*THE HON'BLE SRI JUSTICE P.S.NARAYANA

+W.P.No.21610 of 2005

% 29-1-2008

M/s. Pharmaida Pharmaceuticals Ltd., represented by its Managing Director .. Petitioner

and

$ Central Bank of India, Represented by its Chief Manager Gudimalkapuram Branch, Hyderabad and another .. Respondents

<GIST:

>HEAD NOTE:

! Counsel for petitioner : Sri Pinnikanti Lakshmi Prasad

^ Counsel for respondents : Sri Ch.Siva Reddy

?CASES REFERRED:

• 1. (2004) 4 SCC 311
• 2. 2007(4) ALT 317

THE HON'BLE SRI JUSTICE P.S.NARAYANA

W.P.No.21610 of 2005

Date : 29-1-2008

Between :

M/s. Pharmaida Pharmaceuticals Ltd., represented by its Managing Director .. Petitioner

and

Central Bank of India, Represented by its Chief Manager Gudimalkapuram Branch, Hyderabad and another .. Respondents

THE HON'BLE SRI JUSTICE P.S.NARAYANA W.P.No.21610 of 2005

ORDER:

1. Heard Sri Pinnikanti Lakshmi Prasad, Counsel representing Smt.Veda Vani, the learned Counsel representing the writ petitioner and Sri Ch.Siva Reddy, the learned Counsel representing the 1 st respondent.

2. This Court issued rule nisi on 7-10-2005 and granted interim stay in W.P.M.P.No.27746/2005 subject to the condition of the petitioner depositing a sum of Rs.10 lakhs within a period of four weeks from 7-10-2005 failing which the stay shall stand vacated without further reference to the Court.

3. The Writ Petition is filed for a writ of certiorari or any other appropriate writ by setting aside the notice

dated 1-8-2005 issued under Section 13(2) of Securities and Reconstruction of Financial Assets (Enforcement of Security Interest) Act 2002 (in short hereinafter referred to as "Act" for the purpose of convenience) by the respondent-Bank and to pass such other suitable orders.

4. Sri Pinnikanti Lakshmi Prasad, the learned Counsel representing the writ petitioner had taken this Court through the contents of the impugned notice and would maintain that the impugned notice does not satisfy the ingredients of non-performing asset as defined under Section 2(o) of the Act. The learned Counsel also had drawn the attention of this Court to Section 13(2) and Section 13(4) of the Act and would maintain that the question of availing the further alternative remedy as specified under the Act would not arise unless the stage of Section 13(4) of the Act is reached in a particular given case. Hence, the learned Counsel would submit when the impugned notice is not in conformity with Section 2(o) of the Act, read along with the guidelines of the Reserve Bank of India, it may have to be taken that the said notice is without jurisdiction and hence the Writ Petition is perfectly maintainable. The learned Counsel also would submit that the Constitutional remedy under Article 226 of the Constitution of India cannot be taken away by an ordinary Legislative measure and when there is no other

alternative remedy at all, till the stage of Section 13(4) of the Act is reached, definitely as against a notice under Section 13(2) of the Act, when the said notice is not in conformity with the provisions of the Act and also the guidelines of the Reserve Bank of India, the Writ Petition can be maintained and the said notice is liable to be quashed on this ground. The learned Counsel also pointed out to the respective pleadings of the parties and had drawn the attention of this Court to the relevant provisions of the Act and also the relevant Circulars of the Reserve Bank of India.

5. Per contra, Sri Ch.Siva Reddy, the learned Counsel representing the respondent would maintain that in a way this question already had been answered by the Apex Court in Mardia Chemicals Ltd. Vs. Union of India

<span id="page-4-0"></span>[1] and had placed reliance on the said decision in general and para-50 in particular. The learned Counsel also had further drawn the attention of this Court to Section 13(2) and Section 13(4) of the Act and respondent pointed out to Section 34 of the Act and would explain that the object and the spirit of the Act also may have to be kept in mind while interpreting the different provisions of the Act. Further, the learned Counsel would maintain that the circulars or the guidelines issued by the

Reserve Bank of India are more concerned with the internal affairs in between the Reserve Bank of India and the Banking Institutions for the purpose of guidance and these are not enforceable by way of a Writ of Mandamus or otherwise. Even otherwise, in the light of the different provisions of the Act and the Scheme of the Act, if carefully examined, the discretion exercised while taking a decision relating to whether an asset is a non-performing or not by the Banking Institution, normally not to be interfered with by a writ Court. Further, the learned Counsel would submit that even otherwise it is not as though the petitioner is remediless. At the stage of Section 13(4) of the Act, definitely, the petitioner is having an effective remedy and all these factual issues definitely can be agitated before the concerned Debt Recovery Tribunal and hence the Writ Petition is not maintainable and normally the power of judicial review under Article 226 of the Constitution of India not to be exercised in such matters. The learned Counsel also placed strong reliance on the decision of this Court in Sri Srinivasa Rice and Flour Mill Vs. Authorised Officer, State Bank of India [2] .

