M/S Neelam Beverages vs The State Of Madhya Pradesh

(RESPONDENT NO.1/STATE BY SHRI ALOK AGNIHOTRI, DEPUTY GOVERNMENT ADVOCATE) (RESPONDENT NO.2/BANK BY SHRI P. SHANKARAN NAIR, ADVOCATE) 2 W.P. No.12527 of 2020

.................................................................................................... RESERVED ON : 09.11.2022 DELIVERED ON : 22.11.2022 ....................................................................................................

This petition coming on for hearing this day, the Court passed the following: ORDER

Since pleadings are complete, therefore, with the consent of learned counsel for the parties, the petition is heard finally.

2. By means of this petition filed under Article 226 of the Constitution of India, the petitioner calls in question the legality, validity and propriety of letter dated 17.08.2020 (Annexure-P/7) whereby respondent No.2 informed him that in view of the guidelines issued by the Reserve Bank of India (RBI), his account has been classified as Non Performing Assets (NPA) w.e.f 29.01.2020.

3. To resolve the controversy involved in the case, certain important facts are required to be mentioned which are as under:-

(3.1) The petitioner being a Micro Small Medium Enterprises (MSME) Unit dealing with fruit juices and beverages manufacturing at Village Budhiya of District Rewa had applied for a loan from Allahabad Bank Main Branch, Rewa, under the scheme dated 16.11.2017 (Annexure-P/1) 3 W.P. No.12527 of 2020

introduced by the State Government known as 'Mukhyamantri Yuva Udhyami Yojna' and pursuant thereto, a loan was sanctioned in his favour on 23.02.2018 for a sum of Rs.72 lacs as a term loan and Rs.2.80 lacs as cash credit.

(3.2) As per the petitioner, firstly the Bank had given moratorium for a period of nine months to the petitioner which started from March, 2018 and ended on November, 2018. Thereafter again petitioner was granted second moratorium for a period of nine months from December, 2018 which was up to September, 2019. Subsequently, on a request made by the petitioner, he was further granted third moratorium under Rephasement Cum Deferment of Installments on Negotiated Terms & Crystallization of Interest and the same was up to July, 2020.

(3.3) According to the petitioner, subsequently a guideline was issued by the RBI giving 20% restructuring advance to the borrowers during the pandemic period of COVID-19.

(3.4) According to the petitioner, though further extension of moratorium was granted to him by the respondent/Bank, but while granting the said extension, the respondent/Bank took four months time and during that period, his account and funds were blocked and because of the same, he 4 W.P. No.12527 of 2020

could not complete the construction work of his project. As per the petitioner, he received a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short the 'Act, 2002') in the month of July, 2020 that his account has been classified as Non Performing Assets (NPA) since January, 2020 itself. The petitioner had also been apprised by the respondent/Bank that since his account has been classified as NPA, therefore, he is not entitled to get the benefit of scheme dated 06.08.2020 (Annexure-P/3). Thereafter, on 08.08.2020 (Annexure-P/5) a representation was submitted by the petitioner before the respondent/Bank asking that his account may not be classified as NPA because things were delayed because of COVID-19 situation. Again on 13.08.2020 (Annexure-P/6), the petitioner made an application before the respondent/authority, whereby he complained about the injustice done with him by the respondent/Bank as his account has been illegally classified as NPA. In response to the same, the respondent/Bank issued the impugned letter dated 17.08.2020 (Annexure-P/7) giving details as to why action taken by them in respect of classifying the 5 W.P. No.12527 of 2020

petitioner's account as NPA is proper. Hence, this petition.

4. The challenge is founded mainly on the grounds that before classifying the petitioner's account as NPA, he was not afforded an opportunity to be heard and as such, the action taken by the respondent/Bank for classifying his account as NPA was in violation of principles of natural justice and secondly, when the respondent/Bank on 24.01.2020 had granted moratorium of third phase, that too for a further period of nine months then classifying his account as NPA before expiry of said period was illegal and as such, according to the petitioner, the impugned letter dated 17.08.2020 (Annexure-P/7) is illegal and the same deserves to be set aside.

