Signal Apparels Pvt. Ltd. v. Canara Bank

Prayer: Petitions filed under Article 226 of the Constitution of India praying for issue of Writ of Certiorarified Mandamus to call for the records of the First Respondent culminating in notices No. CB PNRD TPR 255/2009-10 and CB PNRD TPR 254/2009-10 dated 04.01.2010 and quash the same and to forbear the 1st Respondent-Bank from proceeding further under the provisions of SARFAESI Act.

JUDGMENT

D. Murugesan, J.

1. Both the Writ Petitioners are the Companies doing business in manufacture and export of readymade garments. The Petitioner in W.P No. 5313 of 2010, viz. M/s. Signal Apparels Pvt. Ltd., commenced its production in the year 2002 and started availing credit facilities from Canara Bank, Tiruppur, the First Respondent. According to the Petitioner, it has good track record of banking with the First Respondent-Bank from 2002 till May, 2009. To the surprise of the Petitioner, the Respondent-Bank, by its recall notice dated 31.12.2009, informed the Petitioner that the liability mentioned therein in their accounts were 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 notice dated 04.01.2010 under Section 13(2) of the SARFAESI Act.

3. On receipt of the notices dated 04.01.2010, both the Companies submitted their representations dated 02.03.2010 to the Respondent-Bank. M/s. Signal Apparels Pvt. Ltd., in their representation, has stated that even after the receipt of the recall notice dated 31.12.2009, they had proposed to pay a sum of Rs. 20 lakhs on or before 26.03.2010, a further payment of Rs. 135 lakhs on or before 31.08.2010 and the balance payment in full and final settlement on or before 31.12.2010 Similarly, M/s. Signal Export, in their representation, has stated that they proposed to settle a sum of Rs. 5 lakhs on or before 8th March, 2010, a further sum of Rs. 10 lakhs on or before 26.03.2010, a sum of Rs. 15 lakhs on or before 31.08.2010 and the balance amount in full and final settlement on or before 31st December, 2010. In those representations, both the companies had specifically stated that they maintain their banking relationship by keeping a good track record and the enhanced limits sanctioned earlier were also renewed and extended from time to time. In spite of that, the Respondent-Bank had issued the impugned notices. In these circumstances, the companies had approached this Court questioning the notices issued under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred as ‘the Act’) as contrary to law on the grounds that the Respondent-Bank should not have invoked the default clause by issuing notice under Section 13(2), that the Reserve Bank guidelines to identify an account as a Non-Performing Asset should have been followed and the Petitioners should have been informed prior to the accounts being treated as Non-Performing Assets.

4. We have heard Mr. R. Gowthama Narayanan, learned Counsel appearing for the Petitioners and Mr. V. Adhivarahan, learned Counsel appearing for the First Respondent-Bank.

5. Both the Writ Petitions raise a substantial question of importance as to how an account in respect of a debt could be treated as a Non-Performing Asset (NPA) and the procedure to be adopted by the Bank before such account could be declared as Non-Performing Asset.

6. The provision of Sections 13(2) and 13(3) of the Act reads as under:

“13. Enforcement of security interest.— (1) ..

(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 Non-Performing Asset. Therefore, from a careful reading of the above provisions, the following evantualities can be culled out, viz.,—

(i) there must be a debt by a borrower from a secured creditor under a security agreement;

(ii) there must be a default in repayment of secured debt or any instalment thereof by the borrower;

(iii)the borrower's account in respect of such debt is classified by the secured creditor as ‘Non-Performing Asset’;

(iv) a notice in writing should be issued by the secured creditor to the borrower to discharge in full his liabilities within sixty days from the date of the notice;

(v) in terms of sub-section (3) of Section 13, the notice shall also give details of the amount payable by the borrower and the secured assets intended to be enforced by the secured creditor.

7. At the time when Section 13(2) of the Act was considered by the Supreme Court in Mardia Chemicals Ltd. v. Union of India, 2004 (2) CTC 759 (SC): 2004 (4) SCC 311, there was no specific provision contemplating any opportunity for the borrower to make any objection or representation to the notice issued under Section 13(2) of the Act. When the provision of Section 13(2) was considered by the Apex Court, it was observed that it was necessary that the borrowers should have remedy to ventilate their grievance by submitting a reply explaining the reasons as to why measures may or may not be taken under sub-section (4) of Section 13, in case of non-compliance of notice within sixty days. That explanation must be considered by the secured creditor by applying its mind and an internal mechanism must be evolved to consider such objections raised in the reply notice.