• <span id="page-5-0"></span>6. Heard the Counsel.
• 7. The petitioner-Company is incorporated in the

year 1989 under the Companies Act 1956, having its registered office at 4-4-211/12, Inderbagh, Sultan Bazar, Hyderabad. The petitioner-Company is engaged in the business of manufacture and sale of Drugs and Pharmaceuticals, Vitamins, Anti-biotics, fine Chemicals etc., and it had been awarded GMP Certificate (Good Manufacturing practice) by the Government of Andhra Pradesh and its products are approved as W.H.O. Standard as they conformed to the norms specified by the said organization. It is further stated that the petitioner had been enjoying the credit facilities from the year 1995 onwards. In the year 1999, a policy decision had been taken by the Government of Andhra Pradesh to accept only those Companies, which were certified as "WHO GMP" (World Health Organisation Good Manufacturing Practice Companies), with strict implementation of Schedule-M. In order to reach the optimum standards required for such classification, it was absolutely essential for the petitioner to expand its infrastructure. It is further stated that to expand the infrastructure, the petitioner had approached the 1 st respondent-Bank for enhancing the credit limit to Rs.1.5 crores. However, the 1 st respondent-Bank after great persuasion, increased the credit limit only to Rs.60 lakhs and the amount so sanctioned was also

not released at a time. With the result, the expansion undertaken by the petitioner suffered a major set back. The petitioner having undertaken the expansion activity had to inevitably borrow huge amount from other sources at a higher rate of interest and thereby burdened itself with recurring interest liability. Ultimately, the petitioner succeeded in securing W.H.O. GMP status, but however, suffered impairment in its activity on account of increased interest burden. Though the 1 st respondent ostensibly agreed to the re-scheduled terms, the terms were so onerous to the petitioner that it could not confirm to the conditions. It is also further stated that the intrinsic worth of the petitioner-Company now is of the order of Rs.3 crores. If the 1 st respondent is allowed to have its commercial operations without enforcing onerous rescheduling terms, it would have been able to sustain itself and pay the entire amount due to the 1 st respondent-Bank. Had the 1 st respondent shown little more pragmatism and indulgence in the matter of sanctioning of loan at appropriate time and released the funds, the entire adverse situation could have been avoided. Suffice it to say that whatever predicament that the petitioner suffered, it is due to reasons beyond the control of the petitioner and solely attributable to the 1 st respondent. It is further

stated that on the ground that the re-scheduling terms were not honoured by the petitioner, the 1 st respondent-Bank declared the petitioner industry as NPA and arbitrarily proceeded to foreclose the loan and got issued notice under Section 13(2) of the Act. The hassles created by the 1 st respondent in the commercial operations of the petitioner-Company virtually satisfied the petitioner's growth. As of date, the petitioner is able to carry on minimal operations. It is also further stated that the petitioner got issued reply to the notice dated 1-8-2005 under the Act on 27-9-2005. The petitioner-Company had not lost its viability which warrants the respondent-bank to initiate steps for recovery of the amounts forcibly by enforcing the creditors right under the Act. Neither the Company is a willful defaulter nor a chronic defaulter where in the guidelines of the Reserve Bank of India can be implemented and convert the account into NPA. The statement of accounts will show the repayments of the loan. Time and again, the petitioner made several requests and submitted the C.M.A. (data for enhancement of the limits/reschedulement of the loan in view of the changing circumstances in the business market). Further it is stated that after issuance of the notice under Section 13(2) of the Act, the borrower had an opportunity to

ventilate its grievance confining to the liability and the repayment. Practically, by experience, under any circumstances, the respondent-Bank had not afforded any opportunity to its borrowers more pragmatism and indulgence in the matter of sanctioning of loan at appropriate time and released funds so that the entire adverse situation would have been avoided. In stead of showing indulgence the respondent-Bank may proceed under Section 14 of the Act for possession of the property with the help of police or under Section 5 of the Act may transfer the financial assets to the Securitisation Company by creating a third party interest over the property and as such the petitioner is put to irreparable loss and will lose the entity which tantamount to winding up of the Company. The cumulative effect on a plain reading of the annexures is that the 1 st respondent is expected to be flexible in view of the circumstances stated. Further, the material which is furnished is already placed before the 1 st respondent. The 1 st respondent had not disputed the authority of the material placed before it which are filed as annexures before this Court. On the other hand the respondent had not verified the material in respect of its viability, securities given for the advancement of the loan and in such circumstances it is legitimately expected by

