February 19, 2015
Constitutionality of the amended definition of NPA upheld
After a decade of working of the “The Recovery of Debts due to Banks and Financial Institutions Act, 1993” (“RDDBI Act”), it was felt that RDDBI Act was unable to achieve the desired result of efficiently recovering monies from the borrowers. This led to the enactment of “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” (“SARFAESI Act”) in the year 2002, with an attempt to revamp the slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. The SARFAESI Act provides the “Secured Creditor”, the right to enforce the security without the intervention of either the court or tribunal by following the procedure prescribed under Section 13 of the SARFAESI Act. Thereafter, the constitutional validity of SARFAESI Act was challenged in Mardia Chemicals Ltd. & Others v. Union of India & Others1 and the Supreme Court of India (“Supreme Court”) upheld the constitutional validity of SARFAESI Act save that of sub-section (2) of Section 17.2
Section 2(1) (o) of the SARFAESI Act defines “non-performing assets” (“NPA”) and the said definition came to be amended in 2004.3 The amended definition has been the bone of contention in various high courts across the country. While Gujarat High Court by a common judgment dated April 24, 2014 held that the amended Section 2 (1) (o) of the SARFAESI Act is unconstitutional, on the other hand, in another common judgment dated May 18, 2014, the Madras High Court rejected the challenge. Hence, aggrieved parties (i.e. borrowers or the secured creditors) filed various writ petitions invoking Article 32 of the Constitution before Supreme Court.
Recently, by a common judgment in Keshavlal Khemchand and Sons Pvt Ltd & Ors v. Union of India & Ors, the Supreme Court decided on the writ petitions and has upheld the constitutionality of the amended definition of NPA under the SARFAESI Act.
Definition of NPA
Brief proceedings before Madras High Court
Madras High Court rejected the submission that the amended definition suffers from the vires of excessive delegation on the following premises:
Brief proceedings before Gujarat High Court
Gujarat High Court (“Gujarat HC”) opined that the amended definition of the expression “NPA” creates two classes of borrowers and in this context, while one class of borrowers are governed by the guidelines issues by the RBI, the other class of borrowers are governed by the guidelines issued by different authorities4. Gujarat HC relying on the statement of objects and reasons of the SARFAESI Act, held that the Parliament deviated from the original aims and objects propounded by it. It also took note of the fact that Supreme Court in Mardia Chemicals repelled the attack on the original definition of a NPA on the ground that the creditors are bound by the policy guidelines issued by the RBI, and therefore, there is no possibility of the creditors arbitrarily or whimsically classifying the account of any borrower as a NPA. Accordingly, it was concluded that the deviation from the original objects and reasons would be violative of Article 14 of the Constitution of India.
The issue before Supreme Court was to test the constitutional validity of the definition of NPA. In particular, the Supreme Court examined the following aspects:
The Petitioner submitted that:
The Respondent submitted that:
Supreme Court upheld the amended definition of NPA considering the below mentioned aspects and analyzing them at length.
First, Supreme Court observed that if NPA is sought to be defined and holistically made applicable to millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of Creditors for all times to come, it would not only be an impracticable task but could also simply paralyse the entire banking system thereby producing results which are counter productive to the object and the purpose sought to be achieved by the SARFAESI Act. Realising the same, the Parliament left it to the RBI and other regulators to prescribe guidelines from time to time in this regard.
Second, the Supreme Court held that the function of prescribing norms for classifying a borrower’s account as a NPA is not an essential legislative function. According to Supreme Court, Parliament is only stipulating that the expression “NPA” must be understood by all the Creditors in the same sense in which such expression is understood by the expert body i.e., the RBI or other Regulators which are in turn is subject to the supervision of the RBI. Supreme Court held that the amended definition of NPA is not bad on account of excessive delegation of essential legislative function.
Third, Supreme Court held that it is not necessary that legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. Supreme Court observed that if a statute does not contain the definition of a particular expression employed in it, it becomes the duty of the courts to expound the meaning of the undefined expressions in accordance with the well-established rules of statutory interpretation.
Finally, Supreme Court held that as all the creditors do not form a uniform/homogenous class, and therefore by prescribing different norms for the identification of a NPA with reference to different creditors does not amount to unreasonable classification. According to Supreme Court, there are innumerable differences among the creditors based on the legal structure of the creditors’ organization, differences based upon the nature of the loan advanced by them, and differences based on the terms and conditions subject to which such loans or advances are made by each of those creditors, etc.
This is a landmark decision by the Supreme Court so far as it provides clarification on the conflicting approaches taken by various High Courts while deciding on the constitutional validity of the amended definition of NPA under the SARFAESI Act. The decision of the Supreme Court is well reasoned and based on the premise that there is a need for some amount of delegated legislation in the modern world considering the banking norms and guidelines laid down by various regulatory bodies for different class of creditors. Supreme Court`s analysis towards upholding the constitutional validity of the amended definition of NPA, while relying on the classification protected under Article 14 of the Constitution and principles of administrative law is appealing to say the least. More importantly, the Supreme Court has once again opined that the powers delegated to RBI for rule making are consistent with Section 21 and 35-A of the Banking Regulation Act, 1949.
– Alipak Banerjee, Payel Chatterjee & Pratibha Jain
You can direct your queries or comments to the authors
1 2004 4 SCC 311
2 Subsequently, Section 17 (2) was amended by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
3 The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004
4 Extract from Gujarat High Court Judgment: “23. Thus, borrowers are divided into two different classes; First, the borrowers in respect of the Banks and Financial Institutions which are administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force, and in those cases, it will be for that authority or body to frame the guidelines for asset classification and, secondly, the borrowers in respect of all other cases not covered by clause (a), and in respect of those cases, it will be in accordance with the directions or guidelines issued by the Reserve Bank for asset classification.
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