8. Based on the above observation of the Apex Court, sub-section (3-A) of Section 13 was inserted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, with effect from 11.11.2004 By that newly inserted provision, a borrower is made entitled to make a representation or objection to the secured creditor on receipt of notice under sub-section (2) of Section 13 and 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 one week of receipt of such representation or objection, the reasons for non-acceptance of the representation 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 Industrial Development Bank of India Ltd., Chennai v. M/s. Kamaldeep Synthetics Ltd., 2007 (2) CTC 297 (SC): AIR 2007 Mad. 173.

9. In the event of failure by the borrower to discharge in full the liabilities within sixty days from the date of the notice and the representation or the objection, if any made, was not accepted by the secured creditor and a communication of the conclusion was also made to the borrower, then the secured creditor may take recourse to one or more of the following measures in terms of Section 13(4) of the Act:

(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(b) take over the management of the business of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;

(c) appoint any person to manage the secured assets the possession of which has been taken over by the secured creditor; and

(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.

The secured creditor may also approach the Chief Metropolitan Magistrate/District Magistrate for assistance in taking possession of the secured assets as provided under Section 14 of the Act. The powers of Chief Metropolitan Magistrate or District Magistrate are only ministerial and the orders of such judicial officers passed in exercise of the provision of Section 14 shall not be called in question in any Court or before any authority meaning thereby that the said order is not amenable to Appeal under Section 17 of the Act. The scope of powers by the Chief Metropolitan Magistrate/Judicial Magistrate under Section 14 is very limited in the sense that the officers should satisfy as to whether secured asset falls within his territorial jurisdiction and whether notice under Section 13(2) is given or not.

10. In the wake of the above provisions, where the borrower has only an opportunity to make representation or objection in terms of sub-section (3-A) of Section 13 and even such representation or objection is not accepted by the secured creditor, the borrower has no option to challenge the same and the secured creditor, in the event of failure of the borrower to comply with the notice under Section 13(2), can resort to the provision of Section 13(4) for taking possession and the right to make any Appeal in exercise 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 basis or ceases to generate the said income. In another sense, 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. In order to declare an asset or account to be a Non-Performing Asset, the secured creditor must satisfy itself that such asset is not effectively producing income on actual realisation and consequentially, such asset or account could be declared as sub-standard, doubtful or loss asset. Though the provisions of Section 2(o) defines Non-Performing Asset, no set of procedures are contemplated under that provision or under any other provisions of the Act enabling the Banks or financial institutions to follow the same before declaring such asset or account as Non-Performing Asset. However, that provision contemplates that in case, a bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law, then the declaration must be in accordance with the directions or guidelines relating to assets classifications issued by such authority or body. In all other cases, the Bank or financial institution should follow the directions or guidelines relating to the assets classifications issued by the Reserve Bank.

12. In Mardia Chemicals Ltd. v. Union of India, 2004 (2) CTC 759 (SC): 2004 (4) SCC 311, the Apex Court, while dealing with the rights of the secured creditor to declare a debt as Non-Performing Asset, has held in paragraph 44 as follows:

44. As a matter of fact, the Narasimhan Committee also advocates for a legal framework which may clearly define the rights and liabilities of the parties to the contract and provisions of speedy resolution of disputes, which is a sine qua non for efficient trade and commerce, especially for financial intermediation. Even the guidelines of Reserve Bank of India in relation to classifying NPAs, while stressing the need of expeditious steps in taking a decision for classifying and identification of NPAs says, a system be evolved which should ensure that the doubts in asset classification are settled through specified internal channels within the time specified in the guidelines. It is thus clear that while recommending speedier steps for recovery of the debts it is envisaged by all concerned that within the legal framework, such provisions may be contained which may curtail the delays. 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, 2006 (5) CTC 753 (SC): 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 which depletes then the borrower fails in its obligation which results in a mis-match between the asset and the liability in the books of the Bank/FI. Therefore, Sections 5 and 9 talks of acquisition of the secured interest so that the balance sheet of the Bank/FI remains clean. Same applies to immovable property charged or mortgaged to the Bank/FI. These are some of the factors which the Authorised Officer of the bank/FI has to keep in mind when he gives notice under Section 13(2) of the NPA Act. Hence, equity exists in the Bank/FI and not in the borrower. Therefore, apart from obligation to repay, the borrower undertakes to keep the margin and the value of the securities hypothecated so that there is no mis-match between the asset-liability in the books of the Bank/FI. This obligation is different and distinct from the obligation to repay. It is the former obligation of the borrower which attracts the provisions of NPA Act which seeks to enforce it by measures mentioned in Section 13(4) of NPA Act, which measures are not contemplated by DRT Act and, therefore, it is wrong to say that the two Acts provide parallel remedies as held by the judgment of the High Court in M/s. Kalyani Sales Co., AIR 2006 P & H 107. As stated, the remedy under DRT Act falls short as compared to NPA Act which refers to acquisition and assignment of the receivables to the asset reconstruction Company and which authorizes Banks/FIs to take possession or to take over management which is not there in the DRT Act. It is for this reason that NPA Act is treated as an additional remedy (Section 37), which is not inconsistent with the DRT Act.”

