IN THE HIGH COURT OF KERALA AT ERNAKULAM
WP(C) No. 27563 of 2007(F)
1. M.J.BETTY,
... Petitioner
2. M.J.TOMY,
3. M.J.TOMY,
4. M.J.BETTY,
Vs
1. UNION BANK OF INDIA,
... Respondent
2. REGIONAL MANAGER,
3. CHIEF MANAGER & AUTHORISED OFFICER,
4. BRANCH MANAGER,
For Petitioner :SRI.GEORGE ABRAHAM
For Respondent :SRI.A.S.P.KURUP, SC, UBI
The Hon'ble MR. Justice ANTONY DOMINIC
Dated :16/10/2007
O R D E R
ANTONY DOMINIC, J.
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W.P.(C) No. 27563 OF 2007 - F
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Dated this the 16th October, 2007
J U D G M E N T
The question that arises for consideration in this
writ petition is whether the 1st respondent was
justified in declaring the accounts of the petitioners
to be Non-Performing Assets (NPA for short).
2. The facts of the case are that petitioners 1 to
3 herein, who are conducting textile business, had
availed of from the 1st respondent cash credit
facilities for Rs.56 lakhs, Rs.10 lakhs and Rs. 23
lakhs respectively. In so far as the 4th petitioner is
concerned she had availed of a house building loan for
Rs.12 lakhs. As security for the above, petitioners
had offered a commercial building in Angamali Town
situated in a plot of 6 cents of land. In addition to
this two plots having an extent of 35 cents and 25
cents each with building therein, were also given.
According to the petitioners these properties are worth
at least Rs.8 crores.
3. Petitioners would submit that in 2001, on
W.P.(C) No.27563 of 2007 -2-
account of certain misunderstanding between the Branch
Manager of the Bank and themselves, the Bank refused to
renew the cash credit facility and caused a lawyer
notice issued to them requiring them to repay the
entire amount availed of. It is pointed out that
thereafter invoking the provisions of the
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002
(hereinafter referred to as ‘the Act’ for short) Ext.
P4 notice under Section 13(2) was issued on 1-8-2007.
Thereupon, petitioners submitted Ext. P11
representation dated 7-8-2007 agreeing to immediately
pay Rs.25 lakhs and requesting the bank not to proceed
further with Ext. P4. Even thereafter, the Bank issued
Ext. P5 notice dated 13-8-2007 under Section 13(4) of
the Act to which they had filed an objection.
Thereupon, the petitioners approached the 2nd respondent
who had instructed them to remit Rs.25 lakhs offered in
Ext. P11 and in compliance thereof, they had remitted
an amount of Rs.24.25 lakhs.
4. Inspite of it on 3-9-2007 Exts. P6 to P9 were
issued requiring them to pay the entire amount availed
W.P.(C) No.27563 of 2007 -3-
of by them. They had filed Ext. P10 objection and as
they apprehended further action from the Bank this writ
petition was filed on 14-9-2007 seeking to quash Exts.
P6 to P9 and to direct respondents 2 to 4 to renew the
cash credit facility availed of by them. They also
sought a further direction requiring the Bank not to
take any action pursuant to Exts. P6 to P9.
Subsequently, petitioners filed I.A. No. 12586 of 2007
producing Exts. P12 to P15, statements of account
issued by the Bank as on 15-9-2007 which indicate that
the credit availed of by them was far below the limit
prescribed by the Bank.
5. A counter affidavit has been filed by the Bank
in which the petitioners have been described as
defaulters. It is also the contention of the Bank that
the renewal granted was only upto 2006 and that the
petitioners were not submitting their balance-sheet,
financial statements, stock statements and audit
reports. Therefore even when renewal was granted by
Exts. P1 to P3 it was indicated that the Bank will be
reviewing the progress of the accounts in the month of
August, 2006. Bank would state that the petitioners
W.P.(C) No.27563 of 2007 -4-
had not approached them for renewal of the facility and
that in any case in view of their unsatisfactory
performance, the Bank would not have renewed it.
