9911796707
TMI Blog2024 (11) TMI 707X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the present case, the borrower did not reply to the notice under Section 13 (2) of the Act of 2002 dated July 8, 2022. Section 13 (3-A) of the Act of 2002 has obliged the secured creditor to consider the representation or objection of a borrower to a notice under Section 13 (2) of the Act of 2002 and if the secured creditor concludes that such representation or objection is not acceptable, to communicate within 15 days of the receipt of such representation or objection the reason for non-acceptance of the representation or objection of the borrower - Unlike a civil suit filed under Order 37 of the Code of Civil Procedure, 1908, or a suit filed for compensation on account of storage, which does not statutorily empower the recipient of a demand notice to respond to and the issuer of such demand notice to deal with the response within a specified time, a notice under Section 13 (2) of the Act of 2002 can be responded to by the borrower and the secured creditor who has issued such notice is obliged to inform the reasons as to non-acceptance or non-tenability of the objection within the specified period of 15 days from the date of receipt of the response. Not res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same parties and appeals are directed against the same judgement and order. 2. 2. State Bank of India, (hereinafter referred to as the SBI for the sake of convenience) has preferred the appeal being APO 180 of 2023 while CFM Asset Reconstruction Company (hereinafter referred to as the ARC for the sake of convenience) has preferred the appeal being APO No. 393 of 2023. Contentions of SBI 3. Learned advocate appearing for SBI has contended that Atibir Industries Company Limited (hereinafter referred to as the borrower for the sake of convenience) obtained both fund and non-fund-based credit facilities from SBI. Such credit facilities have been sanctioned by a letter dated January 27, 2020. Referring to the letter of sanction dated January 27, 2020, he has pointed out that, amongst the fund- based credit facilities, the borrower enjoyed cash credit as well as term loan facilities. By a letter dated June 11, 2020, the borrower had referred to its earlier letter and resolution plan dated May 26, 2020, the meeting between the borrower and SBI held through video conferencing on June 1, 2020, and the letter of SBI dated June 3, 2020, and submitted a revised restructuring plan for credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by them from the lender. 8. Learned advocate appearing for SBI has contended that the learned Single Judge failed to appreciate that, when one account in the bunch of credit facilities enjoyed by a borrower becomes a non- performing asset, then, the entirety of the credit facility is treated as NPA. He has contended that the learned Single Judge erred in concentrating only on the term loan account and holding such a term loan account did not become a NPA. According to him, the learned Judge has failed to appreciate that, the term loan account also became NPA when the borrower had applied for the reconstruction thereof. Both the cash credit account and the term loan account had become NPA before the issuance of the web notice dated February 10, 2023. In any event both the accounts had become NPA on March 24, 2023, when the accounts were sold to the ARC. 9. Learned Advocate appearing for SBI has relied upon All India Reporter 1966 Supreme Court 334 (Lekhraj Sathramdas Lalvani vs. N.M. Shah), 2003 Volume 4 Supreme Court Cases 712 (High Court of Gujarat and Another vs. Gujarat Kishan Mazdoor Panchayat and Others) and 2004 Volume 12 Supreme Court Cases 278 (N. Mani vs. Sangeetha Theatre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and order was passed had been filed immediately thereafter. Initially, the learned Single Judge had refused to pass any interim order on March 24, 2023, in the second writ petition. An appeal had been filed by the borrower in which, orders dated June 8, 2023, and June 12, 2023 had been passed. 14. Learned Senior Advocate appearing for ARC has referred to the list of events. He has contended that ARC having obtained the assignment validly, the same should not be interfered with. 15. Learned Senior Advocate appearing for ARC has contended that asset classification is borrower-wise and not facility wise, in terms of the RBI Master Circular Prudential Norms on Income Recognition, Asset Classification and Provision Pertaining to Advance dated July 11, 2015, all accounts of the borrower have become NPA on October 16, 2020. Borrower had paid a sum of Rs. 80 lakhs on December 11, 2020, in respect of the term loan account only. All other nine accounts of the borrower had remained unserviced and continued to remain NPA. He has referred to the balance sheet of the borrower for the year ended March 31, 2021, and submitted that the borrower admitted