The Apex Court in Mardia Chemicals' case, has stressed that the guidelines of the Reserve Bank of India in relation to classifying Non-Performing Asset should be followed by the secured creditor and has also observed that a system be evolved in order to ensure that the doubts in asset classification are to be settled through specified internal channels within the time specified in the guidelines. Our attention is not drawn as to whether such internal mechanism is evolved so far to resolve such a dispute.

13. Again, in Mardia Chemicals' case, while considering the rights of the Banks or financial institutions and to follow the Reserve Bank guidelines issued through a circular dated 30.08.2001 by the Banks before declaring a debt as “Non-Performing 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 generate income for the bank. A ‘Non-Performing Asset’ (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period 1993 Four quarters 1994 Three quarters 1995 onwards Two quarters

2.1.2 An amount due under any credit facility is treated as “past due” when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with ‘past due’ concept, with effect from March 31, 2001. Accordingly, as from that date, a Non-Performing Asset (NPA) shall be an advance where—

(i) interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,

(ii) the account remains ‘out of order’ for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC),

(iii) the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,

(iv) interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

(v) any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

4.2.2 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The Banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines.”

From what is quoted above, it is quite evident that guidelines as laid down by the Reserve Bank of India which are in more 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 an asset should not be an NPA.

3.2.2 Sub-standard Assets

(i) With effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/guarantors or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such assets will have well defined credit weaknesses that jeopardies the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

(ii) An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production, should be classified for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition.

3.2.3 Doubtful Assets

With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. For Tier I banks, the 12-month period of classification of a substandard asset in doubtful category is effective from April 1, 2009. As in the case of sub-standard assets, rescheduling does not entitle the bank to upgrade the quality of an advance automatically. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Note: Consequent to change in asset classification norms w.e.f March 31, 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended March 31, 2005, with a minimum of 10% of the required provision in each of the first two years and the balance in equal instalments over the subsequent three years.

3.2.4 Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or 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 advance in respect of which the terms have been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR/term lending institutions will continue to be classified as sub-standard or doubtful as the case may be in respect of additional facilities sanctioned under the rehabilitation packages the income recognition and asset classification norms will become applicable after a period of one year from the date of disbursement.

(ii) A similar relaxation be made in respect of SSI units which are identified as sick by Banks themselves and where rehabilitation packages/nursing programmes have been drawn by the banks themselves or under consortium arrangements.

3.3.3 Internal System for Classification of Assets as NPA

(i) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The Banks may fix a minimum cut-off point to decide what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the entire accounting year.

(ii) Responsibility and validation levels for ensuring proper asset classification may be fixed by the bank.

(iii) The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines.

(iv) RBI would continue to identify the divergences arising due to non-compliance, for fixing accountability. Where there is wilful non-compliance by the official responsible for classification and is well documented, RBI would initiate deterrent action including imposition of monetary penalties.

15. The decision of the secured creditor should not be arbitrary, since such decision would necessarily lead to drastic consequences, especially when the borrower has no right to question the notice under Section 13(2) except a right to make representation or objection. While considering an asset of a borrower to be declared as Non-Performing Asset, a secured creditor should act judicially supported by materials and there must be transparency in arriving at such decision. 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, 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 invocation of provision of Section 13(2) of the Act, the declaration of an asset or account to be a Non-Performing Asset is a condition precedent. In the event such declaration is not in accordance with the R.B.I guidelines and the account of a borrower is a performing account, Section 13(2) may not be pressed into service, as such account cannot be brought under Section 2(o) of the Act. Equally, going by the scheme of the Act, the discretion conferred on the bank to declare an asset to be a Non-Performing Asset is in order to tackle the issue of increase of Non-Performing Asset to high level. That is why, the legislature had left the discretion to the Bank while declaring a debt as a Non-Performing Asset, qualifying such Bank to follow the directions or guidelines issued by the Reserve Bank of India while classifying the assets to be sub-standard, doubtful or loss assets to be known as Non-Performing Assets. This discretion is on national policy and all that requires for the secured creditor is to exercise the discretion judicially. In the wake of the right of the secured creditor to declare a debt as a Non-Performing Asset, to show the application of mind for such declaration, it may indicate the reasons thereof in the notice under Section 13(2) and the Section does not contemplate that in all cases such reasons should be indicated in the notice. The application of mind could be culled out from the materials that were existed on the date of such declaration.

