Mere incorporation of additional corporate guarantee does not restructure NPA in adherence with RBI Prudential Norms: Calcutta High Court
The restructuring of non- performing assets (NPA) cannot be gone through with the mere assurance of additional corporate guarantee. The bench consisting of Sabyasachi Bhattacharya J. of the Calcutta High Court ruled that any minor modification does not alter the terms and conditions of the original sanction sufficient to obliterate the defaults already committed by the borrower in the matter of Metro Niketan Private Limited and another Vs. ICICI Bank Limited and others [W.P.O. No. 91 of 2021]. The set of facts stemmed from a sanction for credit facility in favour of the petitioner for an amount of Rs. 200 lakh by the respondent no.1-Bank. On November 22, 2018, there was a modification/renewal of the Sanction Letter dated June 8, 2010, which, inter alia, scaled down the existing limit of Rs.9.90 crore to a proposed limit of Rs.6.25 crore. Again On February 23, 2019, a letter was issued by the Bank for modification of the Sanction Letter dated November 22, 2018 for the limited purpose of including a corporate guarantee given by the Metro Niketan Private Limited. However, on September 19, 2020, the Bank issued to the petitioner and to its guaranteers and mortgagors/ corporate guarantors notices under Section 13(2) of the SARFAESI Act, 2002, to which the borrower issued an objection under Section 13(3A) on November 20, 2020. Finally, on January 13, 2021, a possession notice under Rule 8(1) of the Security Interest (Enforcement) Rules, 2020, read with Section 13(4) of the SARFAESI Act, was issued by the respondent Bank for taking symbolic possession of the secured property. In the present case, it was argued that the classification of the petitioners’ account as NPA ought to have been in accordance with the RBI Prudential Norms. Since such provisions were violated in classifying the loan account as NPA, the consequential action taken by the Bank under the 2002 Act were invalid The court was of the opinion that a post facto challenge to the genesis of the Bank’s actions before the writ court cannot, by itself, be a justification of the maintainability of the writ petition, after measures have already been taken under the 2002 Act. The court further asserted that the limited scope of exploration in the present writ petitions was hinged around the question whether the bank had authority to classify the loan account-in-question as NPA at the relevant juncture. As per the Master Circular of the RBI pertaining to Prudential Norms on Income Recognition, on a reading of the Clause 2.2 stipulates that an account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limited/drawing power for 90 days. Clause 2.3 defines ‘overdue’ as any amount due to the Bank under any credit facility, if not paid on the due date fixed by the Bank. Hence, loan account of the borrower qualified for being classified as NPA on the date of such classification, which is February 24, 2019, in view of the payable amounts remaining overdue/out of order for over 90 days. Hence, there was no fault on the part of the ICICI Bank in classifying the account as NPA at that point of time.
In The High Court at Calcutta Constitutional Writ Jurisdiction Original Side The Hon’ble Justice Sabyasachi Bhattacharyya WPO No. 821 Mohan Motor Business Private Limited and another Vs. ICICI Bank Limited and another W.P.O. No. 921 Metro Niketan Private Limited and another Vs. ICICI Bank Limited and others : Mr. Avishek Guha Ms. Ruchika Mall Mr. Sarabjit Mukherjee Ms. Madhurima Das Mr. Rajarshi Dutta For the petitioners For the respondents Hearing concluded on Judgment on The Court: 1. A sanction was granted for credit facility in favour of the petitioner for an amount of Rs. 200 lakh by the respondent no.1 Bank. On November 22 2018 there was a modification renewal of the Sanction Letter dated June 8 2010 which inter alia scaled down the existing limit of Rs.9.90 crore to a proposed limit of Rs.6.25 crore. 2. On February 23 2019 a letter was issued by the Bank for modification of the Sanction Letter dated November 22 2018 for the limited purpose of including a corporate guarantee given by the Metro Niketan Private Limited. 3. On September 19 2020 the Bank issued to the petitioner and to its guaranteers and mortgagors corporate guarantors notices under Section 13(2) of the SARFAESI Act 2002 to which the borrower issued an objection under Section 13(3A) on November 20 2020. Reply was given by the Bank to the said objection on December 2 4. On January 13 2021 a possession notice under Rule 8(1) of the Security InterestRules 2020 read with Section 13(4) of the SARFAESI Act was issued by the respondent no.1 Bank for taking symbolic possession of the secured property. 