the petitioner that the 1 st respondent will enhance the credit limit as requested by it. But unfortunately, the 1 st respondent had taken the extreme arbitrary step by invoking the power under Section 13(2) of the Act which is illegal, arbitrary and capricious. Further it is stated that the respondent-Bank failed to explain the reason to treat the petitioner account as NPA on account of doubtful, substandard or loss assets so as to enable to respondent-Bank to enforce the security by invoking the deterrent provisions of the Act. In view of the material placed before the respondent-Bank, it is impossible to conclude that the petitioner's account is a non-performing asset. On the other hand, the authority must take into consideration of the facts, material and circumstances placed before it and exercise the discretion to declare the account as NPA and such discretion has to be exercised judicially, objectively but not subjectively. On a plain reading of the impugned order, it is evident that the authority under the Act had not exercised its discretion vested in it properly, but it exercised mechanically and as such the order is violative of Article 14 of the Constitution of India and is liable to be set aside. The 1 st respondent-Bank is empowered to initiate steps for recovery of the amount by invoking the provisions of R.D.B. Act 1993 by filing an application to

the concerned authority. Apart from that, the present Act had been legislated without the intervention of the Court and the powers given under the Act ensuring the Bank for speedy recovery by safeguarding the interest of the Banks and to avoid procedural wrangles. As such the authority which is empowered under the Act should strictly adhere to the object and the provisions of the Act judicially and objectively. The power exercised should not be deterrent to the borrower but it should always safeguard interest of the borrower while ensuring the recovery of the sums advanced. Further, it is stated that the amounts advanced by the respondent-Bank are sufficiently secured by way of mortgage, hypothecation and receivables. In view of the present situation, the respondent-Bank resorted to the arbitrary action while exercising the power under Section 13(2) of the Act. Particularly, none of the ingredients of Section 13(2) of the Act are satisfied and hence the impugned notice is without jurisdiction.

8. The impugned notice dated 1-8-2005 reads as hereunder :

CENTRAL BANK OF INDIA GUDIMALKAPURAM BRANCH 1-8-2005 BY RGD.POST ACK.DUE WITHOUT PREJUDICE

NOTICE U/S 13(2) OF THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS/AND ENFORCEMENT OF SECURITY INTEREST ACT 2002 1) We have at your request, granted to you various credit facilities for an aggregate amount of Rs.70,00,000 and we give below full details of various credit facilities granted by us:

Facility Limit Outstanding as on 1- 8-2005 a) Cash credit (H) Rs.40,00,000 Rs.42,90,947.00 (DR)

b) Term loan Rs.30,00,000 Rs.25,96,514.00

We inform you that out of total amount of Rs.68,87,461/ due to us as on 1-8-2005 you have defaulted in repayment of entire amount of Rs.68,87,461/- (which represents the principal + interest due to the date of this notice).

2. As you have defaulted in repayment of your liabilities, we have classified your dues as NON PERFORMING ASSET in accordance with the directions or guidelines issued by the Reserve Bank of India.

3. We also inform you that in spite of our repeated demand notices and oral requests for repayment of the entire amount due to us, you have not so far paid the same.

4. You are aware that the various limits granted by us are secured by the following assets/security agreements (SECURED ASSETS)

A) HYPOTHECATION OF STORES/STOCKS

B) EXCLUSIVE CHARGE ON PLANT AND MACHINERY C) COLLATERAL SECURITY OF FACTORY LAND AND BUILDING SITUATED AT SURVEY No.33,

KONDAMADUGU VILLAGE, BIBINAGAR MANDAL, NALGONDA DISTRICT.

C-1) All that portion of land bearing survey No.533, admeasuring Ac:1-22½ guntas, Hectares 0-62½ situated at Kondamadugu (V) Rev. Mandal Bibinagar District, Nalgonda, Regn. Sub-District. Bhongir, Regn. District. Nalgonda, G.P. Kondamadugu, M.P.P. Bibinagar, ZPP.

C-2) All that portion of land bearing survey No.533, admeasuring Ac.0-21 guntas hectares 0.21, dry land situated at Kondamadugu village, Rev. Mandal, Bibi Nagar, District. Nalgonda, Regn. Sub-Dist. Bhongir, Regn. Dist. Nalgonda, G.P.Kondamadugu, M.P.P., Bibinagar, Z.P.P. Nalgonda.