5. However, respondent No.2/Bank has filed a reply to the petition stating therein that the stand taken by the petitioner for delay in project because of COVID-19 is improper and in fact, they have denied the same saying that the delay was not because of pandemic of COVID-19, however it occurred before coming of the same. In the reply, it has been stated by respondent No.2 that they have acted in accordance with the guidelines issued by the RBI. It has also been stated in the reply that so far as another reason assigned by the petitioner for delay in project which was due to Assembly Election and Parliamentary Election is concerned, the same is also not proper because the project work in any manner should have completed by December, 2018, but without there being any proper explanation or reason of delay in completing the 6 W.P. No.12527 of 2020

project, it can be gathered that the petitioner was not inclined to complete the project. As per respondent No.2, term loan amounting to Rs.74.80 lacs was disbursed in favour of the petitioner granting moratorium for a period of nine months and as such, the first Estimated Monthly Installment (EMI) was due on December, 2018, but on the request of the petitioner, the respondent/Bank vide letter dated 20.02.2019 (Annexure- R/2/1) had restructured the repayment schedule so as to enable him to complete the project work and start production. As per restructured repayment schedule, the first EMI of Rs.1,75,000/- was due in the month of October, 2019 and thereafter on every subsequent month. As per respondent No.2, the EMI had to be started from October 2019 and also service interest during moratorium period on advance already availed. According to respondent No.2, since the petitioner did not comply with the above conditions and his account was under

cloud in SMA-1 category, therefore, looking to the poor progress of his project, the last installment of term loan was not released in favour of the petitioner. According to respondent No.2, the petitioner made another request to extend the moratorium period as he could not complete the project work nor start production activities, although it was not permissible under the NPA norms policy issued by the RBI, but considering him a young entrepreneur and his promise to complete the project in quickest possible time, without any adverse effect on the fund exposure of the bank, the authority finally agreed to give him one more chance to pay the EMI 7 W.P. No.12527 of 2020

under Rephasement cum Deferment of Installments on Negotiated Terms & Crystallization on interest. According to respondent No.2, after this EMI payment should have been commenced from July, 2020 and all interest applied should have been paid by June, 2020. As per respondent No.2/Bank, the scheme introduced by the RBI on 06.08.2020 (Annexure- P/3) was not applicable upon the petitioner as his account had already been classified as NPA by a statutory audit team prior to cut off period fixed in the scheme. According to respondent No.2, so far as the stand taken by the petitioner in regard to providing an opportunity of hearing before classifying his account as NPA is concerned, there is no law which requires that before classifying the account as NPA, an opportunity of hearing should be given to him and secondly, the another ground raised by the petitioner in his petition that the respondent has classified his account as NPA before expiry of third phase of moratorium period is concerned, the respondent has also denied the same saying that they have not done any illegal thing and as such, according to respondent No.2, the petition is without any substance and deserves to be dismissed.

6. In a nutshell, the stand taken by respondent No.2 is that the petitioner should have started the repayment of EMI from December, 2018, but since the same was not done, therefore, on a request made by the petitioner, after restructuring his account, he was further granted nine months moratorium but even after lapse of that extended period of nine months, the petitioner could not complete the project 8 W.P. No.12527 of 2020

work then on his prayer, he was again granted third moratorium, but even thereafter, he failed to pay the EMI. However, as per the guidelines issued by the RBI on 01.01.2019 (Annexure-R/2/8) only one time restructuring of existing loan to MSMEs Classified as 'standard' without a downgrade in asset classification is permissible and, therefore, after granting first classification, second and thrid classification was not granted to the petitioner because the Audit Team has refused to grant the same and since the petitioner failed to pay the EMI, therefore, his account has been classified as NPA.

7. Shri Ajay Pal Singh, learned counsel for the petitioner submits that in view of the law laid down by the Division Bench of Punjab and Haryana High Court passed in CWP No.16490 of 2018 [M/s Amar Alloys Pvt. Limited (Regd.) Vs. State Bank of India], a show-cause notice is necessary before classifying the account of a person as NPA. He further submits that the respondent/Bank acted contrary to the guidelines issued by the RBI and also submits that when third moratorium granted for a period of nine months was not yet over, the petitioner's account cannot be classified as NPA by the respondent.

