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High Court of Judicature at Madras
N. PAUL VASANTHAKUMAR & M.M. SUNDRESH, JJ.
M/s. Deccan Chronicles Holdings Limited, rep. by its Assistant General Manager, R. Guruprasad & Others
Versus
The Union of India, represented by its Joint Secretary, New Delhi & Others
Writ Petition Nos.5897, 5898, 7296 to 7299, 7390, 7653, 7654, 7806, 8090, 8091, 8457, 8458, 8593 to 8596, 8746, 8747, 8766, 8942, 8970, 9019, 9073, 9123, 9124, 9183, 9420, 9421, 9573, 9611, 9649, 9671, 9690, 9774, 9825, 10007, 10304, 10656, 10665, 10766, 11042, 11078, 11317, 11471 to 11474, 12318, 12462, 12506 & 12508 of 2014
Decided on: 08-05-2014
SARFAESI ACT - CONSTITUTIONALITY - SECTION 2(1)(O) - CLASSIFICATION OF ASSETS AS NON-PERFORMING ASSETS - RESERVE BANK OF INDIA'S GUIDELINES - VALIDITY - JUDICIAL REVIEW - ECONOMIC LEGISLATION - DELEGATED LEGISLATION - LEGISLATION BY REFERENCE - LEGALLY RECOVERABLE DEBT - MASTER CIRCULAR - VALIDITY - JUDICIAL DEFERENCE.
Fact of the Case:
Numerous petitions challenging the constitutionality of Section 2(1)(o) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and the guidelines issued by the Reserve Bank of India (RBI) pertaining to the classification of assets as "Non-Performing Assets" (NPAs). The petitioners, who had borrowed money from the respondent banks and failed to repay, faced proceedings under the SARFAESI Act after their assets were declared NPAs based on RBI guidelines.
Finding of the Court:
1. The RBI, as the central bank, has the role of maintaining, monitoring, improving, and developing the health of banking companies and banking in India. Its policies are essential for the stability and sound economic growth of the country. (Para 6) 2. The Banking Regulation Act, 1949, empowers the RBI to regulate banking activities and ensure the protection of depositors' interests. Sections 21 and 35A of the Act confer powers on the RBI to issue directions to banking companies in the public interest or banking policy. (Paras 9-10) 3. The RBI's prudential norms for asset classification, including the 90-day delinquency norm for NPAs, have been introduced over time and are based on international benchmarks. These norms are essential for the financial soundness of Indian banks. (Para 11) 4. The Master Circular issued by the RBI under Sections 21 and 35A of the Banking Regulation Act defines "Non-Performing Asset" and provides guidelines for asset classification. The Circular has statutory flavor as held by the Supreme Court in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Limited. (Paras 13-14) 5. Section 2(1)(o) of the SARFAESI Act defines "Non-Performing Asset" by adopting the definition from the RBI's guidelines. This adoption is valid as the RBI has the power to issue such guidelines, and the SARFAESI Act merely recognizes and utilizes this power for the purpose of recovery. (Paras 16-17) 6. The challenge to the constitutionality of Section 2(1)(o) is not maintainable as it has already been upheld by the Supreme Court in Mardia Chemicals Limited and others v. Union of India and others. The Supreme Court's decision is binding on the High Courts. (Para 19) 7. The impugned provisions do not involve delegated legislation or legislation by reference. The SARFAESI Act merely adopts the definition of "Non-Performing Asset" from the RBI's guidelines, which are issued under the RBI's statutory powers. (Paras 26-30) 8. The definition of "debt" in both the SARFAESI Act and the Recovery of Debts due to Banks and Financial Institutions Act, 1993, is exhaustive and includes interest as part of the debt. There is no need for a separate definition of "legally recoverable debt." (Para 36) 9. The RBI's Master Circular is valid as it is based on material factors and aims to create transparency, uniformity, stability, and protection of depositors' interests in the banking system. The Circular is not vague or arbitrary. (Para 37) 10. In reviewing economic legislation, courts should adopt a "dignified reluctance" and avoid substituting their judgment for that of expert bodies. Judicial deference is appropriate in such cases. (Para 39)
Issues: 1. Whether Section 2(1)(o) of the SARFAESI Act, which adopts the definition of "Non-Performing Asset" from the RBI's guidelines, is unconstitutional. 2. Whether the RBI's guidelines for asset classification, including the 90-day delinquency norm for NPAs, are valid. 3. Whether the Master Circular issued by the RBI under Sections 21 and 35A of the Banking Regulation Act is valid. 4. Whether the challenge to the constitutionality of Section 2(1)(o) is maintainable in light of the Supreme Court's decision in Mardia Chemicals Limited and others v. Union of India and others.