5. On January 14 2021 the Bank issued a notice under Section 13(4) of the SARFAESI Act and on January 15 2021 the respondent no.1 Bank issued an e mail to the petitioners intimating that the loan account of the petitioners was then overdue for the past 91 days. Learned counsel appearing for the respondent Bank takes a preliminary objection as to maintainability of the writ petition against the actions taken by the Bank under Sections 13(2) and 13(4) of the SARFAESI Act in view of an equally efficacious alternative remedy being available under Section 17 of the said Act. In support of such contention counsel cites the following judgments : United Bank of India Vs. Satyawati Tondon & Ors. reported at8 SCC 110 Kanaiyalal Lalachand Sachdev & Ors. Vs. State of Maharashtra & Ors. reported at AIR 2011 SCW 1194 iii) Authorised Officer State Bank of Travancore & Anr. Vs. Mathew K. C. reported at3 SCC 85 iv) Unreported judgment passed by the Division Bench of this Hon’ble High Court in M.A.T. No.128 of 2019 delivered in the case of Bishnu Bikash Sarkar & Anr. Vs. ICICI Home Finance Company Limited & Ors. dated 6th February 2019 ICICI Bank Vs. Umakanta reported at13 SCC 497 vi) Unreported judgment delivered on 14.01.2021 by this Hon’ble Court in W.P.A. No.11360 of 2020 passed by Hon’ble Justice Hiranmoy Bhattacharya in Bansal Enterprises Vs. Bank of Baroda. The respondent Bank submits that the unreported judgment dated January 14 2021 passed by a co ordinate Bench in WPA 11360 of 2020 was challenged in MAT No.68 of 2021 No.2695 of 2021 which was dismissed by the Supreme Court by an order dated February 17 2021. It is further submitted on maintainability that the writ petition is premature insofar as the same challenges the notice under Section 13(2) of the SARFAESI Act. On such contention the Bank relies on D. Krishnan and others Vs. The Branch Manager The Federal Bank Limited & another reported at 2017 SCC OnLine Mad 24346 and M s. Sigma Generators Private Limited & another Vs. Oriental Bank of Commerce & others reported at 2014 SCC OnLine 7198. 10. While addressing the question of maintainability learned counsel appearing for the petitioners contends that the action of the Bank and its authorized officer in declaring the account of the petitioner as Non Performing Asset on February 24 2019 is the plinth of the challenge in the present writ petition on the ground that the same is contrary to the Master Circular issued by the Reserve Bank of India on July 1 2015 containing the Prudential Norms of Income Recognition and Asset Classification and Provisioning Pertaining to Advances. It is argued that the modification dated February 23 2019 amounted to a restructuring of the account in terms of the RBI Prudential Norms. 11. By placing reliance on Clause 12.1 of such Norms learned counsel for the petitioners contends that restructuring would normally involve modification of terms of advances securities which would generally include things repayment period repayable amount or the amount of instalments rate of interestunder Annexure 5 of the Prudential Norms containing Key Concepts it is reiterated by the petitioners that restructuring as contemplated therein is in consonance with the Clause 12.1 of the said Norms. 13. Learned counsel for the petitioners contends that once the loan sanctioned was restructured on February 23 2019 upon taking additional security from the Metro Niketan Private Limited both as collateral and corporate guarantee the question of the account being classified as NPA on the very next date that is February 24 2019 could not arise. It is further contended that the modification letter dated February 23 2019 was accepted and acted upon by the petitioners but the Bank acted without authority in classifying the loan account of the petitioner as NPA which is the very basis of the measures taken under the SARFAESI Act de hors the RBI Prudential It is argued that a collateral remedy cannot be an absolute bar to a writ petition if the acts of the authority is questioned on the ground of lack of jurisdiction. In this regard the petitioners rely upon the following decisions: i) Whirlpool Corporation Vs. Registrar of Trade Marks Mumbai & ii) M s. Godrej Sara Lee Ltd. Vs. Asst. Commissioner & Anr. Ors. reported at8 SCC 1 reported at14 SCC 338. 15. Section 2(1)(o) of the SARFAESI Act 2002 defines "Non Performing Asset" as an asset or an account of a borrower which has been classified by a Bank or a financial institution as sub standard doubtful or loss asset. In the event a bank is not administered or regulated by any authority or body established constituted or appointed by any law for the time being in force the bank would be governed by the directions or guidelines relating to asset classification issued by the RBI. In the present case it is argued the classification of the petitioners account as NPA ought to have been in accordance with the RBI Prudential Norms. Since such provisions were violated in classifying the loan account as NPA the consequential action taken by the Bank under the 2002 Act were invalid. In this context the petitioners rely on Sravan Dall Mill P. Limited Vs. Central Bank of India reported at AIR 2010 AP 35. 18. On merits it is contended by the petitioners that the Bank in its reply dated December 2 2020 admitted that the previous notice under Section 13(2) of the 2002 Act dated July 20 2020 was recalled by the Bank on September 10 2020 and a fresh notice under the said provision was issued on September 19 2020. In paragraph No.4 of such reply the Bank accepted that the modification letter dated February 23 2019 was acted upon but failed to give any reason as to why how the petitioners account was classified as NPA on the very next date that is February 24 2019. The reply of the Bank being not in compliance with Section 13(3A) of the 2002 Act the classification of the account of the petitioners borrower as NPA can be challenged. In support of such proposition learned counsel for the petitioners places reliance on East India Laminates Ltd. Vs. Union Bank of India. The account of petitioner no.1 after being restructured on February 23 2019 did not remain NPA for a period of less than or equal to 12 months or did not remain in the sub standard category for a period of 12 months. As such the petitioners account was also not a loss asset since the facility was secured additionally by collateral and corporate guarantee provided by the Metro Niketan Private Limited. Thus the petitioners account could not be classified either as sub standard doubtful or loss asset as envisaged in Clause 4 of the RBI Prudential Norms. 