8. Shri Sankaran P. Nair, learned counsel for respondent No.2/Bank submits that the petition is not maintainable because the representation submitted by the petitioner has already been decided by the respondent/Bank and the petitioner has no cause of action to file a petition 9 W.P. No.12527 of 2020

unless the Bank proceeds under Section 13(4) of the Act, 2002 against him and in this regard, he has placed reliance upon an order passed by the Division Bench of this Court in Writ Appeal No.296 of 2010 [Velocity Ltd., Indore, Vs. State Bank of India]. He further submits that the law does not require any opportunity of hearing prior to classifying the account as NPA. According to him though third moratorium was granted for a period of nine months vide letter dated 24.01.2020, but that period started immediately after completion of earlier moratorium and the petitioner even after lapse of the period of third moratorium, failed to pay the EMI, therefore, they have classified his account as NPA.

9. Considering the submissions advanced by learned counsel for the parties and on perusal of record, the following questions emerge to be decided:-

"(i) As to whether against the impugned letter, this petition is maintainable or not?

(ii) As to whether before classifying the petitioner's account as NPA, any prior notice was required to be issued or not?"

10. In the case of Velocity Ltd (supra), the Division Bench has very categorically observed that when the representation or objection by borrower against notice under Section 13(2) issued by the secured creditor and representation is decided communicating the reasons by the secured creditor to the borrower about non-acceptability or un-tenability is only 10 W.P. No.12527 of 2020

for information of the borrower but the same is not assailable in a writ petition whereas the same can be assailed in appeal against the measures taken under Section 13(4) by the secured creditor. In the aforesaid case, the Division Bench of this Court in paragraph-14 has observed as under:-

"14. On a close scrutiny of the provisions of the Act of 2002 and the law laid down by the Supreme Court in the case of Mardia Chemicals, in the case of Punjab National Bank and in the case of United Bank of India v. Satyawati Tondon, we find that it is not justifiable to entertain a writ petition against the notice under section 13(2) of the Act of 2002 and also against the communication of reason by the secured creditor to the borrower about non-acceptability or untenability of the representation or objection. Such communication is not an order/action causing harm to the borrower but is a step before taking recourse to one or more of the measures provided under section 13(4). It is only when such measure under section 13(4) is taken it can be said that the borrower is aggrieved and only on taking of such measure the borrower can take recourse to the provision of appeal provided under section 17 of the Act of 2002. Keeping in view the scheme of the Act of 2002 the object behind making amendment by way of introducing section 13(3A) and the observations made by the Supreme Court in the case of Mardia Chemicals Limited in our considered view the communication of reasons is only for the purpose of information/knowledge of the borrower, and the same being not an action to cause harm to the borrower, at that stage it cannot be assailed. Having regard to the scope of provisions of section 17 of the Act of 2002, the reasons so communicated can be well assailed in case measures referred to in sub-section (4) of section 13 are taken by the secured creditor. This being the scheme of the Act of 2002, any interference by this Court in a writ petition under Article 226 of the Constitution of India at the stage of notice under section 13(2) and at the state of communication of rejection of representation/objection under section 11 W.P. No.12527 of 2020

13(3A) of the Act of 2002 would hamper the process of recovery, defeating the very purpose of introducing section 13(3A) in the Act of 2002."

Moreso, the Delhi High Court in the case reported in 2014 SCC OnLine Del 7198 [M/s. Sigma Generators Pvt. Ltd. & Anr. Vs. Oriental Bank of Commerce & Ors] has observed that in case the creditor/Bank does not take further step even after issuance of a notice under Section 13(2) of the Act, 2002, the said action cannot be assailed by the borrower by filing a petition under Article 226 of the Constitution of India. The Delhi High Court in the aforesaid case has also held that after issuance of a notice under Section 13(2) of the Act, 2002, the only remedy available with the aggrieved debtor is to approach the Debts Recovery Tribunal by making an application under Section 17 of the Act, 2002. In the aforesaid case, the Delhi High Court has observed as under:-