5. For the reasons stated above, we hereby call upon you to discharge in full your liabilities to us within a period of 60 days from the date of receipt of notice, failing which we will be exercising the powers under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Act) against the secured assets mentioned above in accordance with the law. The powers available to us under Section 13 of the Act, inter alia, includes (i) power to take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset, (ii) take over the management of the secured assets including the right to transfer by way of lease, assignment or sale and realize the secured asset, and any transfer of secured asset by us shall vest in the transferee all rights, in, or in relation to the secured asset transferred as if the transfer has been made by you.

6. The amount realized from the exercising of the powers mentioned above, will first be applied in payment of all costs, charges and expenses which in the opinion of us

have been properly incurred by us or any expenses indicated thereto, and secondly applied in discharge of the dues of us as mentioned above with contractual interest from the date of this notice till the date of actual realization, and the residue of this money, if any shall be paid to you.

7. Please take note that after receipt of the notice, you shall not transfer by way of sale, lease or otherwise any of the secured assets referred in this notice, without prior written consent of the secured creditor.

8. We also inform you that, if the dues of us are not fully satisfied with the sale proceeds of the secured assets or even otherwise, we reserve our right to proceed against you before DEBTS RECOVERY TRIBUNAL., Courts for recovery of the balance amount from you.

Sd/- Regional manager Authorised Signatory

9. In the counter affidavit filed by the 1 st respondent-Banking Institution it is stated that the petitioner approached the 1 st respondent-Bank for financial assistance for its business activity during 1995 and the 1 st respondent-Bank after assessing the credit requirement as per the banking norms had sanctioned Rs.75 lakhs as under:

1. Cash Credit (Hypothecation) limits Rs. 30.00 lakhs 2. L.C. Limit Rs. 20.00 lakhs

2. Bills purchase Rs. 20.00 lakhs 4. Bank Guarantee Rs. 5.00 lakhs

------------------- Rs. 75.00 lakhs ===========

But the petitioner failed to achieve even half of the projected turn over for 1997-1998 and has not utilized documentary bills. The petitioner maintained the stock inventory level on high side and sundry debtors dues as on 25-9-1998 were Rs.75 lakhs due to lack of distributors.

The petitioner failed to run the business at expected level. Therefore the 1 st respondent-Bank revised the limits and converted the loan facility into cash credit hypothecation of Rs.50 lakhs and bills purchase limits of Rs.10 lakhs. As the petitioner could not run the business and repay the loan, the 1 st respondent-Bank rescheduled the loans by reducing cash credit limit to Rs.40 lakhs and converted the balance amount outstanding into working capital term loan of Rs.30 lakhs for repayment of the loans easily. In spite of the help extended by the Bank, the petitioner failed to repay the loans as agreed upon. But the 1 st respondent-Bank does not know about the petitioner getting certificate of W.H.O. Good Manufacturing Practice companies and outside borrowings by the petitioner-Company etc. Further it is stated that the 1 st respondent-Bank sanctioned the loan and rescheduled

the same in accordance with Rules and practice of the Bank. The allegation that had the 1 st respondent shown little more pragmatism and indulgence in the matter of sanctioning of loan at the appropriate time and released the funds, the entire adverse situation could have been avoided, is frivolous and baseless. It is also further stated that to maintain the international standards in accounting system in the Banking and Financial matters, the Reserve Bank of India introduced prudential norms for income recognition, asset classification and provisioning for the advances. Before introducing the prudential norms, the Government had taken recommendations of Narasimham Committee on Financial Reforms, which recommended for setting up of Recovery Tribunals for expeditious adjudication and speedy recovery of Bank dues. As per the recommendations of Tiwari Committee, Debts Recovery Tribunals were established in the country under the provisions of the Recovery of Debts due to Banks and Financial Institutions Act 1993 but it did not bring the desired results. Therefore, the Government of India thought it fit to bring the Economic Legislation for effective recovery of the mounting Non-Performing Assets and as per the recommendations of Narasimham Committee and Andhyarujina Committee the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 was enacted giving powers to the Banks and Financial Institutions to sell the secured interest without intervention of the Courts for recovery of the loans and to proceed under the Act the account should be classified as Non Performing Asset. It is also further stated that as per the latest guidelines of the Reserve Bank of India, interest in the loan accounts shall be charged every month and if interest is not serviced for three months continuously, the accounts shall be classified as Non Performing Assets and proceed under the Act for recovery of the Bank dues. Therefore, the account of the petitioner had become non-performing asset as the interest was not serviced nor the instalments were paid as per the norms of the Reserve Bank of India and hence the respondent-Bank had issued notice under Section 13(2) of the Act. It is also further stated that the notice under Section 13(2) of the Act is a preliminary notice under the Act demanding the secured debtors to pay the amount within 60 days. Therefore, the petitioner had sent the notice under Section 13(2) on 1-8-2005. The petitioner-Company did not repay the amount due but got issued a representation or objection dated 27-9-2005 for the notice which was received by the respondent on 3- 10-2005. Even though the petitioner got issued the