19. The petitioners further argue that a proper interpretation of the RBI Prudential Norms shows that the decision of classifying an asset as NPA should be based on the record of recovery. An account having temporary deficiencies cannot be so classified. The guidelines for such classification are enumerated in Clause 4.2.4 of the said Norms. Clause 4.2.5 of the said Master Circular it is argued mandates that where the arrears of interest and principle are cleared by the borrower in the case of loan accounts classified as NPAs the accounts should not be treated as non performing and may be classified as standard account thereafter. 20. That apart the Bank did not give any notice to the petitioners or Metro Niketan Private Limited prior to classifying the account as an NPA and or disclose any reason for overruling the objection of the petitioner in its reply. In this context the petitioners place reliance on Amar Alloys Pvt. Limited Vs. State Bank of India reported at 2019 SCC OnLine P&H 571. 21. Thus it is argued the entire actions of the Bank and its Authorized Officer under Sections 13(2) and 13(4) of the SARFAESI Act 2002 having emanated from the classification of the petitioners account as NPA in violation of the RBI Prudential Norms were without competence or authority. In reply on merits learned counsel for the respondent Bank submits that the initial sanction dated June 8 2010 was renewed from time to time lastly on November 22 2018. While renewing such sanction the existing limit of the borrower for an exposure of Rs.9.90 crore was reduced on request of the petitioners to Rs.6.25 crore such renewal being valid up to November 21 2019. The loan account of the borrower thus went under stress. Despite several reminders and opportunities to the petitioners intimating the status of the account and to repay the dues from time to time no steps were taken by the petitioners in that regard. The corporate guarantor being Metro Niketan Private Limited stepped in by offering collateral security to secure the loan that was availed by the borrower. Although the respondent Bank accepted such collateral security there was no change or modification of any of the terms and conditions of the Sanction Letter dated November 22 2018 in the modification letter dated February 23 2019. 23. The Bank submits that the attempt of the petitioner to take shelter under the relevant provisions of the RBI Prudential Norms dated July 1 2015 on the basis that the loan was restructured on February 23 2019 is contrary to the facts of the case. The same would be revealed by a mere comparison between the Sanction Letter dated November 22 2018 and the modification letter dated February 23 2019. Since there was no restructuring of the credit facility apart from merely adding collateral security the Prudential Norms are not attracted at 24. The classification of the loan account as NPA on February 24 2019 was valid in law since the loan account of the borrower petitioners was already under stress and there was non payment in the loan account for a period of 90 days in consequence whereof as per the RBI Guidelines the respondent Bank was well within its authority to declare the account as NPA. 25. The Bank argues that not only is the writ petition premature in respect of the notice under Section 13(2) of the 2002 Act which is merely a demand notice the writ petitioners also have a remedy under Section 17(1) of the 2002 Act to challenge the actions taken by the respondent Bank under Section 13(4) as well as Section 13(2) of the 2002 Act before the Debts Recovery Tribunal. In the guise of challenging the classification of its loan account as NPA the respondent Bank argues the petitioners have tried to invoke the writ jurisdiction of this Court. However as per the various judgments as cited by the Bank while arguing the maintainability point the appropriate remedy of the writ petitioner lay under Section 17(1) of the 2002 Act. 27. On the above grounds learned counsel for the respondent no.1 Bank contends the writ petition ought to be dismissed. 28. Heard learned counsel for both sides and perused the written notes of arguments filed by the contesting parties as well as the materials on record. Petitioner No.1 in WPO No.89 of 2021 and petitioner No.1 in WPO No.91 of 2021 Metro Niketan Private Limited) are the borrower and corporate guarantor respectively in respect of the credit facility taken from the respondent No.1 in both the mattersof the SARFAESI Act 2002 to Mohan Motors as well as Metro Niketan and other 32. An objection was filed by the borrower under Section 13(3 A) of the 2002 Act in response to the notice under Section 13(2). The Bank gave a reply thereto on December 2 2020. 