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Shiv Shakti Traders v/s Union of India

    Writ C No. 44487 of 2017

    Decided On, 03 November 2017

    At, High Court of Judicature at Allahabad

    By, THE HONOURABLE MS. JUSTICE BHARATI SAPRU & THE HONOURABLE MR. JUSTICE SIDDHARTH

    For the Appellant: Sandeep Srivastava, Advocate. For the Respondent: A.S.G.I., Vinay Kumar Pandey, Advocate.



Judgment Text

Bharati Sapru, J.

1. Heard Sri Ajay Goyal, learned counsel for the petitioners and Sri Vinay Kumar Pandey, learned counsel for the respondent No. 1.

2. In view of the order proposed to be passed no notice is required to be issued to the respondent Nos. 2 and 3.

3. The above noted writ petition has been filed by the petitioners praying for quashing the possession notice dated 29.7.2017 issued by the respondent No. 2, under Section 13(4) read with Rule 8 of the Secularization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as 'SARFAESI Act, 2002').

4. The petitioners have assailed the notice on the ground that the account of the petitioners has been wrongly classified as Non-Performing Asset (NPA) without following the RBI guidelines. No notice was issued by the respondent No. 2, before classifying their account as NPA. Second argument raised is that the proceedings regarding the same subject matter of dispute is also pending before the arbitrator, respondent No. 3, in view of the agreement between the parties to that effect, therefore, proceedings under SARFAESI Act, 2002 are illegal.

5. The first submission of the counsel for the petitioners is that they were required to be given notice by the respondent No. 2 before classifying their account as NPA. The argument has been re-enforced by relying upon the judgment of this Court in the case of "Rita Bagga and Others v. Union of India and others, 2015 (5) ADJ 55".

6. The learned counsel for the petitioners has not able to point out any paragraph of the aforesaid judgment which directs that the bank/financial institution is required to give prior notice to the borrowers, before classifying an account as, NPA. A perusal of the judgments cited at the bar shows that no such direction/observation is

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recorded therein.

7. The provisions of the SARFAESI Act, 2002 define Non-Performing Assets vide Section 1 (o), which are as follows:-

(o) "non-performing asset" means an asset of 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 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];

8. In the case of "Mardia Chemicals Limited v. Union Bank of India, (2004) 136 TAXMAN 360 SC", a question was raised before the Supreme Court that the categorization of an asset as NPA was based on whims of the bank, in answer, the Supreme Court held:

"Next we come to the question as to whether it is on whims and fancies of the financial institution 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 provisions-pertaining to advances through a Circular dated August 30, 2001."

9. Clearly, the Apex Court was influenced by the fact that the categorization of an asset as non-performing asset was based on the guidelines of the RBI.

10. The classification of the NPA as per the aforesaid meaning has to be in accordance with the directions or guidelines relating to the asset classification issued by the RBI. In this regard, RBI has issued a master circular known as "Master Circular-Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances", which was revised on 1.7.2014. Certain provisions of these guidelines are extracted hereunder:

"Definitions:

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.

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,

(vi) the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on secularization dated February 1, 2006.

(vii) In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

2.1.3 In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

2.1.4 In addition, an account may also be classified as NPA in terms of paragraph 4.2.4 of this Master Circular."

22. Para 2.2 provides as to when an account should be treated out of order, which is extracted hereunder:-

"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'."

11. From the aforesaid as per para 2.1.2 (ii) if an account remains out of order as per para 2.2 in respect of cash credit, it would be treated as NPA. Para 2.2 provides that an account would be treated as "out of order" if the outstanding balance remains continuously in excess of the sanctioned limit or where the outstanding balance in the account is less than the sanctioned limit/drawing power and there are no credit continuously for ninety days or credits are not enough to cover the interest debited during the same period. If any of the contingencies are existing, the account will be treated out of order. Para 2.1.3 provides if the interest due and charged during any quarter is not serviced fully within ninety days from the end of the quarter then the account will be classified as NPA."

12. From the above, it is clear that the classification of the account of the borrower would be considered as per the above Master Circular of the RBI since the petitioners have not pointed out, which guideline has been violated in their case, in the writ petition.