representation/objection on receipt of the notice under Section 13(2) of the Act to complete the formality, the representation does not give any hope of recovery of the amount due. As the said representation was not tenable and not acceptable to the respondent-Bank, reply was sent to the said representation on 7-10-2005. In stead of repaying the loans and bringing the account into performing asset, the petitioner had filed the Writ Petition and obtained the interim order, which reads :"There shall be interim stay subject to condition of petitioner depositing a sum of Rs.10,00,000/- (Rupees ten lakhs) within a period of four weeks from today failing which the stay shall stand vacated without further reference to the court". But the petitioner had not deposited the said amount of Rs.10 lakhs as per the directions of this Court and hence the interim stay stood vacated. The writ petitioner is not interested in repaying the loan amounts with intention to delay and to avoid the repayment and the petitioner-Company filed the present Writ Petition without any ground and immaturely. Further, it is stated that the Writ Petition is not maintainable on the ground that the respondent-Bank may proceed against the petitioner under Section 13(4) of the Act. When the writ petitioner failed to comply with the interim orders of this Court, the

respondent-Bank is entitled to take action under law. The petitioner had failed to repay the amount on receipt of notice under Section 13(2) within 60 days and failed to comply with the interim directions of this Court and has no right to seek any kind of relief. As per the guidelines of the Reserve Bank of India, if the interest is not serviced for three months continuously, the account shall be classified as Non Performing Asset. The Bank cannot exercise any discretion in classifying the NPA. The value of the securities given by the borrower or false promises made by the borrower cannot be taken into consideration for classifying the account as NPA and the question of explaining the reasons for classifying the account is also not required in law. The material papers filed in the Writ Petition do not contain any material to show that the petitioner is not liable for the action under the Act. The borrower cannot direct the Bank under what provision of law the Bank should proceed for recovery of the dues. In fact, the Parliament was well aware of the existence of the R.D.B. Act while enacting the Act of 2002. The petitioner had borrowed loans from the 1 st respondent-Bank for running its business activity and failed to repay the loans as agreed upon. The 1 st respondent-Bank had reviewed the account from time to time and converted the loans into

working capital terms loan to enable the petitioner to repay the amount easily. Still, the petitioner failed to repay the loan except giving false promises and asking for enhancement of the limits. The turnover of the Company, the business activity, stock inventory level etc., show that the Company does not deserve or entitled for any loan enhancement. The Company also had failed to service the interest as per the Reserve Bank of India guidelines and in the result, the account was classified as NPA. The big borrowers like the petitioner are taking money from the Banks and not bothered to repay the Bank loans. In the result, the bad debts which are called as NPAs are mounting day by day in the Banks and suits filed in the Civil Courts for recovery of dues are being delayed for one reason or the other. Considering the problem of recovery of Banks dues, Narasimham Committee had recommended for the establishment of the Special Tribunal for recovery of Bank dues. As per Tiwari Committee report, the Government enacted the Recovery of Debts due to Banks and Financial Institutions Act 1993. Under the said Act, Debt Recovery Tribunals shall be established for expeditious adjudication and early recovery of the dues of the Banks and Financial Institutions. Even though the Debt Recovery Tribunals were established, no desired results could be achieved.

For the purpose of effective recoveries of the Banks dues, the Government had enacted the Act of 2002 in terms of recommendations of Narasimham Committee, second report, and Andhyarujina Committee report giving powers to the Banks and Financial Institutions to sell the secured interest without intervention of the Courts. Under Section 13 of the Act, the procedure for enforcing the security interest had been provided. Under Section 13(2) if a borrower makes any default in payment of secured debts or any instalments thereof and his account is classified by the secured creditor as NPA, then the secured creditor may send notice in writing to the borrower to discharge the liability in full to the secured creditor within 60 days from the date of notice. Under Section 13(3A) if the borrower makes any representation or raise any objection the secured creditor shall consider such representation and communicate to the borrower if the secured creditor comes to the conclusion that such representation is not acceptable or tenable. However, the reply given by the secured creditor will not confer any right to the borrower to prefer an application to the Debt Recovery Tribunal under Section 17 of the said Act. If the borrower fails to discharge the liability in full within the period of 60 days, the secured creditor is entitled to take measures under