33. On January 13 2021 a possession notice was issued under Rule 8(1) of the Security InterestRules 2020 read with Section 13(4) of the SARFAESI Act 2002 by the ICICI Bank for taking symbolic possession of the secured property. On January 14 2021 the Bank issued a formal notice under Section 13(4) of the 2002 Act. The ICICI Bank on January 15 2021 issued an e mail to the petitioners intimating that the loan account in question was overdue for the past 91 days. 34. Being aggrieved by the classification of the loan account as NPA on February 24 2019 and the consequential notice under Section 13 sub sections and of the 2002 Act the present writ petitions have been preferred. 35. A preliminary objection as to maintainability of the writ petition is taken by the respondent Bank primarily on the issue that there is an equally efficacious alternative remedy availabe in the form of Section 17 of the 2002 Act. Hence relying on several judgments of the Supreme Court as well as two unreported judgments of this court the Bank submits that generally the courts adopt a self imposed restriction by refusing to interfere where an equally efficacious alternative remedy is available to the petitioners. 36. By citing certain judgments in reply the writ petitioners pointed out that such interference can take place in case of patent jurisdictional errors and under certain exceptional circumstances. 37. The crux of the principles laid down in the cited judgments clearly indicates that interference under Article 226 of the Constitution is only in exceptional cases. Arbitrary exercise of jurisdiction patent bias violation of Fundamental Rights and Natural Justice as well as gross abuse of the process of law are some of such grounds on which High Courts can interfere despite availability of an alternative remedy. In the present case since the petitioners have specifically alleged lack of authority and arbitrariness on the part of the Bank in classifying the loan account as NPA the writ petitioners cannot be shut out at the outset provided they substantiate such allegations. 39. Although the argument of the petitioners that such classification as NPA was the genesis of subsequent proceedings under the SARFAESI Act and a challenge against such classification is permissible in writ jurisdiction is impressive at the first blush the reliefs claimed in the writ petitions if granted would tantamount to interference with the notice and measures taken by the ICICI Bank respectively under sub sectionsandof Section 13 of the SARFAESI Act. The genesis of such notices or any illegal therein can very well comprise grounds of effective challenges against both such actions of the Bank which leaves ample scope for alternative remedy to the writ petitioners. 40. Hence a post facto challenge to the genesis of the Bank’s actions before the writ court cannot by itself be a justification of the maintainability of the writ petition after measures have already been taken under the 2002 Act. 41. As such the limited scope of exploration in the present writ petitions hinges around the question whether the bank had authority to classify the loan account in question as NPA at the relevant juncture. 42. Although the petitioners have annexed the Master Circular dated July 1 2015 issued by the Reserve Bank of India pertaining to Prudential Norms on Income Recognition Asset Classification and Provisioning pertaining to Advances the first few clauses thereof being Clause No.1 to 3.4 of the Master Circular are conspicuous by their absence in the Annexureshas been described as a loan or an advance where interest and or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan and the account remains ‘out of order’ in respect of an overdraft cash credit. 44. Clause 2.2 stipulates that an account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limited drawing power for 90 days. Clause 2.3 defines ‘overdue’ as any amount due to the Bank under any credit facility if not paid on the due date fixed by the Bank. 45. Hence in the present case the loan account of the borrower qualified for being classified as NPA on the date of such classification that is February 24 2019 in view of the payable amounts remaining overdue out of order for over 90 days. Hence there was no fault on the part of the ICICI Bank in classifying the account as NPA at that point of time. 46. Section 13(2) of the 2002 Act provides that where any borrower which 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 its account in respect of such date 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 its liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights conferred on it under Section 13(4) subject to the exceptions provided therein. Section 13(4) is a consequence of such failure and the measures contemplated thereunder automatically follow upon the failure of the borrower to comply with the requirements of Section 13(2). 47. Section 13(3 A) of the SARFAESI Act provides an opportunity of representation and raising objection to the borrower. In the present case the writ petitioners subjected themselves to the provisions of the SARFAESI Act by giving a representation objection to the notice under Section 13(2) which was duly considered by the respondent No.1 Bank. 48. Thus it is evident that there was no arbitrariness or material irregularity in the Bank’s actions. 