6. In paragraph 6 of the counter affidavit,
answering the contention of the petitioners that the
value of the properties mortgaged by them is more than
Rs.8 crores, it is stated that there is no dispute
regarding the value of the security offered by the
petitioners even though the value may not be that much
as narrated by them. Justifying their action in
declaring the accounts to be NPA, it is stated that in
so far as the 1st petitioner is concerned as against
Rs.56 lakhs credit limit, the outstanding as on 31-3-
2007 was Rs.63,29,723.97 and that as against the
sanctioned limit of Rs.10 lakhs for the 2nd petitioner,
the outstanding was Rs.11, 20,092/-. It is further
stated that as far as the 3rd petitioner is concerned,
while the sanctioned limit was Rs.23 lakhs, the
outstanding as on 31-3-2007 was Rs.26,74,697/- and in
the housing loan account availed of by the 4th
petitioner, Rs.53,643/- was overdue for payment. It is
stated that on account of the wilful default as above
W.P.(C) No.27563 of 2007 -5-
and the substantial amount that was remaining
outstanding the Bank classified the accounts as NPA
with effect from 31-3-2007.
7. It is also stated that when notices under
Section 13(2) of the Act there was no objection from
the petitioners and thereafter notice under Section 13
(4) were issued and the Bank took possession of the
properties on 14-9-2007, the date on which this writ
petition was filed. Exts. R4(a), (b) and (c) are the
mahazars, possession notices published in the
newspapers and the photographs evidencing the take over
of the properties. According to the Bank, if at all
the petitioners are aggrieved, the remedy available to
them is to file appeals to the Debt Recovery Tribunal
and they are not entitled to invoke the extraordinary
jurisdiction of this Court.
8. A reply affidavit has been filed by the
petitioners on 24-9-2007 in which, answering the
contention that the petitioners had not produced
documents which were required for the renewal of cash
credit facility, the petitioners would state that they
were always willing to produce these documents, but the
W.P.(C) No.27563 of 2007 -6-
Manager of the Bank was not willing to accept the same.
They would further reiterate that on receipt of the
notice under Section 13(2) they approached the 2nd
respondent and it was on his direction that they had
deposited Rs.24.25 lakhs. They would contend that in
terms of the guidelines issued by the Reserve Bank of
India which is binding on the respondent-Bank, their
accounts could not have been classified as NPA and
that the classification so made is an arbitrary
exercise of power justifying invocation of the powers
of this Court under Article 226 of the Constitution.
They have also elaborately referred to the guidelines
of the Reserve Bank of India in terms of which only the
account could be classified as NPA and reiterate their
contention that there is a patent violation of these
guidelines.
9. Subsequent to the filing of the reply
affidavit, on 26-9-2007, the Bank filed an additional
counter affidavit. In paragraph 2 thereof, the reasons
for declaring the accounts as NPA have been detailed in
the following manner:
(1) The party has not paid the interest portion
W.P.(C) No.27563 of 2007 -7-
and the outstanding amount was far above the sanctioned
limit.
(2) In CCH accounts the clear stipulation is that
amount in the account must be always below the
sanctioned limit. Once it goes above the sanctioned
limit it is an overdrawing and accumulation of
interest.
(3) Similarly they have not submitted the audited
balance sheet for the year 2005-2006 and 2006-07. They
were irregular in the matter of submitting stock
statements and financial statements and cheques issued
were dis-honoured.
10. The bank has also produced Exts. R4D, E, F
and G indicating the total amount due from the accounts
of the petitioners as on 25-9-2007. It is stated
that the outstanding as on 25-9-2007 in the accounts of
petitioners 1 to 4 were Rs.55,36,477.97,
Rs.7,21,543.29, Rs.21,65,578.38 and Rs.10,25,954/-
respectively. However, the additional counter
affidavit filed by the Bank is also silent on the
contention raised by the petitioners regarding the
irregularity in classifying the account as NPA with
W.P.(C) No.27563 of 2007 -8-
reference to the guidelines issued by the Reserve Bank
of India.
11. Thus, from the averments in the counter
affidavit, it is to be noted that the following
averments of the writ petitioners stand undisputed: (1)
That the value of the security offered is Rs.8 crores
as averred by the petitioners. (2) That on the
direction of the 2nd respondent, the petitioners have
remitted an amount of Rs.24.25 lakhs by crediting their
daily income during the period 13-8-2007 to 25-8-2007.