"17. We may record that a Division Bench of the High Court of Madras in N.A.K.G. Cotfibres Private Ltd. v. Zonal Manager also has taken the view that if the Bank has not followed the procedures contemplated under Section 13(2) or under Section 13(3A) or Section 14, the proper course open to the petitioner is to approach the DRT under Section 17 and not to rush to the Court with a writ petition. The view of the Madras High Court thus appears to be that even if the creditor Bank, after issuing notice under Section 13(2) does not take further steps, the remedy available to the aggrieved debtor is under Section 17 only. However the view of the High Court of Orissa in Krushna Chandra Sahoo v. Bank of India AIR 2009 Orissa 35 (DB) and of the High Court of Jharkhand in Jayant Agencies v. Canara Bank AIR 2011 Jharkhand 68 (after noticing United Bank of India v. Satyawati Tandon (2010) 8 SCC 110), is otherwise. While in the former, finding that the notice under Section 13(4) was 12 W.P. No.12527 of 2020

issued without deciding the representation/objections under Section 13(3A), writ petition was entertained and the notice under Section 13(4) quashed, in the latter, though the Bank denied receipt of representation/objection under Section 13(3A) but upon being satisfied that such representation/objections was preferred, the writ petition was entertained and the proceedings under Section 13(4) quashed. The same learned Single Judge of the Jharkhand High Court earlier, in Stan Commodities Pvt. Ltd. v. Punjab & Sind Bank AIR 2009 Jharkhand 14 also, held that since the "RBI's Prudential Norms of Income Asset Classification & Provisioning-Pertaining to Advances" issued by Circular dated 30th August, 2001 required that before classifying the account as NPA, there should be a settlement of the controversy/doubt regarding classification of the asset and intimation to the borrower, the borrower is entitled to be informed and be given an opportunity against the intended classification of the account as NPA; accordingly, it was held that a borrower is entitled to be informed and given an opportunity of settlement before declaration of its account as NPA; also finding that the decision if any on the representation/objection under Section 13(3A) had not been communicated to the borrower, the notice issued under Section 13(4) was quashed.

However another Single Judge of the Jharkhand High Court in Paritran Trust v. Punjab National Bank, though noticing Stan Commodities Pvt. Ltd. (supra) but without noticing Jayant Agencies (supra), dismissed the challenge, to the notice under Section 13(2) on the ground that no opportunity of hearing had been afforded to the borrower before declaring the account as NPA, and held that in the scheme of the SARFAESI Act, no opportunity of hearing is to be afforded to the borrower before declaring the account as NPA and further held that there is no prohibition in Section 13 against issuing a composite order declaring the account of the borrower as NPA and simultaneously requiring the borrower to discharge its liability."

11. However, the Supreme Court in a case reported in 13 W.P. No.12527 of 2020 AIR 2022 SC 1045 [Phoenix Arc Private Limited Vs. Vishwa Bharati Vidya Mandir and others] dealing with the similar has observed that the discretionary jurisdiction under Article 226 is not absolute but has to be exercised judiciously in the given facts of a case and in accordance with law. It has also been observed by the Supreme Court that the normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available. The Supreme Court in the aforesaid case has observed as under:-

"20. In Mathew K.C. [State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85 : (2018) 2 SCC (Civ) 41] after referring to and/or considering the decision of this Court in Chhabil Dass Agarwal [CIT v. Chhabil Dass Agarwal, (2014) 1 SCC 603] , it was observed and held in para 5 as under : (Mathew K.C. case [State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85 : (2018) 2 SCC (Civ) 41] , SCC p.