default of more than 90 days in payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2(o) of the SARFAESI Act, 2002, and contended that an account may be classified as an NPA by the directions and guidelines relating to asset classification issued by RBI. He has referred to the notice dated July 8, 2022, claimed to be under Section 13(2) of the SARFAESI Act, 2002 purporting to classify the account as NPA on October 16, 2020. He has referred to Rule 2.1.2 of the Master Circular of the Reserve Bank of India relating to Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances. He has contended that the term loan account can be classified as NPA after 90 days while, in the facts of the present case, it has been classified as 90th day. 23. Referring to the term loan account, learned Senior Advocate appearing for the borrower has contended that, the installment of the term loan for the month of February 2020 was paid by the borrower on April 6, 2020. Therefore, there was no default concerning the payment of installment for February 2020. According to him, the term loan facility was within limits on April 6, 2020, since the sanctioned term loan limit was Rs. 16,80,00,000. He has referred to the circulars issued by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He has also referred to paragraph 52 of the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021. 27. Referring to the circulars dated March 27, 2020, April 17, 2020, and May 23, 2020, issued by RBI on account of Covid 19 pandemic, learned senior advocate appearing for the borrower has contended that, such circulars have statutory force. He has referred to 2010 Volume 10 Supreme Court Cases 1 (ICIC Bank Limited vs. Official Liquidator of APS Star Industries Limited and Others), to contend that, Master Circulars of the Reserve Bank of India relating to Prudential Norms on Income Recognition, Asset Classification and Provision pertaining to Advances have statutory force. The circulars also have statutory force. 28. Learned Senior Advocate appearing for the borrower has pointed out that, the borrower filed an earlier writ petition WPO 428 of 2023 which was withdrawn on March 21, 2023, with the liberty to file afresh. On March 23, 2023, a Web Notice, styled as Corrigendum was issued by SBI. SBI had acted in hot haste in transferring the account on March 24, 2023. 29. Learned Senior Advocate appearing for the borrower has contended that the borrower approached SBI with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act of 2002 is a notice of demand. The Act of 2002 has provided for the secure creditor to take a measure under Section 13(4) in the event, the debt is not discharged after the notice under Section 13(2). According to him, non-reply to a notice under Section 13(2) of the Act of 2002 will not operate as an estoppel concerning the classification of the account as NPA. In support of such contention, he has relied upon AIR 1966 Supreme Court 275 (Union of India vs. Watkins Mayor Co.) and 2003 SCC OnLine AP 1129 (Manepall Udaya Bhaskara Rao vs. Kanuboyina Dharmaraju). 34. Learned Senior Advocate appearing for the borrower has contended that the legal rights of the borrowers had been violated. Since the borrower could not approach the debts recovery tribunal as SBI had withdrawn the notice under Section 34 of the Act of 2002, the borrower is entitled to invoke the writ jurisdiction. In support of such contention, he has relied upon 2004 Volume 4 Supreme Court Cases 311 (Mardia Chemicals Ltd. And Others vs. Union of India and Others) and AIR 2020 Cal 136 (Pyari Devi Chabiraj Steels Pvt. Ltd. vs. Axis Bank Limited). 35. Learned Senior Advocate appearing for the borrower has contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised issues concerning the extent and disbursement of the credit facilities. Nonetheless, it continued to enjoy the credit facilities. 40. The borrower had faced difficulties in repaying the credit facilities. By a letter dated January 17, 2020 borrower had informed SBI about its financial conditions and expressed its inability to pay the dues. The borrower had undertook to regularize the account on or before January 22, 2020. On the strength of the pleadings in the writ petition, it is established that the borrower had faced financial difficulties in repaying the credit facilities much before the onset of the COVID-19 pandemic. 41. The Central Government imposed a lockdown between March 24, 2020, to May 3, 2020, due to the Covid-19 pandemic. Factory of the borrower is located within the State of Jharkhand and the borrower had to comply with the Covid-19 pandemic directions of such State. 42. Borrower has acknowledged its failure to honour the repayment obligations of the credit facilities. The borrower had identified four several factors, claiming that they were external to the borrower, in preventing the borrower from honouring its obligations to repay the credit facilities in ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther interest and incidental expenses along with costs. 