards securitisation or asset reconstruction. 16. To put it precisely, for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less, even in the recall notice, insofar as the petitioner in W.P. No. 5313 of 2010 is concerned, it has been indicated that the limit was ₹ 110 lakhs; on the other hand, the overdue was ₹ 200.02 lakhs. That was the reason why the bank had come to the conclusion that the account was a non-performing account. Even when the recall notice dated 31.12.2009 gave time to the petitioner till 15.01.2010, there was no response from the petitioner till their reply dated 02.03.2010 was given. Even in the said reply, all that the petitioner had stated that they are proposing to settle the accounts by making a payment of ₹ 20 lakhs on or before 26.03.2010, a further sum of ₹ 135 lakhs on or before 31.08.2010 and the balance payment in full and final settlement on or before 31.12.2010, showing that the account did not produce the income even after 15.01.2010. Similarly, the petitioner in W.P. No. 5314 of 2010 was informed in the recall notice that as against the limit of ₹ 50 lakhs, the overdue liability was ₹ 116.45 lakhs. In response to the notice under Section 13(2), all that the petitioner had replied on 02.03.2010 that they are proposing to settle the acc ..... 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