UNIQUE ENGINEERING WORKS Vs. UNION OF INDIA

JUDGEMENT

(1.) BY this writ petition, petitioner seeks to challenge the constitutional validity of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 [hereinafter referred to for the sake of brevity as Non-Performing Asset (NPA) Act, 2002].

(2.) EXTRA-ORDINARY and urgent situations demand extra-ordinary remedial measures particularly in economics and finance. With globalization, india has become a signatory to various International Conventions, which require India to reduce its gross fiscal deficit, which was 10% of G. D. P. around 21 st June 2002. Banking is one of an important economic organ to revitalize the economy. However, on 21st June 2002 the non-performing assets of banks had reached a figure of Rs. 90,000 crores (approximately )and therefore, the Government came out with an Ordinance known as Securitisation and Reconstruction of Financial Assets and enforcement of Security Interest Ordinance, 2002 which has been substituted by the Act on 19th July 2002 with effect from 21st June 2002. That Act briefly is called as Non-Performing Asset Act, 2002 (hereinafter referred to as NPA Act 2002) In the banks, there were higher value loan accounts, which are secured by the borrowers handing over their assets as and by way of security to the banks against which the banks lend moneys. On account of non-payment of principal and interest amounts, the margin between the value of the assets pledged/mortgaged / charged narrow down vis-a-vis the amounts lent to the borrowers. Consequently, the assets became non-performing. Under the circumstances, reserve Bank of India has issued guidelines on 4th July 2002 after the ordinance defining these non-performing assets. These assets have become sub-standard, doubtful and loss assets on account of non-payment of dues because these assets cannot service the loans sanctioned by the banks in favour of the borrowers. It is under these circumstances that npa Act, 2002 has been enacted. There is one more reason for enactment of this Act, 2002. On account of mounting arrears of cases in Civil courts, recovery was delayed and therefore, the Government enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to for the sake of brevity as the DRT Act, 1993 ). However, assets, which were charged for maintenance of higher value loan accounts, could not be sold under the recovery machinery provided under the DRT Act, 1993, till the final decree. Even in cases where suits were filed before the Civil Courts, Receivers were appointed from time to time, but such Receivers had no power to sell the assets pending the suits. Under the circumstances, the Non-Performing Asset (NPA)Act, 2002 has been enacted.

(3.) MR. Dhulia, learned Counsel for the petitioner firstly contended that section 13 (2) and Section 13 (4) are bad in law as they do not provide for any opportunity to the borrower to contest the classification of his account as non-performing asset. He invited our attention to Reserve bank of India guidelines dated 4th July 2002 under which the sub-standard assets; the doubtful assets and the loss assets are all combined to constitute non-performing assets. He submitted that the Chief Manager of the bank, on his own without any parameters / guidelines, can select a standard asset and classify the same as a non-performing asset without giving any opportunity "to the borrower before issuing notice under section 13 (2) of the Non-Performing Asset (NPA) Act, 2002. He, therefore, submitted that hearing should be provided to the borrowers before issuance of notice under section 13 (2) of the Non-Performing Asset (NPA) Act, 2002 and in the absence of such a hearing / opportunity, there is a violation of the rule of natural justice and therefore, section 13 (2) is liable to be struck down. In this connection, Mr. Dhulia further pointed out that in several cases loans were classified as standard assets prior to 21st June 2002 when the Ordinance was issued. That under the previous guidelines, these loans were standard assets. That under the previous guidelines, there were three distinct separate, assets namely doubtful assets, sub-standard assets and loss assets. But under the present guidelines, they are all combined to constitute, non-performing assets and consequently, it was argued that if an asset was a standard asset before 21st June 2002, it cannot become a non-performing asset on 21st June 2002 without opportunity to the borrowers. He, therefore, contended that section 13 (4) is harsh as it gives excessive power to the bank officers not only to classify an asset as a non-performing asset, but also it gives power to him to thereafter invoke the provisions of section 13 (2) of the said Act, 2002. That in the absence of the guidelines, the bank officer can pick and choose DRT Act, 1993 in one case and in other cases he can invoke the impugned Act, 2002. Further the impugned Act, 2002 empowers the bank to seize the assets and to sell them without intervention of the Court / Tribunal on expiry of 60 days from the receipt of the notice under section 13 (2) of the Act, 2002. Mr. Dhulia next contended that section 13 (4) of the said Act, 2002 is very harsh and arbitrary. That it empowers the secured creditor to take possession of secured assets of the borrower. That it empowers the secured creditor to take over the management of the assets