49. The next question which crops up is whether the writ petitioners were entitled to the benefit as contemplated in Clause 17.2.2 of the Prudential Norms of 2015 which provides that the non performing assets upon restructuring would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre restructuring repayment schedule. Reliance is placed by the writ petitioners on Clause 17.1 of the Norms pertaining to eligible criteria for restructuring of advances as well as the Key concepts used in the guidelines as defined in Annexure 5 as well as Clause 12.1 of the Norms to argue that restructuring would normally involve modification of terms of the advances securities which would include among others alteration period repayable amounts the amount of instalment rate of interest due to reasons other than competitive reasons). Any change in repayment schedule of a loan would render it a restructured account. 50. Clause 17.1.1 provides that Banks may restructure the accounts classified under ‘standard’ ‘sub standard’ and ‘doubtful’ categories. Subsequent clauses of the Prudential Norms 2015 also provide for the situations in which such restructuring is undertaken. 51. However the petitioners conveniently overlook the provisions of Clauses 17.2.3 and 17.2.4 of the Norms which provide that standard accounts classified as NPA and NPA accounts retained in the same category on restructuring by the Bank should be upgraded only when all the outstanding loan facilities in the account perform satisfactorily during the ‘specified period’ that is principal and interest on all facilities in the account are serviced as per terms of payment during that period. It is further provided that in case satisfactory performance after the specified period is not evidenced the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre restructuring payment 53. The reference to standard sub standard and doubtful categories is entirely irrelevant for the purpose of considering the validity of the classification of the loan account as NPA. 54. That apart the modification letter issued on February 23 2019 merely incorporated an additional corporate guarantee given by the Metro Niketan without altering any of the terms of the original sanction as modified on November 22 2018. 55. On February 24 2019 irrespective and independent of the modification letter the account of the borrower qualified for being classified as a non performing asset which was duly declared by the ICICI on that date. 56. Mere incorporation of additional corporate guarantee by the Metro Niketan ipso facto does not come within the purview of the ‘restructuring’ as contemplated in the Prudential Norms under reference and or in commercial jurisprudence in general. 57. Such minor modification did not alter the terms and conditions of the original sanction sufficient to obliterate the defaults already committed by the borrower. 58. Hence I find no irregularity and or arbitrariness in declaration of the borrower’s loan account as NPA on the relevant date. 59. Reliance by the petitioners on Clause 4.2.4 which relates to temporary deficiencies which would not qualify an asset to be classified as NPA is entirely misplaced. 60. Clause 4 of the Guidelines explains the categories of NPAs and defines sub standard doubtful and loss assets. Such classification occurs only upon the asset having remained non performing over a period. However the broad guidelines for the classification of assets as NPA is on a much wider scale than temporary deficiencies as defined in Clause 4.2.4. Clause 4.2.4 is a miniscule exception of temporary deficiencies which has nothing to do with the present case where several reminders were given to the borrower and guarantors for clearing off the bank’s dues which were consistently ignored by the writ petitioners. 61. The subsequent notice under Section 13(2) of the SARFAESI Act and measures taken under Section 13(4) thereof were only necessary corollaries consequential upon such classification as NPA within the contemplation of Section 13 of the 2002 Act. Hence there is no substantial basis for the challenge in the present writ petitions to the classification of the loan account as NPA. 62. The present writ petitions are ex facie attempts to bypass the regular remedy available under Section 17 of the 2002 Act in the garb of a challenge to the root of such action post facto measures being taken under Section 13. Hence let alone making out any exceptional case 18 of arbitrariness miscarriage of justice or violation of any Fundamental Right or principle of Natural Justice the actions taken by the Bank from classifying the loan account as NPA to taking measures under Sections 13(2) and 13(4) of the 2002 Act were all above board and well within the authority of the Bank. Hence there is no merit in the present writ petitions. 63. Accordingly WPO No.89 of 2021 and WPO No.91 of 2021 are dismissed on contest. The petitioners in each of the said writ petitions shall pay costs of Rs.50 000 each to the ICICI Bank Limited being respondent No.1 in both the matters within 30 days from date for the unnecessary harassment caused to respondent No.1 and to deprecate the mala fide attempt to subvert and delay the process of law in an oblique manner. 64. Urgent certified copies of this order shall be supplied to the parties applying for the same upon due compliance of all requisite Sabyasachi Bhattacharyya J. ) 