IMPORTANT POINTS
To give a rigid definition of NPA for all time to come is impracticable task. Such definition would paralyse the entire banking system thereby producing results counterproductive to object and the purpose sought to be achieved by the Act.
The question whether essential legislative functions can be delegated not yet settled and requires further examination. The question left open.
Defining every expression employed in a statute is not necessary. It is the duty of court to expound the meaning of the expression not defined in Act.
Section 2(1)(o) does not suffer from the vice of excessive delegation.
Section 2(1)(o) is not violative of Article 14 of Constitution.
Section 13(3A) is not violative of Article 14 of Constitution.
Divergence between Statement of objects and tenor of the Act cannot be a ground for declaring the law unconstitutional.

Headnote:(a) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 13 – On the pre-conditions having been fulfilled creditor may issue notice – Notice to include u/s 13(3) details of amount payable by borrower including debt classified by creditor as NPA – On non-discharge of liabilities within sixty days of notice creditor becomes entitled to take steps u/s 13(4). (Para 8)
       (b) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Validity – Constitutional validity of the Act already upheld except section 17(2) – Section 17(2) was declared ultra vires by (2004) 4 SCC 311 – Power of Creditors to classify borrower’s account as NPA, held not excessive delegation – Can be done only by following guidelines issued by RBI. (Para 11, 12)
       (2004) 4 SCC 311 – Followed
       (c) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 2(1)(o) as amended by Act 30 of 2004 – Different Creditors may follow different sets of guidelines made by different bodies administering or regulating them. (Para 19, 20)
       (d) Words and Phrases – Loan – Has a well-settled connotation – Advancing of money by one person to another under an agreement by which the recipient of the money agrees to repay the amount on such agreed terms with regard to the time of repayment and the liability to pay interest. (Para 37)
       (e) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 2(1)(o) and 13(2) – NPA – Installment of money due from borrower becoming overdue – Length of period of such non-repayment determining the classification of financial assets from sub-standard to loss – Character of NPA varying depending upon length of time for which they remained NPA – Other factors also play determinative role – These include magnitude of the amount due and outstanding, reasons of default, the nature of the business of defaulting borrower, the overall prospects of the defaulter's business, and national and international market conditions relevant to the business of a defaulter. (Para 44, 45, 46)
       (f) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 2(1)(o) – Non Performing Assets (NPA) – To give a rigid definition for all time to come – Impracticable task – Also would paralyse the entire banking system thereby producing results counterproductive to object and the purpose sought to be achieved by the Act – That is why the task has been left to RBI and various regulators. (Para 49, 50)
       (2010) 10 SCC 1 – Relied upon
       (g) Interpretation of statute – Delegated legislation – Essential legislative functions – Whether can be delegated – Not yet settled – Requires further examination – Question left open. (Para 63)
       AIR 1951 SC 332; AIR 1967 SC 1480; AIR 1967 SC 1895; AIR 1968 SC 1232; (1975) 1 SCC 492; 1967 1 AC 141; 1878 (5) Ind App 178; AIR 1980 SC 350 – Referred
       (h) Interpretation of statute – Legislative function – Defining every expression employed in a statute – Not necessary – Defining certain words is the practice – Expression not defined in Act – Duty of court to expound the meaning. (Para 65)
       (i) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 2(1)(o) – NPA – Prescribing norms for classification of NPA – Laying down of such norms requiring constant and close monitoring of financial system – Norms so laid down may require a periodic revision – Not an essential legislative function – Section 2(1)(o) not suffering from vice of excessive delegation. (Para 66)
       (j) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 2(1)(o) – All creditors not forming a uniform/homogenous class – Innumerable differences – Nature of loans and terms different – Norms and guidelines for NPA – Enabling creditors to follow different norms – Not violative of Article 14 of Constitution. (Para 68, 71)
       (k) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Section 13(3A) – Obligating creditors to examine representation/objection of borrowers objectively – Provision further requiring creditors to communicate reasons for non-acceptance of such representation/objection – Provision not violative of Article 14 of Constitution. (Para 48, 73)
       (l) Interpretation of Statute – Statement of objects appended to the Bill – Is not voted by legislature – Divergence between Statement of objects and tenor of the Act – Cannot be a ground for declaring the law unconstitutional. (Para 74)
       Facts of the case:
       Validity of section 2(1)(o) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has been called in question in these batch of cases following conflicting judgments of Madras and Ahmadabad High Courts.
       Finding of the Court:
       The amended definition of the expression "NPA" under Section 2(1)(o) of the Act is constitutionally valid.
       Result: All petitions and appeals dismissed.