89) "5. We have considered the submissions on behalf of the parties. Normally this Court in exercise of jurisdiction under Article 136 of the Constitution is loath to interfere with an interim order passed in a pending proceeding before the High Court, except in special circumstances, to prevent manifest injustice or abuse of the process of the court. In the present case, the facts are not in dispute. The discretionary jurisdiction under Article 226 is not absolute but has to be exercised judiciously in the given facts of a case and in accordance with law. The normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well-defined exceptions as observed in CIT v. Chhabil Dass 14 W.P. No.12527 of 2020

Agarwal [CIT v. Chhabil Dass Agarwal, (2014) 1 SCC 603] , as follows : (SCC p. 611, para 15) '15. Thus, while it can be said that this Court has recognised some exceptions to the rule of alternative remedy i.e. where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case [Thansingh Nathmal v. Supt. of Taxes, AIR 1964 SC 1419] , Titaghur Paper Mills case [Titaghur Paper Mills Co.

Ltd. v. State of Orissa, (1983) 2 SCC 433 : 1983 SCC (Tax) 131] and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.

21. Applying the law laid down by this Court in Mathew K.C. [State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85 : (2018) 2 SCC (Civ) 41] to the facts on hand, we are of the opinion that filing of the writ petitions by the borrowers before the High Court under Article 226 of the Constitution of India is an abuse of process of the court. The writ petitions have been filed against the proposed action to be taken under Section 13(4). As observed hereinabove, 15 W.P. No.12527 of 2020

even assuming that the communication dated 13-8- 2015 was a notice under Section 13(4), in that case also, in view of the statutory, efficacious remedy available by way of appeal under Section 17 of the Sarfaesi Act, the High Court ought not to have entertained the writ petitions. Even the impugned orders passed by the High Court directing to maintain the status quo with respect to the possession of the secured properties on payment of Rs 1 crore only (in all Rs 3 crores) is absolutely unjustifiable. The dues are to the extent of approximately Rs 117 crores. The ad interim relief has been continued since 2015 and the secured creditor is deprived of proceeding further with the action under the Sarfaesi Act. Filing of the writ petition by the borrowers before the High Court is nothing but an abuse of process of court. It appears that the High Court has initially granted an ex parte ad interim order mechanically and without assigning any reasons. The High Court ought to have appreciated that by passing such an interim order, the rights of the secured creditor to recover the amount due and payable have been seriously prejudiced. The secured creditor and/or its assignor have a right to recover the amount due and payable to it from the borrowers. The stay granted by the High Court would have serious adverse impact on the financial health of the secured creditor/assignor. Therefore, the High Court should have been extremely careful and circumspect in exercising its discretion while granting stay in such matters. In these circumstances, the proceedings before the High Court deserve to be dismissed."

Here in this case, though in pursuance to a notice issued to the petitioner under Section 13(2) of the Act, 2002 (Annexure- R/2/9), the petitioner submitted his objection which was decided by the respondent/Bank, but no action has been taken by them against the petitioner under the provisions of Section 13(4) of the Act, 2002 and as such, no cause of action arises in his favour so far to file a writ petition. Here in this case, 16 W.P. No.12527 of 2020

though in pursuance to a notice issued to the petitioner under Section 13(2) of the Act, 2002 (Annexure-R/2/9), the petitioner submitted his objection which was decided by the respondent/Bank, but no action has been taken by them against the petitioner under the provisions of Section 13(4) of the Act, 2002 and as such, no cause of action arises in his favour so far to file a writ petition. However, for a sake of assumption, if it is presumed that the respondent/authority shall take any coercive measure against the petitioner under Section 13(4) of the Act, 2002, even then an alternative remedy of appeal under Section 17 of the Act, 2002 will be available with the petitioner and in that situation, rather to file a petition, it would be better for him to avail the remedy of appeal. In view of the aforesaid, I am of the considered opinion that classifying the account of the petitioner/borrower as NPA does not give him any cause of action to file a writ petition.