(3) The further allegation that the establishments of
petitioners 1 to 3 are running establishments which
employed about 180 persons (in reply affidavit it is
stated to be 140 persons). The averment that there was
some misunderstanding with the Manager which even
resulted in heated argument with him and that resulted
in the initiation of the proceedings.
12. On these pleadings, the point that was urged
by the learned counsel for the writ petitioner, was
that the bank could not have classified the account as
NPA as on 31-3-2007. Therefore, I am only concerned
with the correctness or otherwise of the action of the
W.P.(C) No.27563 of 2007 -9-
Bank in this regard. Since the counsel for the
respondent Bank contended that in view of Section 17 of
the Act, the remedy available to the petitioners is to
file appeal before the Debt Recovery Tribunal, that
question also falls for consideration.
13. While examining the legality of classifying
the accounts as NPA, the cash credit originally
sanctioned, the outstanding as on 31-3-2007, 15-9-2007
and 25-9-2007, which are available on record needs to
be seen. For easy reference, I will put it in the form
of a comparative statement in the following manner:
STATEMENT
Limit As on
(in lakhs) 31.3.07 15.9.07 25.9.071 56 63,29,723.97 43,50,120.00 55,36,477.97
2 10 11,20,092.00 5,25,120.00 7,21,543.29
3 23 26,74,697.00 16,00,586.80 21,65,578.3854,643.00 9,71,643.00 10,25,954.00
4 12(HBA) (Exts. P12 to
P15) (Exts. R4D to G)Thus while the Bank is right in contending for the
position that as on 31-3-2007 when the account was
classified as NPA (the outstandings were in excess of
the limits). But when the Bank took possession on 14-
W.P.(C) No.27563 of 2007 -10-
9-2007 the outstandings in all the accounts were far
below the limit fixed and this is evident from Exts.
P12 to P15 statements of account issued by the Bank
itself. Even on 25-9-2007, the outstanding amounts
were much below the limit fixed by the Bank and this is
also evident from Exts. R4D to G produced along with
the additional counter affidavit filed by the Bank.
14. However, dealing with the contention that as
on 15-9-2007 the outstanding amount was below the limit
fixed by the Bank, the learned counsel for the Bank at
one stage argued that since the classification as NPA
was as on 31-3-2007, the position of the accounts as on
15-9-2007 is irrelevant. Irrespective of the
correctness of this, if that be the logic I fail to see
the relevance of the figures as on 25.09.2007 supplied
by the Bank through Exts. R4D to G. In any case, there
is substantial difference in the figures in Exts. P12
to P15, statements of accounts as on 15-9-2007 and
Exts. R4D to G, statement of accounts as on 25-9-2007
and this has not been explained by the Bank in the
affidavits filed.
15. The expression N.P.A is defined in Section 2
W.P.(C) No.27563 of 2007 -11-
(o) which is extracted below for reference:
“Section 2(o). “non-performing asset” means
an asset or account of a borrower, which
has been classified by a bank or financial
institution as sub-standard, doubtful or
loss asset,”
(a) in case such bank or financial
institution is administered or regulated
by any authority or body established,
constituted or appointed by any law for
the time being in force, in accordance
with the directions or guidelines relating
to assets classifications issued by such
authority or body;
b) in any other case, in accordance
with the directions or guidelines relating
to assets classifications issued by the
Reserve Bank;
Thus, going by its definition, NPA 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 accordance with the guidelines,
relating to asset classifications, issued by the
Reserve Bank of India.
16. The Master Circular – Prudential Norms on
Income Recognition, Asset Classification and
Provisioning Pertaining to Advances dated 1st July, 2006
issued by the Reserve Bank of India is the one which is
relevant. This circular defines Non-Performing Assets
W.P.(C) No.27563 of 2007 -12-
as follows:
“2.1.2 A non-performing asset (NPA) is a loan
or an advance where;
i) interest and/or instalment of
principal remain overdue for a period of more
than 90 days in respect of a term loan,
ii) the account remains ‘out of order’
as indicated at paragraph 2.2 below, in
respect of an Overdraft/Cash Credit (OD/CC),
iii) the bill remains overdue for a
period of more than 90 days in the case of
bills purchased and discounted,
iv) the instalment of principal or
interest thereon remains overdue for two crop
seasons for short duration crops,
v) the instalment of principal or
interest thereon remains overdue for one crop
season for long duration crops.