50. Borrower has acknowledged receipt of the notice dated July 8, 2022, under Section 13 (2) of the Act of 2002. The borrower did not respond to such notice. Borrower did not claim that the account was not an NPA with effect from October 16, 2022, as claimed by SBI in its letter dated July 8, 2022. 51. SBI had invoked Section 13 (4) of the Act of 2002 by a notice dated October 28, 2022. By a notice dated November 4, 2022, SBI had recalled the notice dated October 28, 2022, issued under Section 13 (4) of the Act of 2002. 52. SBI issued a web notice dated February 10, 2023, inviting bids from Asset Reconstruction Companies/non-banking financial companies/banks for the transfer of the entire loan facility of the borrower. The borrower had filed a writ petition challenging such notice being WPO 428 of 2023. In such a writ petition interim orders had been passed. Borrower had however withdrawn such writ petition on March 21, 2023. 53. On March 23, 2023, SBI had issued a Web Notice recording its decision to conduct the e-auction process of the Stressed Loan Exposures of the borrower on March 24, 2023. 54. SBI had assigned the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sitions other than those permitted under the Directions of 2021 and in the manner prescribed therein. It has also provided that the directions shall apply to all loan transfers undertaken by the lenders as mentioned in Clause 3 thereof, including the sale of loans through novation or assignment, and on participation. In short, the Directions of 2021 has permitted transfer of loan exposures which turned into stressed loans on satisfaction of the parameters laid down therein. It has defined stressed loans to mean loan exposures that are classified as NPA or special mention accounts (SMA). 59. SMA has been defined in Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019. Such Directions of 2019 have provided a framework for the resolution of stressed assets. It has laid down criteria for early identification and reporting of stress. It has provided that, the lender shall recognise incipient stress on loan accounts immediately on default, by classifying assets as SMA following the parameters laid down therein. It has also provided for SMA subcategories. It has noted both revolving credit facilities as also non-revolving credit facilities in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lan several times and one of such plans was submitted by a letter dated June 11, 2020. There, the borrower had on page 3 thereof, acknowledged that the cash credit limit was Rs. 155 crores and that the amount outstanding as of March 31, 2020, was Rs. 278.56/- and on June 6, 2020, was Rs. 302.00/-. The borrower had therefore acknowledged the cash credit account to have been overdrawn beyond the sanctioned limit and the over drawal remaining over the sanctioned limit for a period over 60 days taking the period from March 31, 2020 till June 6, 2020. In terms of I. Framework for Resolution of Stressed Assets as has been provided in Prudential Framework for Resolution of Stressed Assets dated June 7, 2019, the cash credit account was SMA-2 on June 6, 2020, having been in default for a period above 61 days from March 31, 2020. Nothing has been placed on record to suggest that the cash credit account had been made regular as of the date of the issuance of the notice under Section 13 (2) of the Act of 2002. The cash credit account remained irregular and overdrawn from March 31, 2020, at the very least till the date of the issuance of such notice and continued to be so till the date of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, the account of the borrower so far as cash credit facilities are concerned, turned NPA, and therefore, the account was correctly classified as NPA by SBI. 68. The borrower had assailed the classification of NPA and alleged that, since the account was not an NPA, the financial asset could not have been sold by SBI to the ARC. Since the borrower had assailed the classification of the account as NPA, it was incumbent upon it to establish conclusively before the learned single judge that, the classification was incorrect. It had failed to discharge its burden of proof on such aspect. It had enjoyed various credit facilities such as term loans and cash credit facilities as well as other non-fund-based credit facilities. The burden of proof was on the borrower to establish that, none of the credit facilities could have been classified as NPA on October 16, 2023, in terms of the Master Circular of the Reserve Bank of India. It has failed to discharge such burden of proof. It had invited the attention of the learned single judge merely to the term loan account while it was enjoying other credit facilities and it was incumbent upon it to establish that none of such other credit faciliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a security interest in favour of SBI in respect of its assets. 