of the borrower. That it empowers the secured creditor to appoint a manager to manage the assets after taking possession. That it empowers the secured creditors to sell the secured assets of the borrower. That in the circumstances, section 13 (4) is unreasonable, arbitrary and harsh and therefore, it violates article 14. and Article 19 (l) (g) of the Constitution of India. In this connection, it was further argued that before the NPA Act, 2002, the petitioner had a right to challenge the claim of the secured creditor under the DRT Act, 1993. That before the enactment of the said act 2002, the asset could not be sold till the decree is passed by the court / Tribunal. That before the impugned Act 2002, the banks / financial institutions were required to file suits in the Civil Court / Debt recovery Tribunal (DRT) under the DRT Act 1993, under which, there were ample powers given to the Tribunal to attach and manage the assets of the borrower given as security pending hearing and final disposal of the suit /petition, whereas under the present Act 2002, once an asset is certified as non-performing asset, then the bank / financial institution can straight-away invoke provisions of section 13 (2) under which notice of 60 days is required to be given to enable the borrower to discharge his liability, failing which, section 13 (4) can be resorted to subject to right of appeal, under section 17 of the said Act, 2002. He, therefore, contended that section 13 (4) is unreasonable, arbitrary and violative of petitioner's fundamental rights under Article 14 and Article 19 (1) (g)of the Constitution. In the alternative, he submitted that even if the validity of the Act 2002 is upheld by the Court, the Court should issue appropriate directions under which a machinery is provided before an asset is classified as non-performing asset. Mr. Dhulia next contended that in view of section 13 (2) of the said act, 2002, the impugned Act 2002 cannot be made applicable retrospectively. He submitted that the, Act, 2002 came into force with effect from 21st June 2002. He contended that there are large number of borrow ers, who have taken term loans for a period of 10 to 15 years. He contended that under the earlier norms prevailing before 4th July 2002, when Reserve Bank of India Guidelines came into force, the assets of the borrowers with the bank, in many cases, were standard/assets vis-avis non-performing assets. But under the new Guidelines they have been suddenly converted into non-performing assets with effect from 21st June 2002 and suddenly the banks are calling upon the debtors to pay the full debt within 60 days, even when the debts have not become finally due and payable, only on the ground that the assets charged in favour of the bank have become sub-standard, doubtful and loss assets. He, therefore,' contended that the NPA Act, 2002 has to apply prospectively and not retrospectively. He further contended that there are borrowers of the bank, who Have taken loans for purchase of consumer items and cars. That the banks are now refusing to proceed for recovery of loans under the DRT Act, 1993 and that, as a matter of short-cut, banks and financial institutions are moving under the impugned NPA Act, 2002 just by classifying the assets of the borrower as non-performing assets without application of mind. He contended that if the validity of the NPA act, 2002 is upheld, it would make the provisions of DRT Act, 1993 redundant. In this connection he further contended that banks and financial institutions are invoking the provisions of the impugned NPA Act, 2002 even in case where matters are pending before the Debt Recovery tribunal under the DRT Act, 1993, He contended that the impugned npa Act, 2002 cannot be applied to pending matters before the Debt recovery Tribunal under the DRT Act, 1993. He contended that if retrospective effect is given to the impugned NPA Act, 2002 it would also cover suits pending before the Debt Recovery Tribunal. He contended that the DRT Act, 1993 is a complete Code by itself. He contended that under section 17 and section 18 of the DRT Act, 1993, no court except the Debt Recovery Tribunal has jurisdiction, power and authority to decide cases filed by the banks and financial institutions for recovery of debts due to such banks and financial institution. He contended that without amending section 17 and section 18 of the DRT Act, 1993, it was not open to the Parliament to make the impugned NPA Act, 2002 retrospective. It may be clarified that in the" first instance, it is argued on behalf of the petitioner that the impugned NPA Act, 2002 is only prospective. However, if the Court holds that the NPA Act, 2002 is retrospective then it was argued that the impugned enactment would become arbitrary, illegal and bad in law as the impugned NPA Act, 2002 cannot take away the powers of Debt Recovery Tribunal under section 17 and section 18 of the DRT Act, 1993. It was further argued that when a suit is pending before Debt Recovery Tribunal, a part of the claim cannot be taken away from the Debt Recovery Tribunal and introduced under the impugned NPA Act, 2002 as such a position would violate Order 2 Rule 2 of C. P. C. He further contended that appeal is a continuation of the original suit. He contended that where the suit is pending before the Debt recovery Tribunal, the claim under that suit