Section 13(4) which includes taking of possession and sale, taking over management, appointing managers. If the borrower is aggrieved by any of the measures taken by the secured creditor under Section 13(4), he may file an appeal (application) under Section 17 of the Act. When the vires of the Act was questioned, the Supreme Court upheld the validity of the Act in Mardia Chemicals Ltd. Vs. Union of India, referred (1) supra. It is also further stated that the petitioner had received the notice dated 1-8-2005 from the 1 st respondent-Bank under Section 13(2) of the Act. On receipt of the said notice, the petitioner made a representation through their Advocate dated 27-9-2005 which was received by the Bank on

3-10-2005. The 1 st respondent-Bank also replied to the said representation as contemplated under Section 13(3A) stating that the representation is not acceptable or tenable. If the petitioner fails to discharge the liability in full as claimed in the notice under Section 13(2) of the Act, the 1 st respondent-Bank is entitled to take the measures as specified in Section 13(4) of the Act. If the petitioner is aggrieved by any of the measures to be taken by the 1 st respondent-Bank the petitioner may prefer an application to the Debt Recovery Tribunal under Section 17 of the Act. Until the respondents take any measure under

Section 13(4) of the Act, the petitioner is not entitled to approach the Debt Recovery Tribunal or any other authority. But however, the petitioner had filed the present Writ Petition and obtained interim orders. Since the petitioner had failed to comply with the interim orders of this Court on 7-10-2005, the said orders stand vacated. It is therefore clear that the petitioner is not interested in repaying the amount borrowed from the 1 st respondent-Bank and filed the present Writ Petition prematurely to delay the proceedings under the Act. As the statutory appeal is provided in the At, the petitioner if aggrieved by any of the measures taken by the Bank, the petitioner may prefer an application under Section 17 of the Act and hence the present Writ Petition is not maintainable in law.

10. These are the respective stands taken by the writ petitioner and also the 1 st respondent-Bank.

11. Section 69 of the Transfer of Property Act 1882 dealing with Power of sale when valid, reads as hereunder:

(1) A mortgagee, or any person acting on his behalf, shall, subject to the provisions of this section, have power to sell or concur in selling the mortgaged property, or any part thereof, in default of payment of the mortgage-money, without the intervention of the Court, in the following cases and in no others, namely:

(a) where the mortgage is an English mortgage, and

neither the mortgagor nor the mortgagee is a Hindu, Muhammadan or Buddhist or a member of any other race, sect, tribe or class from time to time specified in this behalf by the State Government, in the Official Gazette;

(b) where a power of sale without the intervention of the Court is expressly conferred on the mortgagee by the mortgage-deed, and the mortgagee is the Government;

(c) where a power of sale without the intervention of the Court is expressly conferred on the mortgagee by the mortgage-deed and the mortgaged property or any part thereof was, on the date of the execution of the mortgagedeed, situate within the towns of Calcutta, Madras, Bombay or in any other town or area which the State Government may, by notification in the Official Gazette, specify in his behalf.

(2) No such power shall be exercised unless and until-

(a) notice in writing requiring payment of the principal money has been served on the mortgagor, or on one of several mortgagors and default has been made in payment of the principal money, or of part thereof, for three months after such service; or

(b) some interest under the mortgage amounting atleast to five hundred rupees, is in arrear and unpaid for three months after becoming due.

(3) When a sale has been made in professed exercise of such a power, the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorise the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorised or improper or irregular exercise of the power shall have his remedy in damages against the person exercising the power.

(4) The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances, if any, to which the sale is not made subject, or after payment into Court under Section 57 of a sum to meet any prior incumbrances, shall, in the absence of a contract to the contrary, be held by him in trust to be applied by him, first, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale; and, secondly, in discharge of the mortgage-money and costs and other money, if any, due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorized to give receipts for the proceeds of the sale thereof.

(5) Nothing in this Section or in Section 69-A applies to powers conferred before the first day of July, 1882.

12. Section 69-A of the said Act dealing with Appointment of receiver specifies as hereunder :

(1) A mortgagee having the right to exercise a power of sale under Section 69 shall, subject to the provisions of sub-section (2), be entitled to appoint, by writing signed by him or on his behalf, a receiver of the income of the mortgaged property or any part thereof.

(2) Any person who has been named in the mortgageddeed and is willing and able to act as receiver arbitrary be appointed by the mortgagee.

If no person has been so named, or if all persons named are unable or unwilling to act, or are dead, the mortgagee may appoint any person to whose appointment the mortgagor agrees; failing such agreement, the mortgagee shall be entitled to apply to the Court for the appointment of a receiver, and any person

appointed by the Court shall be deemed to have been duly appointed by the mortgagee.

A receiver may, at any time, be removed by writing signed by or on behalf of the mortgagee and the mortgagor, or by the Court on application made by either party and on due cause shown.

A vacancy in the office of receiver may be filled in accordance with the provisions of this sub-section.