17. In the above legal background, it has to be now considered as to whether the declaration of the account of the borrower to be a ‘non-performing account’ could be justified. It is the case of the Petitioners that when the recall notice dated 31.12.2009 was issued, the Petitioners were given time to make payment till 15.01.2010 Even before the said time expired, the impugned demand notice dated 04.01.2010 was issued. Even after the receipt of the recall notice, the Petitioners were agreeable to make payment and in that sense, the account cannot be declared to be one of Non-Performing Asset. This submission of the Petitioners cannot be accepted. It is true that while the recall notice dated 31.12.2009 was issued, the Petitioners were granted time to clear the liability on or before 15.01.2010 and even before that date, the impugned demand notice under Section 13(2) had been issued. Nevertheless, 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 Rs. 110 lakhs; on the other hand, the overdue was Rs. 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 Rs. 20 lakhs on or before 26.03.2010, a further sum of Rs. 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 Rs. 50 lakhs, the overdue liability was Rs. 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 accounts by making a payment of Rs. 5 lakhs on or before 08.03.2010, a sum of Rs. 10 lakhs on or before 26.03.2010, a sum of Rs. 15 lakhs on or before 31.08.2010 and the balance payment in full and final settlement on or before 31.12.2010

18. It is the further case of the Respondent-Bank in respect of the Petitioner in W.P No. 5313 of 2010 that the credit facilities towards manufacture of hosiery garments and working capital limits were first permitted during the year 2002 and was last renewed on 23.07.2008 tenable till 22.07.2010 During the last renewal on 23.07.2008, the following limits were permitted:

Packing Credit: Rs. 65 lacs Foreign Bills Discounting Limit: Rs. 45 lacs

On the other hand, the liabilities of the Petitioner were,—

Packing Credit: Rs. 88.70 lacs Foreign Bills Discounting Limit: Rs. 111.67 lacs Current Account Temporary Overdraft: Rs. 4.06 lacs

It is the case of the Respondent-Bank that the overdue in the accounts started from 15.12.2008, whereas the limits were made available till 08.05.2009 and the Petitioner did not submit stock statements from July 2009 and the audited balance sheet as on 31.03.2009 Similarly, it is the contention of the bank in W.P No. 5314 of 2010 that the credit facilities towards manufacture of hosiery garments and working capital limits were first permitted during the year 2007 and was last renewed on 28.04.2008 tenable till 27.04.2010 During the last renewal on 28.04.2008, the following limits were permitted:

Packing Credit: Rs. 25 lacs Foreign Bills Discounting Limit: Rs. 25 lacs

On the other hand, the liabilities of the Petitioner were,—

Packing Credit: Rs. 49.71 lacs Foreign Bills Discounting Limit: Rs. 60.08 lacs Current Account Temporary Overdraft: Rs. 7.71 lacs

It is specifically stated that overdue in the accounts started from 18.04.2008 whereas the limits were made available till 21.04.2009 The Petitioner did not submit stock statement from July 2009 and the audited balance sheet as on 31.03.2009 The debt of the borrower had not produced any income for the secured creditor for more than 180 days and also there was default on the part of the borrower as provided under Section 13(2). In the given case, non-payment of dues availed is on credit facilities. In such situation, the Petitioners shall fall within the definition of ‘borrower’ as defined under Section 2(f) of the Act and the credit facilities shall be considered to be overdues beyond the maximum period fixed in the R.B.I guidelines.

19. From the above statements, it cannot be said that the action of the Bank is either arbitrary or unreasonable in declaring the assets of the Petitioners as Non-Performing Assets. In view of the available materials placed before this Court, it would not be proper to interfere with such discretion.

20. For the above reason, we find no merit to interfere with the impugned notice dated 04.01.2010 Accordingly, both the Writ Petitions are dismissed. No costs. Consequently, connected M.Ps are also dismissed.

BV