12. In light of the aforesaid discussion, question No.1 formulated is answered accordingly.

13. Furthermore, in a case reported in 2014 SCC OnLine Jhar 2064 [Paritran Trust Vs. Punjab National Bank and others], it has been held by the Jharkhand High Court that no notice is required to be issued to the borrower before classifying his account as NPA. In the aforesaid case, the Jharkhand High Court has observed as under:-

"11. From an analysis of provisions under Section 13(2) of the SARFAESI Act, 2002 it is apparent that the secured creditor is empowered to issue notice in writing requiring the borrower to 17 W.P. No.12527 of 2020

discharge its liability, if the borrower has defaulted in repayment of secured debt or its account has been classified as NPA. The learned Senior Counsel for the petitioner has submitted that the letter dated 09.12.2011 is a composite letter declaring the account of the petitioner NPA as well as a notice under Section 13(2) of the SARFAESI Act and therefore, the action taken by the respondent-Bank is liable to be quashed. This contention is liable to be rejected. I find that in Section 13(2) of the SARFAESI Act, 2002 there is no bar for resorting to Section 13(2), after the account of the borrower has been declared NPA. The word "then"

in Section 13(2) only indicates that there should be a determination of the liability prior to resorting to Section 13(2). It is not in dispute that the borrower has defaulted in repayment of loan and before its account became NPA it was cautioned and directed to regularise the loan account. There is no prohibition in Section 13(2) of the Act against issuing a composite order both declaring the account of the borrower NPA and requiring the borrower to discharge its liability simultaneously. In the present case though the respondent-Punjab National Bank has filed counter- affidavit stating that the account of the borrower became NPA on 31.03.2011. The notice dated 09.12.2011 under Section 13(2) clearly demonstrates that the account was declared NPA prior to notice dated 09.12.2011.

12. In the scheme of the SARFAESI Act, 2002, I do not find any provision which requires an opportunity of hearing to be afforded to the borrower. In "Stan Commodities Pvt." the question before the Court was, "whether the declaration of the account as NPA without giving prior information/opportunity to settle the controversy regarding classification of account as NPA is justified?" In the present case, the respondent- Bank has written letter requiring the petitioner to make payment and regularise the account. The petitioner's account was declared NPA on 31.03.2011 by the respondent-Punjab National Bank and thereafter, a notice under Section 13(2) was issued to the petitioner. The petitioner made his representation under Section 13(3-A). Representation dated 21.01.2012 was rejected by the Punjab National Bank 18 W.P. No.12527 of 2020

vide letter dated 27.01.2012 and by the Union Bank of India vide letter dated 25.01.2012 and the Oriental Bank of Commerce has also rejected the representation of the petitioner-Trust under Section 13(3-A) and copies of the rejection letters have been produced in the present writ proceeding. It is pertinent to note that the representation by the petitioner-Trust under Section 13(3-A) of the SARFAESI Act, 2002 was for reschedulement of the loan account. In the said representation, the petitioner-Trust has detailed the difficulties faced by it due to revised guidelines issued by the MCI and nowhere in the representation dated 21.01.2012, the petitioner-Trust has disputed the calculation nor has it claimed its account being declared NPA as arbitrary, illegal or defective. Mere submission of a representation cannot create a bar against taking action in accordance with law by the secured creditor. As noticed above, the petitioner's account was declared NPA on different dates, much prior to issuance of letter dated 09.12.2011 and the petitioner was requested to make payment and regularise the account."

In view of the aforesaid, I am of the opinion that no prior notice is required to be issued before classifying the account of a person as NPA. However, the case of M/s Amar Alloys Pvt. Limited (Regd.) (supra), on which learned counsel for the petitioner has placed reliance is under pending adjudication before the Supreme Court and even otherwise, I am not convinced with observation made by the Division Bench of Punjab and Haryana High Court in the aforesaid case rather the view taken by the Jharkhand High Court in the case of Partitran Trust (supra) is more appropriate.

14. Thus, question No.2 formulated is answered accordingly.

15. In view of the aforesaid enunciation of law and 19 W.P. No.12527 of 2020

the facts and circumstances available in this case, I am of the opinion that mere issuance of notice under Section 13(2) of the Act, 2002, does not give any cause of action to the petitioner to file a writ petition under Article 226 of the Constitution of India before this Court and as such, the objection raised by learned counsel for respondent No.2 in respect of maintainability of petition stands sustained.

16. Resultantly, the petition filed by the petitioner stands dismissed as not maintainable.

(SANJAY DWIVEDI) JUDGE

Devashish

DEVASHISH MISHRA 2022.11.24 10:35:01 +05'30'