Judgement Key Points

Key Points: - The amended definition of "Non-Performing Asset" (NPA) under Section 2(1)(o) of the SARFAESI Act, 2002, and its constitutional validity to classify NPAs by different regulators/guidelines was upheld. (!) (!) (!) (!) (!) (!) - The Court held that defining every expression in a statute is not necessary; courts may expound undefined terms; delegation of norm-setting for NPA classification is not an essential legislative function. (!) (!) - RBI guidelines for asset classification and the role of regulators/authorities in classifying NPAs were recognized as permissible, with the amendment enabling different regulators to prescribe norms. (!) (!) (!) (!) - The Gujarat High Court’s concerns about class legislation and excessive delegation were rejected; the amended provision is valid, and diverging objects vs. tenor of the Act does not render it unconstitutional. (!) (!) (!) - The Act requires a creditor to classify a borrower’s account as NPA before invoking Section 13, and Section 13(3A) obligates consideration of borrower representations with reasons for non-acceptance. (!) (!) - The decision reiterates that Section 13(4) permits creditors to recover via possession/management transfer with safeguards and depends on classification as NPA and other factors. (!) (!) (!) - The judgment references Mardia Chemicals and confirms the constitutional validity of most Act provisions except previously ultra vires Section 17(2) in a related context, while upholding amended NPA definitions. (!) (!) (!) - Costs are awarded to creditors; petitions and appeals dismissed. (!)

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JUDGMENT

Chelameswar, J.

1. Leave granted in all the SLPs.

2. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (hereinafter referred to as the 'Act'), was made by the Parliament in the year 2002. The Statement of Objects and Reasons appended to the Act explained the purpose behind the enactment as follows:-

"There is no legal provision for facilitating securitization of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow place (sic pace) of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions."

The enactment was preceded by three Committee Reports - two headed by Mr. M. Narasimham [Ex. Governor, Reserve Bank of India] and the third by Mr. T.R. Andhyarujina [Senior Advocate, Supreme Court of India].

3. Recovery of money from a debtor by resorting to the filing of a suit takes painfully long time in this country, for various reasons [1.31 There has been a perception, and not without reason, that our legal system have not kept pace with measures of financial sector reform and indeed economic reforms more generally. As far as the banking sector is concerned, there is continuing need for an appropriate legal framework to help enforce contracts and protect the interests of secured creditors especially in bankruptcy proceedings. Some of our laws are outdated and legal procedures are cumbersome and time consuming. Even where Court decrees are obtained their enforcement has been marked by delays. Our experience with the Debt Recovery Tribunals has not been altogether satisfactory in view of the legal issues that have been raised. Our laws indeed seem marked by a basic asymmetry in their protection of creditors as distinct from borrowers which comes in the way of the proper and smooth functioning of banking and credit systems. [See: Introduction : The Issues, Report of the Committee on Banking Sector Reforms (April 1998), Ch.I page 6]. Huge amounts of money are lent by various banks and other financial institutions. Speedy recovery of the monies due to such institutions is an important element determining the efficiency not only of such institutions but also becomes an important factor for the financial health of the country.

4. In order to facilitate banks and financial institutions (hereinafter collectively referred to as "CREDITORS" for the sake of convenience) to speedily recover the monies due to them from the borrowers, Parliament made a law called 'The Recovery of Debts due to Banks and Financial Institutions Act, 1993' (51 of 1993) under which banks and financial institutions could approach a tribunal constituted under the said Act. It deals exclusively with the claims for the recovery of the monies due from the borrowers to the CREDITORS. Apart from creating such an exclusive forum, the Act also provided for a more simpler procedure for the adjudication of the legality of the claims brought before it by the CREDITOR and a procedure for speedy recovery of sums so adjudicated.

5. After a decade of working of the tribunals constituted under Act 51 of 1993, the Parliament felt that even machinery and procedure established under the Act 51 of 1993 is not able to produce the desired result of efficiently recovering monies from the borrowers. The Parliament, therefore, made the Act. The crux of the Act is that any 'security interest'[Section 2(zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, char

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2015 Supreme(SC) 64

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Cases Referred (8)