2.1.3 Banks should, classify an account as
NPA only if the interest charged during any
quarter is not serviced fully within 90 days
from the end of the quarter.
2.2 ‘Out of Order’ status
An account should be treated as ‘out of
order’ if the outstanding balance remains
continuously in excess of the sanctioned
limit/drawing power. In cases where the
outstanding balance in the principal
operating account is less than the sanctioned
limit/drawing power, but there are no credits
continuously for 90 days as on the date of
Balance Sheet or credits are not enough to
cover the interest debited during the same
period, these accounts should be treated as
‘out of order’.
W.P.(C) No.27563 of 2007 -13-
17. Para 4 of the circular states that the Banks
are required to classify non-performing assets further
into the three categories, namely, Sub-standard
Assets, Doubtful Assets and Loss Assets. In terms of
paragraphs 4.1.1, 4.1.2 and 4.1.3 of the circular a
non-performing asset can be classified as Sub-standard
or Doubtful if it has remained in any one of such
categories as defined in the circular for a period of
12 months. As far as Loss Assets is concerned it
should be identified by the bank and the amount has not
been written off wholly. Such an asset is considered
as uncollectible and of little value that its
continuance as a bankable asset is not warranted.
18. Circular specifically provides in para 4.2.3
as follows:
“Bank should not classify an advance
account as NPA merely due to the existence
of some deficiencies which are temporary in
nature such as non-availability of adequate
drawing power based on the latest available
stock statement, balance outstanding
exceeding the limit temporarily, non-
submission of stock statements and non-
renewal of the limits on the due date, etc.
In the matter of classification of accounts
with such deficiencies banks may follow the
following guidelines:
a) Banks should ensure that drawings in
W.P.(C) No.27563 of 2007 -14-
the working capital accounts are covered by
the adequacy of current assets, since
current assets are first appropriated in
times of distress. Drawing power is required
to be arrived at based on the stock
statement which is current. However,
considering the difficulties of large
borrowers, stock statements relied upon by
the banks for determining drawing power
should not be older than three months. The
outstanding in the account based on drawing
power calculated from stock statements older
than three months, would be deemed as
irregular.
A working capital borrowal account will
become NPA if such irregular drawings are
permitted in the account for a continuous
period of 90 days even though the unit may
be working or the borrower’s financial
position is satisfactory.
b) Regular and ad hoc credit limits need
to be reviewed/regularised not later than
three months from the due date/date of ad
hoc sanction. In case of constraints such
as non-availability of financial statements
and other data from the borrowers, the
branch should furnish evidence to show that
renewal/review of credit limits is already
on and would be completed soon. In any
case, delay beyond six months is not
considered desirable as a general
discipline. Hence, an account where the
regular/ad hoc credit limits have not been
reviewed/renewed within 180 days from the
due date/date of ad hoc sanction will be
treated as NPA.”
19. Para 4.2.4 requires the bank to upgrade loan
accounts classified as NPAs and the said paragraph is
extracted below:
W.P.(C) No.27563 of 2007 -15-
“4.2.4 Upgradation of loan accounts
classified as NPAs.
If arrears of interest and principal are
paid by the borrower in the case of loan
accounts classified as NPAs, the account
should no longer be treated as nonperforming
and may be classified as ‘standard’ accounts.
With regard to upgradation of a
restructured/rescheduled account which is
classified as NPA contents of paragraphs
4.2.14 and 4.2.15 will be applicable.”
The obligation of the bank to upgrade loan accounts has
been reiterated by the Reserve Bank of India in
subsequent circulars as well.
20. What emerges from a reading of the circular is
that all on a sudden, an account cannot be classified
to be an NPA. On the other hand, the bank can classify
an account as an NPA only when interest or instalment
of principal remains overdue for a period of more than
90 days in respect of a term loan. In so far as cash
credit account is concerned, the account remains out of
order if the outstanding balance remains continuously
in excess of the sanctioned limit/drawing power. It is
also stated that in cases where the outstanding balance
in the principal opearting account is less than the
sanctioned limit/drawing power, but there are no
credits continuously for 90 days as on the date of
W.P.(C) No.27563 of 2007 -16-
balance sheet or credits are not enough to cover the
interest debited during the said period, such accounts
should be treated as out of order. Therefore, a
minimum 90 days period is required in terms of the
aforesaid provisions of the guidelines to classify an
account as an NPA. Similarly, the existence of some
deficiencies which are temporary in nature such as non-
availability of adequate drawing power should not be a
reason for classifying an advance as NPA. Further, the
bank is also required to upgrade the loan account
already classified as NPA if arrears of interest and
principal are paid by the borrower.