cannot be brought under the impugned NPA Act, 2002. He submitted that it is well settled rule of interpretation that the right of appeal in a pending suit is a substantive right which cannot be taken away retrospectively unless the impugned act 2002 apply as provisions. He contended that the impugned NPA Act, 2002 is neither declaratory nor procedural. He further contended that had the bank/financial institution filed a suit for foreclosure or sale the petitioner had a right to defend the suit instituted by the banks / financial institutions under the DRT Act, 1993 and even go in appeal, whereas under the present Act, 2002, once the asset of the borrower is classified as non-performing asset, the burden is on the petitioner to file an appeal under section 17. He further contended that the impugned NPA Act, 2002, cannot apply to pending contracts. That these are substantive rights and therefore, the impugned NPA Act, 2002 cannot be read as retrospective. Mr. Alok Singh, learned Counsel appearing for the petitioner in writ petition No. 727 of 2003 has adopted the arguments of Mr. Dhulia. In addition, however, he contended that under section 13 (11) of the impugned npa Act, 2002 the secured creditor is given the power to proceed against the guarantor or sell the pledged assets without taking action under section 13 (2) of the impugned NPA Act. 2002 and therefore, section 13 (11) of the impugned NPA Act, 2002 was unreasonable, arbitrary and violative of petitioner's fundamental rights under Article 14 and article 19 (l) (g) of the Constitution. Mr. Alok Singh learned Counsel for the petitioner in writ petition the of 2003 is appearing for the guarantor. Mr. Alok Singh further submitted that provisions of section 13 (11)are also contrary to section 141 of the Contract Act. Mr. P. R. Mullick, learned Counsel for the petitioner in writ petition no. 1002 of 2003 submitted that under section 15 of the Sick Industrial companies Act, 1985, reference is provided to BIFR. That under section 3 (1) (o) of the said Act, 1985, a Sick Industrial Company is defined to mean an industrial company whose accumulated losses equals or exceeds its net worth. That under section 16 of the said Act, 1985 inquiry into the working of the sick industrial companies is contemplated. That under section 17 and section 18 of the said Act, 1985, BIFR is empowered to make suitable orders on inquiry including preparation and sanction of rehabilitation scheme. That under section 19 of the said Act, 1985, rehabilitation is provided for by financial assistance from banks / financial institutions. He isubmitted that by virtue of the provisions of the impugned NPA Act, 2002 it is, inter alia, provided under the Schedule that with effect from 21st June 2002 no reference shall be made to BIFR after the commencement of the impugned NPA Act, 2002 and further, all pending references before BIFR shall abate. Mr. Mullick contends that under the impugned NPA Act, 2002 there is no scope for rehabilitation of sick industrial companies. That there is no scope for rehabilitation of potential sick industrial company. That under section 9 of the impugned npa Act, 2002 measures for asset reconstruction is provided for under which the reconstruction company or securitisation company shall take over non-performing assets in terms of the guidelines framed by Reserve bank of India. Mr. Mullick contended that the emphasis has now shifted from rehabilitation of sick industrial company by BIFR to recovery of loans by banks and financial institutions under the impugned NPA Act, 2002. He submitted that even in cases where BIFR has taken steps to rehabilitate a sick industrial company, the authority of BIFR is withdrawn by virtue of the impugned NPA Act, 2002. He contends that no opportunity is given to the borrower to prevent the secured creditor (banks and financial institutions) from handing-over the borrower's assets to the reconstruction company / securitisation company. He, therefore, submitted that section 9 is arbitrary, unreasonable and violative of petitioner's fundamental rights under Article 19 (l) (g) of the Constitution. He further pointed out that under section 5 of the impugned NPA Act, 2002 the securitisation company or reconstruction company can acquire the assets of the borrower by issuance of a debenture or a bond. That however section 5 does not provide for any opportunity to the borrower to object to the handing over of his assets or acquisition of his assets by securitisation company /reconstruction company and therefore, he submits that section 5 of the impugned NPA Act, 2002 is ultra-virus Article 14 and Article 19 (l) (g) of the Constitution of India. Mr. Mullick further contended that in 1985 there was a Health Code Scheme framed by reserve Bank of India under which Code I dealt with standard assets; code II dealt with sub-standard assets; Code HI dealt with doubtful assets, code IV dealt with loss assets, Code V dealt with recall debts, Code vi dealt with protested debts and Code VII dealt with sick and rehabiltation debts. That in 1993 Reserve Bank of India formulated norms called as prudential Norms, which dealt with servicing of loans given by banks and financial institutions. That under the Prudential Norms debts were recalled by banks only if the debts came under Code IV, which dealt with loss assets. Mr. Mullick contended that