IMPORTANT POINT
Amended definition of expression “NPA” under Section 2(1)(o) of SARFAESI Act, 2002 is constitutionally valid.

Headnote:(A) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002—Section 2(1)(o) (As amended by Act 30 of 2004)—Classification of account as NPA—Constitutional validity of Section 2(1)(o)—Amended definition of expression “NPA” under Section 2(1)(o) of Act is constitutionally valid—All NPAs do not belong to same class—Their characters vary depending on length of time for which they remained NPAs—Function of prescribing norms for classifying a borrower’s account as a NPA is not an essential legislative function—Stipulation under the Act of classifying account of borrower as NPA as a condition precedent for enforcing security interest is an additional obligation imposed by the Act on creditor—Parliament is only stipulating that expression “NPA” must be understood by all creditors in same sense in which such expression is understood by expert body i.e., RBI or other Regulators which are in turn subject to supervision of RBI—Submission that amendment of definition of expression ‘non-performing asset’ under Section 2(1) (o) is bad on account of excessive delegation of essential legislative function, is untenable and is required to be rejected. (Paras 45, 46, 66 and 76)
(B) Interpretation of Statute—Definition of expressions—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—But if a statute does not contain definition of a particular expression employed in it, it becomes duty of courts to expound meaning of undefined expressions in accordance with well established rules of statutory interpretation. (Para 65)
Result : Appeals of borrowers dismissed and appeals of creditors allowed.

JUDGMENT

Chelameswar, J.—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. 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, charge, hypothecation, assignment other than those specified in section 31; created in favour of a ‘CREDITOR’

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IMPORTANT POINTAmended definition of expression “NPA” under Section 2(1)(o) of SARFAESI Act, 2002 is constitutionally valid.

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IMPORTANT POINT
Amended definition of expression “NPA” under Section 2(1)(o) of SARFAESI Act, 2002 is constitutionally valid.