21. In so far as the facts of this case, the bank
has classified the accounts of the petitioners as NPA
on 31-3-2007 when the outstanding was above the limits
fixed. In the counter affidavits filed not an attempt
is made by the Bank to explain the position for at
least the period specified in the notification prior to
31-3-2007, to justify the classification as NPA.
However, in view of the admitted remittance of Rs.24.25
lakhs during the period from 13-8-2007 to 25-8-2007 and
other remittances made the outstandings as on 15-9-2007
W.P.(C) No.27563 of 2007 -17-
were much below the limits fixed by the bank.
Therefore, as on 15-9-2007, in terms of para 4.2.4 of
the prudential norms issued by the Reserve Bank of
India the bank ought to have upgraded the loan accounts
of the petitioners which were already classified as
NPAs on 31.03.2007. This has not been done by the
bank. On the other hand, for the mere fact that the
accounts of the petitioners were classified as NPAs as
early as on 31-3-2007, ignoring the changed position,
on 14.09.2007, the bank proceeded to take over
possession of the running concerns of the petitioners
and the other mortgaged properties.
22. Nowhere in the affidavits filed by the bank
has it made any attempt to explain as to how the action
taken by them is in compliance with the Reserve Bank of
India guidelines. Therefore, they have no case that
what they have done is in terms of Section 2(o) of the
Act. If that be so, there is violation of the Reserve
Bank of India guidelines in classifying the petitioners
account as NPAs. Once it is held to be so, all further
action taken on the basis that the petitioners’
accounts were NPAs also have to be declared illegal and
W.P.(C) No.27563 of 2007 -18-
arbitrary. It may be true that power has been conferred
on the bank to classify an asset as an NPA. But the
conferment of power and the exercise thereof are two
different aspects. When power conferred on an
authority is exercised in an arbitrary manner the court
is entitled to examine the manner in which the power
has been exercised. If it is found that there has been
illegal exercise of power, the court will hold that the
power conferred is not for exercised in the manner it
has been done. Statutory power conferred for public
purposes is conferred as it were upon trust, not
absolutely and can validly be used only in the right
and proper way which parliament when conferring it, is
presumed to have intended. In this case the bank has
exercised the power conferred under the provisions of
the Act in a most arbitrary manner and therefore all
further action taken by them against the petitioners
has to be declared null and void.
23. In this context I should refer to the judgment
of the Apex Court in Mardia Chemicals v. Union of India
{2004 (2) KLT 273 (SC)} in which the question as to
whether it is on the whims and fancies of the financial
W.P.(C) No.27563 of 2007 -19-
institutions to classify the assets as non-performing
assets, has been dealt with in paragraph 37. It has
been held that as a matter of fact a policy has been
laid down by the Reserve Bank of India providing
guidelines in the matter of declaring an asset as a
non-performing asset and that is quite evident from the
guidelines laid down by the Reserve Bank of India
laying down the terms and conditions and circumstances
in which the debt is to be classified as non-performing
asset as early as possible. Referring to the said
guidelines the court found that there are guidelines
for treating the debt as a non-performing asset. I am
afraid that the argument raised before the Apex Court
has come true in this case.
24. The further question that remains to be dealt
with is whether the only remedy available to the
petitioners is to file an appeal under Section 17 of
the Act. It is true that in the Apex Court judgment
referred to above, it is held in paragraph 80 that on
measures having been taken under sub-section (4) of
Section 13 and before the date of sale/auction of the
property it would be open to the borrower to file an
W.P.(C) No.27563 of 2007 -20-
appeal under Section 17 of the Act before the Debt
Recovery Tribunal.