71. The Act of 2002 has provided a multitude of options to a lender such as SBI to effectively manage its exposure vis- -vis a borrower. A lender can proceed under Section 5 of the Act of 2002 and sell the financial asset upon such financial asset becoming SMA or NPA. A lender can also proceed under Section 13 of the Act of 2002 to recover its dues from the borrower. 72. Requirements of statutory compliance on the lender under the two routes noted in the preceding paragraph are different. In respect of a sale under Section 5 of the Act of 2002, the account of the borrower needs to be either SMA or NPA before the date of sale. 73. When a lender chooses to proceed under Section 13 of the Act of 2002 it is then required to issue a notice under Section 13 (2) thereof. In such notice, the lender is mandatorily required to specify that the account of the borrower has been classified as NPA and that a specific amount is outstanding on a particular date. Such a notice triggers the mechanism under Section 13 (3-A) of the Act of 2002. Upon receipt of notice under Section 13 (2) of the Act of 2002, a borrower has a right to repl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake recourse to Section 13 (4) of the Act of 2002. However, the interdiction has to be on accepted and established legal grounds. The writ petitioner has to establish that, the action undertaken by the bank or the financial institution was contrary to any statute or the directions of Reserve Bank of India. The act of assignment or the process to assign the financial asset per se does not violate any right of the borrower. In the facts and circumstances of the present case, the borrower as the writ petitioner has failed to establish any action of SBI to be beyond the Act of 2002 or any binding directions of the Reserve Bank of India. 79. Lekhraj Sathramdas Lalvani (supra) has laid down that when an authority passes an order which is within its competence, it cannot fail merely because it purports to be made under the wrong provision if it can be shown to be within its power under any other rule, and the validity of the impugned order should be judged on a consideration of the substance and not of its form. A similar view has been expressed in the High Court of Gujarat and Another (supra) and N. Mani (supra). 80. The account had been correctly classified as NPA by SBI. In any event, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond controversy, it is not only competent but expedient, in the interest of justice, to entertain the plea. 86. In the facts and circumstances of the present case, SBI and ARC have contended that, the issue as to whether the account of the borrower had become NPA or not was not correctly decided as, the cash credit account of the borrower which had become NPA thereby making the entire credit facility enjoyed by the borrower as NPA, was not brought to the notice of the court. 87. Pleadings filed before the learned Single Judge have raised the issue as to whether the account of the borrower was NPA on October 16, 2023, as claimed and whether the assignment was valid. Contentions raised in the appeal are concerning such issues only. No new document is sought to be introduced. Borrower cannot be said to be taken by surprise. 88. In Watkins Mayor Co (supra) Supreme Court while dealing with the claim of compensation on account of storage has held that no reply to the notice of demand was of no consequence. The full bench of the Andhra Pradesh High Court in Manepalli Udaya Bhaskara Rao (supra) has held that non-reply to a notice of demand issued before the filing of a summary suit und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under Section 5 of the Act of 2002 and not under Section 13(4) thereof. In any event, the borrower has failed to discharge the burden of proof rebutting the presumption that the account became NPA on the date of the web notice which is February 10, 2023. 93. Ramchandra Keshav Adke (supra) has noted the rule that where the power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden. In the facts and circumstances of the present case, SBI has acted in a manner recognized by law, and as such the ratio of such case does not come into bearing. 94. The contention on behalf of the ARC that, under Section 13 (8) of the Act of 2002, the borrower has lost the right of redemption on the date of the publication of the public notice cannot be accepted, in the facts and circumstances of the present case. No public notice under rule 9 (1) of the Security Interest (Enforcement) Rules, 2002 had been issued by SBI. SBI had assigned its financial assets in favour of ARC. Assignment of financial assets is not a transfer of title of the mortgaged properties held by SBI in favour of ARC. 95. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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