(3) A receiver appointed under the powers conferred by this Section, shall be deemed to be the agent of the mortgagor; and the mortgagor shall be solely responsible for the receiver's acts or defaults, unless the mortgage deed otherwise provides or unless such acts or defaults are due to the improper intervention of the mortgagee.

(4) The receiver shall have power to demand and recover all the income of which he is appointed receiver, by suit, execution or otherwise in the name either or mortgagor or of the mortgagee to the full extent of the interest which the mortgagor could dispose of, and to give valid receipts accordingly for the same, and to exercise any powers which may have been delegated to him by the mortgagee, in accordance with the provisions of this Section.

(5) A person paying money to the receiver shall not be concerned to inquire if the appointment of the receiver was valid or not.

(6) A receiver shall be entitled to retain out of any money received by him, for his remuneration, and in satisfaction of all costs, charges and expenses incurred by him as receiver, a commission at such rate exceeding five per cent on the gross amount of all money received as if specified in the appointment, and, if no rate is so specified, then at the rate of five per cent, on that gross amount, or at such other rate as the Court thinks fit to

allow, on application made by him for that purpose.

(7) The receiver shall, if so directed in writing by the mortgagee insure to the extent, if any, to which the mortgagee might have insured, and keep insured against loss or damage by fire, out of the money received by him, the mortgaged property or any part thereof being of an insurable nature.

(8) Subject to the provisions of this Act as to the application of insurance money, the receiver shall apply all money received by him as follows, namely:

(i) in discharges of all rents, taxes, land revenue, rates and outgoings whatever affecting the mortgaged property; (ii) in keeping down all annual sums, or other payments, and the interest on all principal sums, having priority to the mortgage in right whereof he is a receiver;

(iii) in payment of his commission, and of the premium on fire, life or other insurances, if any, properly payable under the mortgage deed or under this Act, and the cost of executing necessary or proper repairs directed in writing by mortgagee;

(iv) in payment of the interest falling due under the mortgage;

(v) in or towards discharge of the principal money, if so directed in writing by the mortgagee;

And shall pay the residue, if any, of the money received by him to the person, who but the possession of the receiver, would have been entitled to receive the income of which he is appointed receiver, or who is otherwise entitled to the mortgaged property.

(9) The provisions of sub-section (1) apply only if and as far as a contrary intention is not expressed in the mortgage-deed; and the provisions of sub-section (3) to (8) inclusive may be varied or extended by the mortgagedeed, and as so varied or extended, shall, as far as may be, operate in like manner and, with all the like incidents, effects and consequences, as if such variations or extensions were contained in the said sub-sections.

(10) Application may be made, without the institution of a suit, to the Court for is opinion, advice or direction or any present question respecting the management or administration of the mortgaged property, other than questions of difficulty or importance not proper in the opinion of the Court for summary disposal. A copy of such application shall be served upon, and the hearing thereof may be attended by, such of the persons interested in the application as the Court may think fit.

The costs if every application under this sub-section shall be in the discretion of the Court.

(11) In this section, "the Court" means the Court which would have jurisdiction in a suit to enforce the mortgage.

13. It is needless to say that Section 13 of the Act deals with Enforcement of Security Interest sub-section (1) of Section 13 specifies :

(1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor any be enforced, without the intervention of court or tribunal, by such creditor in accordance with the provisions of this Act.

Sub-section (2) of Section 13 of the Act reads as hereunder :

(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 subsection (4).

14. It may be appropriate to have a glance at subsection (4) of Section 13 also at this juncture and the said provision reads as hereunder :

In case the borrower fails to discharge his liability in full within the period specified in subsection (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-

(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 secured assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;

(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.

16. Section 17 of the said Act deals with Right to appeal.

17. In the decision referred (1) supra the Apex Court at para-50 observed :

"It has also been submitted that an appeal is entertainable before the Debts Recovery Tribunal only after such measures as provided in subsection (4) of Section 13 are taken and Section 34 bars to entertain any proceeding in respect of a matter which the Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. Thus before any action or measure is taken under sub-section (4) of Section 13, it is submitted by Mr.Salve, one of the Counsel for the respondents that there would be no bar to approach the civil court. Therefore, it cannot be said that no remedy is available to the borrowers. We, however, find that this contention as advanced by Shri Salve is not correct. A full reading of Section 34 shows that the jurisdiction of the civil court is barred in respect of matters which a Debts Recovery Tribunal or an Appellate Tribunal is empowered to determine in respect of any action taken "or to be taken in pursuance of any power conferred under this Act". That is to say, the prohibition covers even matters

which can be taken cognizance of by the Debts Recovery Tribunal though no measure in that direction has so far been taken under sub-section (4) of Section 13. It is further to be noted that the bar of jurisdiction is in respect of a proceeding which matter may be taken to the Tribunal. Therefore, any matter in respect of which an action may be taken even later on, the civil court shall have no jurisdiction to entertain any proceeding thereof. The bar of civil court thus applies to all such matters which may be taken cognizance of by the Debts Recovery Tribunal, apart from those matters in which measures have already been taken under sub-section (4) of Section 13".