25. My examination in this case was to be limited
extent whether the bank has acted arbitrarily in
classifying the accounts as NPA and whether there was
violation of the guidelines issued by the Reserve Bank
of India. My finding is that the bank has not placed
materials to satisfy the court that the guidelines
issued by the Reserve Bank of India has been complied
with and that this power has been exercised in an
arbitrary manner. When an act is complained to be
without jurisdiction or when there is arbitrary
exercise of power, this Court is entitled to examine
the correctness of the same in exercise of its power
under Article 226 of the Constitution of India.
26. The question whether availability of an
alternate remedy is an absolute bar for exercising
powers under Article 226 of the Constitution has been
considered by the Apex Court on various occasions. It
is an accepted principle that the availability of
alternate remedy is not an absolute bar, but a self-
imposed restriction and this issue has been dealt with
W.P.(C) No.27563 of 2007 -21-
in State of H.P. v. Gujarat Ambuja Cement Ltd. {(2005)
6 SCC 499} in the following terms:
“Where under a statute there is an allegation
of infringement of fundamental rights or when
on the undisputed facts the taxing
authorities are shown to have assumed
jurisdiction which they do not possess can be
the grounds on which the writ petitions can
be entertained. But normally, the High Court
should not entertain writ petitions unless it
is shown that there is something more in a
case, something going to the root of the
jurisdiction of the officer, something which
would show that it would be a case of
palpable injustice to the writ petitioner to
force him to adopt the remedies provided by
the statute. It was noted by this Court in
L. Hirday Narain v. ITO {(1970) 2 SCC 355}
that if the High Court had entertained a
petition despite availability of alternative
remedy and heard the parties on merits it
would be ordinarily unjustifiable for the
High Court to dismiss the same on the ground
of non-exhaustion of statutory remedies;
unless the High Court finds that factual
disputes are involved and it would not be
desirable to deal with them in a writ
petition.”
This Court had occasion to deal with an almost
identical question in the case of Padmanabhan & Others
v. The Commissioner, HR & CE Department & Others {ILR
2007(3) Kerala Series 289}. In a case arising under
the Securitisation & Reconstruction of Financial Assets
& Enforcement of Security Interest Act, 2002 itself,
W.P.(C) No.27563 of 2007 -22-
the Bombay High Court in the case of Manoj D. Kapasi &
Another v. Union of India & Others {2005 (125) Company
Cases 676} held as follows:
“True it is that in the event of any
measures being taken by a bank or when any
order is passed by the DRT an appeal ought to
be preferred as provided under the statute.
However, as far as the writ court is
concerned, the rule of exhaustion of internal
statutory remedy is a rule of self-limitation
as has been stated by the apex court time and
again. In the present case, the question was
with respect to action of respondent No. 2
and whether it was in accordance with law.
Prima facie, we do not find that notice of
sale was in accordance with the statutory
rules nor does the impugned order passed by
the DRT take cognisance of these breaches.
In the circumstances, we allow this petition
in terms of prayer clauses (a) and (c-i)
though without any order for costs.”
27. I am convinced that a patent illegality has
been committed by the bank and the bank has exercised
the power in a most arbitrary manner. The consequence
of such exercise of power is the immediate closure of
the business establishments run by the petitioners 1 to
3 leaving at least 140 employees jobless. This has been
done ignoring the guidelines of the Reserve Bank of
India and despite the availability of security worth
more than Rs.8 crores. Inspite of this, when the bank
W.P.(C) No.27563 of 2007 -23-
has acted in a manner like this, this Court should not
shut its eyes and drive the petitioners to pursue the
alternate remedy.
28. In the result, I declare that the action of
the 1st Respondent Bank in classifying the accounts of
the petitioners as NPA is illegal and arbitrary and a
superior officer of the Bank shall re-examine the
question whether the accounts of the petitioners are
liable to be classified as NPAs strictly following the
guidelines issued by the Reserve Bank of India. For
this purpose if the petitioners are to produce any
documents, the concerned officer of Bank will be
entitled to call upon them to produce the same. Until
that is done, all actions that have been taken by the
bank shall be withdrawn and the status quo as on 31-3-
2007 in so far as the proceedings against the
petitioners are concerned, shall be restored.
29. The writ petition is disposed of as above.
ANTONY DOMINIC,JUDGE
jan/-