13. The second argument advanced on behalf of the petitioners is that the arbitration proceedings are already pending between the parties before the respondent No. 3 and, therefore, as per the "doctrine of election" and the agreement between the parties, the respondent No. 3 should not proceed as per the SARFAESI Act, 2002. The petitioners have brought on record the copy of the loan agreement between the petitioners and the respondent No. 2 on record, which does not provides that there is some bar against the respondent No. 2, to proceed against the petitioners as per the SARFAESI Act, 2002. Further Section 13 (1) of the Act aforesaid starts with an non-obstinate clause which starts as "Notwithstanding anything contained in Section 69 or 69- A of the Transfer of Property Act, 1882 any security interest created in favour of any secured creditor may be enforced, without intervention of the Court or Tribunal in accordance with the provisions of this Act." This non-obstinate clause is not limited to Section 69 or 69-A of the Transfer of Property Act but applies to all laws, which are inconsistent with the objects of the Act. The proceedings for arbitration operate in a different field and the provisions of SARFAESI Act, 2002 are confined to the recovery of dues of financial institution by enforcement of its security interest by the financial institution/bank. Therefore, the proceedings for arbitration will not come in the way of recovery of the defaulted amount from the petitioners by the respondent No. 2 by means of proceedings under Section 13 (4) of the SARFAESI Act, 2002. The Apex Court in the case of "Transcore v. Union of India, (2008) 1 SCC 125, while deciding the dispute regarding the objection to the overlapping jurisdiction of Debt Recovery Tribunal and the jurisdiction of SARFAESI Act, 2002 held that the doctrine of election will not apply, since the object of both the Acts are same i.e., the recovery of bad debt.

14. Further the recovery against the petitioners is being made by a Company, HDB Financial Services Ltd., which cannot be termed as "State" within the meaning of Article 12 of the Constitution of India. Since repeated petitions impleading financial institutions, which are not covered by the definition of "State" is being filed before this Court, therefore, a brief look at the relevant legal provisions in this regard has become necessary.

15. "The word "State" has been defined in Article 12 of the Constitution to include the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.

16. Article 226 of the Constitution provides that every High Court shall have powers, throughout the territories in relation to which it exercises jurisdiction, to issue any person or authority, including in appropriate cases, any Government, directions, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, or any of them, for the enforcement of any of the rights conferred by Part III and for any other purpose.

17. The definition of "State" was initially treated to be exhaustive confined to the authorities stipulated under Article 12 of the Constitution of India and those which could be read ejusdem generis with the authorities mentioned in Article 12 of the Constitution of India itself because till about the year 1967 the Courts had taken the view that even statutory bodies, Universities, Section Committee for admission to Government Colleges were not "other authorities" for the purpose of Article 12 of the Constitution of India. It was only in the year 1967 that a Constitution Bench of the Supreme Court in Rajasthan State Electricity Board, Jaipur v. Mohan Lal, 1967 SC 1857:1968 (1) SCJ 461: (1967) 2 SCR 377 held that the expression "other authorities" was wide enough to include all Constitutional or Statutory Authorities on whom powers were conferred were for the purpose of carrying on commercial activities. It was observed:-

"The expression "other authorities" is wide enough to include within it, every authority created by a Statute and functioning within the territory of India or under the Control of the Government of India; and we do not see any reason to narrow down these meanings in that context in which the word "other authorities" are used in Article 12".

18. Thus, though the definition of "State" was expanded but it followed that since a company incorporated under the Companies Act was not formed statutorily and was not subject to any statutory duty, it was excluded from the purview of the "State". Reference in this connection may be made to the decision of the Supreme Court in Praga Tools Corporation v. C.V. Imanual, AIR 1969 SC 1306.