18. In the decision referred (2) supra, this Court at paras 20, 21, 22 and 23 observed :

"As seen from the pleadings on behalf of the respondent bank there was ample material for the bank to assess and classify the loan account of the 1 st petitioner. The petitioners have not pleaded and with material and factual particulars that the classification by the respondent bank of the loan account of the 1 st petitioner is in transgression of any directions or guidelines issued by the RBI in respect of asset classification. From the facts pleaded in the bank's counter (of which there is no rebuttal by the petitioners) it is apparent that there was ample factual and material for the bank to arrive at an assessment and to make a classification regarding the loan account.

There is, as considered earlier in the judgment

no statutory format, express or by necessary implication, that requires the respondent bank to follow a particular or formal procedure or requires a formal declaration as a condition precedent to classification of debt as NPA. From the scheme of the Act in general and the provisions of Section 13(2) in particular, the conclusion is compelling that the legislature has consecrated the power, authority and discretion (to classify a debt as NPA) to the secured creditor within the generic guidelines to be ascertained from the definition of a non performing asset [Sec.2(o)].

On the basis of the fact pleaded by the Bank in its counter affidavit the bank must be held to have legitimately inferred and assessed the account of the 1 st petitioner as falling within the legislatively delineated spectrum – sub-standard, doubtful or loss asset.

A wide margin of discretion is available to the respondent bank as the secured creditor, within the legislative presents of the Act, to assess and classify a debt but within the legislative framework. This Court is not constituted an appellate authority over the bank's exercise of discretion in this area. The respondent bank, as legislatively recognized is an institution having the requisite expertise to form a commercial judgment on known principles of banking practices and procedures fertilized by R.B.I. directions and guidelines to assess and classify a debt as NPA. From the wealth of material pleaded in the counter affidavit the bank had assessed the debt as non-performing asset. On facts, the petitioners have miserably failed to

establish that such assessment by the bank is perverse and irrational to a degree warranting oversight and correction in judicial review."

It is no doubt true that the learned Judge on a particular given fact situation made the aforesaid observations.

19. The main grievance ventilated by the learned Counsel representing the writ petitioner is that inasmuch as the impugned notice which had been already specified above is not in conformity with either the definition specified under Section 2(o) of the Act or the guidelines of the Reserve Bank of India, the same to be taken as one without jurisdiction and hence the same is liable to be quashed. Certain submissions were made to the effect that the Writ Petition is maintainable since the stage of Section 13(4) of the Act had not reached in the present case and hence the writ petitioner cannot be left remediless at this stage and on the contrary the Counsel representing the 1 st respondent-Bank otherwise contending that the petitioner as well can wait till the stage of Section 13(4) of the Act and can avail the effective alternative remedy provided under the provisions of the Act and in a way the Writ Petition at this stage is premature.

20. The relevant guidelines of the Reserve Bank

o f India had been placed before this Court and in particular 5.6.2 – Non-performing Assets – Norms for classification, 5.6.3 – 'Out of order' and 'overdue' status of accounts**, 5.6.4 –** Asset Classification-Categories of nonperforming assets had been strongly relied upon. Elaborate submissions were made that the present notice is not in conformity with the said guidelines if read along with the definition specified under Section 2(o) of the Act.

21. On a careful reading of different provisions of the Act and also the guidelines which had been specified above, it may be that the circulars and the guidelines issued by the Reserve Bank of India may be for internal guidance in between the Banking Institutions and the Reserve Bank of India, but however, the Banking Institutions are expected to observe those guidelines. In the present case, when the ingredients to be satisfied as specified by Section 2(o) of the Act read along with guidelines, if to be carefully analysed, inasmuch as some discretion is conferred on the Banking Institution while taking a decision relating to whether a particular asset is a non performing asset or not, this Court is of the considered opinion that the power of judicial review to be sparingly exercised in such matters. Hence, this Court is not inclined to interfere and accordingly the Writ Petition is

bound to fail and the same shall stand dismissed. It is needless to say that the petitioner is at liberty to pursue his other legal remedies, if any available. No costs.

_________________ Justice P.S.Narayana

Date : 29-1-2008

L.R. copy to be marked : YES / No

AM

<span id="page-35-0"></span>[1] 2004(4) SCC 311

<span id="page-35-1"></span>[2] 2007(4) A.L.T., 317