Prudential Norms reasonal by Reserve bank of India dealt with means recognition, asset classification and provisions for advances. He pointed out that, however, the Prudential Norms of Reserve Bank of India do not deal with securitisation of assets and therefore Reserve Bank of India should issue directions / guidelines for securitisation of assets. He contended that for the first time the Parliament has enacted a law which deals with securitisation of assets. But reserve Bank of India has not issued any guidelines in this regard. Mr. Mullick next contended that although the impugned NPA Act, 2002 came into force with effect from 21st June 2002, till today, the Sick Industrial companies Act, 1985 has not been repealed, but the said Act, 1985 has become redundant as the references pending before the BIFR abate and therefore, the very object of the said Act, 1985 fails. He, therefore, submitted that section 5 and section 9 of the impugned NPA Act, 2002 are ultra-virus petitioner's fundamental rights under Article 14 and Article 19 (l) (g) of the Constitution of India' mr. M. C. Pandey, learned Advocate for the petitioner in Writ Petition nos. 362 of 2003, 363 of 2003 and 498 of 2003 submitted that section 13 of the impugned NPA Act, 2002 gives wide and arbitrary powers to the bank manager to pick and choose certain borrowers for action under the impugned NPA Act, 2002. He contended that the normal procedure for recovery of loans by banks and financial institutions is contemplated by DRT Act, 1993. He submitted that the impugned NPA Act, 2002 provides for summary procedure. He submitted that under the DRT act, 1993 the borrower can file a counter-claim; that he can challenge the claim of the bank / financial institution by way of defence, whereas, under the impugned NPA Act, 2002 the bank manager classifies an asset as non-performing asset unilaterally and thereafter he invokes the said act, 2002 and it is left for the borrower to go in appeal before the Tribunal and challenge only the action of the secured creditor in taking possession and that the borrower cannot challenge his liability as ascertained by the bank / financial institutions. He, therefore, submitted that there is no guidance provided under the Act as to in which cases the drt Act 1993 will be invoked and in which cases the impugned NPA act, 2002 will be invoked. He further submitted that in certain cases the secured property is a residential house, which cannot be attached and sold in view of section 60 CPC. He, therefore, submits that section 13 is ultra-virus petitioner's fundamental rights under Article 14 and 19 (l) (g)of the Constitution of India. Mr. Bansal, learned Advocate for the petitioner in Writ Petition No. 925 of 2003 submitted that under section 36 of the impugned NPA Act, 2002 no secured creditor is entitled to invoke section 13 (4) of the impugned NPA Act, 2002 unless his claim in respect of financial asset comes within the period of limitation specified under the Limitation Act, 1963. Mr. Bansal contended that it is left to the bank officers to decide whether the bank's claim is within limitation or beyond limitation. He contends that under section 13 (4) the asset of the borrower can be taken and disposed of even if the bank's claim is time barred. He, therefore, submitted that the impugned Act, 2002 does not provide for any machinery of adjudication and summary powers are given to the bank manager to seize the property of the borrower and sell the same. He, therefore, contended that section 13 (4) of the impugned NPA Act, 2002 is bad in law and violative of rules of natural justice and it also violates petitioner's fundamental rights under Article 14 and Article 19 (l) (g) of the Constitution of India. Mr. Bansal further contended that notice under section 13 (2) is given to the petitioner in writ petition No. 925 of 2003. That the petitioner is a guarantor. That the bank has instituted proceedings under the DRT Act, 1993 against the principal borrowers and pending those proceedings, notice under section 13 (2) is given to the guarantor, which is derogatory to the provisions of DRT Act, 1993. He contended that under section 37 of the impugned NPA Act, 2002, application of other laws like Companies Act; Securities Contract Regulation Act, 1956; SEB1 Act, 1992 and DRT Act, 1993 are not barred provided that the provisions of the impugned NPA Act, 2002 is in addition to those acts and not in derogation to those Acts. He contended that the giving of notice by the bank to the guarantors under section 13 (2) of the impugned NPA Act, 2002 is derogatory to the powers of Debt Recovery tribunal under the DRT Act, 1993. He, therefore, submitted that the action of the bank should be struck down. He, therefore, submitted that notice under section 13 (2) of the impugned NPA Act, 2002 should be struck down. Mr. Arvind Vashishth, learned Advocate for the petitioner in writ Petition Nos. 766 of 2003 and 1046 of 2003 adopted the arguments of mr. Dhulia, learned Advocate for the petitioner in main petition. He further submitted that the petitioner in writ petition No. 1046 of 2003 and writ petition No. 766 of 2003 are guarantors and notice under section 13 (2) of the impugned NPA Act, 2002 is directed against the resdential house of the guarantor which is not permitted under the provisions of section 31 (g) of the impugned NPA Act, 2002.