19. In Ajay Hasia v. Khalid Mujib Sehrawardi, AIR 1981 SC 487: (1981) 1 SCC 722: (1981) 2 SCR 79, question arose in respect of a Regional Engineering College whose administration was carried on by a society registered under the provisions of Societies Act, 1898. An objection was raised by the society in response to the petition filed by the candidates challenging the admission procedure that it was not "State" within Article 12 of the Constitution of India and, therefore, not amenable to the writ jurisdiction of the Supreme Court under article 32 of the Constitution. The Court observed that the society cannot be equated with the Government of India or the Government of any State and nor could it be said to be a local authority. It, therefore, was required to be seen whether it would fall within the expression "other authorities" for it to be a State under Article 12 of the Constitution. The court also emphasised that the concept of instrumentality or agency of the Government is not limited to a corporation created by a Statute but it also equally applicable to a company or a society and in each individual case it would have to be decided, on a consideration of the relevant factors, whether the company or the the society was an instrumentality or the agency of the Government so as to come within the meaning of the Expression "other authority" under Article 12 of the Constitution of India. The tests laid down by the Supreme Court in International Airport Authority were summarised as follows:-

"The tests for determining as to when a corporation can be said to be an instrumentality or agency of Government may now be culled out from the judgment in the International Airport Authority's case (Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 Sc 1628). These tests are not conclusive or clinching, but they are merely indicative indicia which have to be used with care and caution, because while stressing the necessity of a wide meaning to be placed on the expression "other authorities", it must be realised that it should not be stretched so far as to bring every autonomous body which has some nexus with the Government within the sweep of the expression. A wide enlargement of the meaning must be tampered by a wise limitation. We may summarise the relevant tests gathered from the decision in the International Airport Authority's case as follows:-

(1) "One thing is clear that if the entire share capital of the corporation is held by Government it would go a long way towards indicating that the corporation is an instrumentality or agency of Government."

(2) "Where the financial assistance of the State is so much as to meet almost entire expenditure of the corporation, it would afford some indication of the corporation being impregnated with governmental character."

(3) "It may also be a relevant factor ....... whether the corporation enjoys monopoly status which is the State conferred or State protected."

(4) " Existence of "deep and pervasive State control may afford an indication that the Corporation is State agency or instrumentality."

(5) "If the functions of the corporation are of public importance and closely related to governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of Government."

(6) "Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of this inference of the corporation being an instrumentality or agency of Government.

20. Regarding the banking companies, which have no share or control of the State or Central Government, the judgment of "Federal Bank Ltd. v. Sagar Thomas, AIR 2003 SC 4325", is relevant. The Federal Bank was held not to be an instrumentality or agency of the "State" and, therefore, not amenable to writ jurisdiction of the High Court under article 226 of the Constitution for the following reasons:-

"As indicated earlier, share capital of the appellant bank is not held at all by the Government nor is any financial assistance provided by the State, nothing to say which may meet almost the entire expenditure of the company. The third factor is also not answered since the appellant bank does not enjoy any monopoly status nor it can be said to be an institution having, State protection. So far control over the affairs of the appellant bank is concerned, they are managed by the Board of Directors elected by its share-holders. No governmental agency or officer is connected with the affairs of the appellant bank nor is anyone of them a member of the Board of Directors. In the normal functioning of the private banking company there is no participation or interference of the State or its authorities. The statutes have been framed regulating the financial and commercial activities so that fiscal equilibrium may be kept maintained and not get disturbed by the mal-functioning of such companies or institutions involved in the business of banking. There are regulatory measures for the purposes of maintaining the healthy economic atmosphere in the country.

......... Any business or commercial activity, may be banking, manufacturing units or related to any other kind of business generating resources, employment, production and resulting in circulation of money are no doubt, such which do have impact on the economy of the country in general. But such activities cannot be classified as one falling in the category of discharging duties or functions of a public nature. Thus the case does not fall in the fifth category of cases enumerated in the case of Ajay Hasia. Again we find that the activity which is carried on by the appellant is not one which may have been earlier carried on by the Government and transferred to the appellant company."

21. It is clear from the above pronouncement of the Apex Court that the private financial institutions, carrying of business or commercial activity, may be performing public duties, but cannot be considered to be covered under the definition of "State" under Article 12 of the Constitution of India. The writ petition against such entity is not maintainable before the High Court.

22. In view of the above reasons, writ petition fails and is, accordingly, dismissed. It is open for the petitioners to challenge the impugned possession notice dated 29.7.2017 issued by the respondent No. 2 under Section 17 of the SARFAESI Act, 2002.

23. There shall be no order as to costs.
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