Ratio Decidendi: 1. The RBI has the power to issue guidelines for asset classification, including the definition of "Non-Performing Asset." (Para 10) 2. The SARFAESI Act merely adopts the definition of "Non-Performing Asset" from the RBI's guidelines, which are issued under the RBI's statutory powers. This adoption is valid as it is a recognition and utilization of the RBI's power for the purpose of recovery. (Paras 16-17) 3. The challenge to the constitutionality of Section 2(1)(o) is not maintainable as it has already been upheld by the Supreme Court in Mardia Chemicals Limited and others v. Union of India and others. The Supreme Court's decision is binding on the High Courts. (Para 19) 4. The impugned provisions do not involve delegated legislation or legislation by reference. The SARFAESI Act merely adopts the definition of "Non-Performing Asset" from the RBI's guidelines, which are issued under the RBI's statutory powers. (Paras 26-30) 5. The RBI's Master Circular is valid as it is based on material factors and aims to create transparency, uniformity, stability, and protection of depositors' interests in the banking system. The Circular is not vague or arbitrary. (Para 37) 6. In reviewing economic legislation, courts should adopt a "dignified reluctance" and avoid substituting their judgment for that of expert bodies. Judicial deference is appropriate in such cases. (Para 39)
Final Decision: The writ petitions challenging the constitutionality of Section 2(1)(o) of the SARFAESI Act and the RBI's guidelines for asset classification were dismissed. The connected miscellaneous petitions were also dismissed.
M.M. Sundresh, J.
1. The common thread that runs across all these cases is to the constitutionality of Section 2(1)(o) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (Act No.54 of 2002), (in short, “SARFAESI Act”) as well as the guidelines issued by the Reserve Bank of India pertaining to the classification of assets as “Non-Performing Assets.”
2. In all these cases, the petitioners have borrowed monies from the respective respondent Banks. They did not repay the amounts borrowed. Thereafter, the Banks initiated proceedings under the SARFAESI Act, 2002 after declaring the assets as "Non Performing Assets" in view of the guidelines issued by way of the Circular by the Reserve Bank of India.
3. Being a Court of record, we would like to record the earlier proceedings. The cases were heard at length before the other Bench in which one of us (M.M.Sundresh,J.) was a party. After conclusion of the arguments, the judgment was reserved. Thereafter, on the next working day, two memos have been filed by the counsels on behalf of two petitioners stating that the challenge made to the Circular was decided by the other learned judge sitting single and the matter requires a fresh hearing before some other Bench in which he may not be a party. Accordingly, the cases have been posted before us giving the pleasure of hearing the counsels once over by one of us, who was the party to the earlier Bench.
4. Heard Mr.AR.L.Sundaresan and Mr.N.V.Srinivasan, learned Senior Counsels and Mr..Anirudh Krishnan, Mr.K.Gowtham Kumar, Mr.N.Murali, Mr.S.V.Pravin Rathinam, Mr. S.Seshadri, Mr. A.V.Raja, Mr. E.Ramachandran, Mr. A.Swaminathan, Mr.V.Ayyadurai, Mr. S.N.Kirubanandam, Mr.Venkatesh Mohanraj, Mr.R.Kannan, Mr.S.Regu, Mr. A.Selvendran, Mr.V.Girish Kumar, Ms.Anuradha Balaji, Mr.R.Sugumaran, Mr.A.V.Arun, the learned counsels appearing for the petitioners and Mr.G.Masilamani, learned Additional Solicitor General, Mr.N.Ramesh and Mr.S.Ravichandran, learned Central Government Standing Counsels, Mr.G.Arul Murugan and Mr.S.Udayakumar, learned Additional Central Government Standing Counsels, Mr.T.Poornam, Mr.V.Karthik, Mr.F.B.Benjamin Goerge, Mr.V.Girishkumar, Mr.Om Prakash, Mr.G.R.Lakshmanan, Mr.S.R.Sumathy, Mr.M.LGanesh, Mr.Srinath Sridevan, Mr.T.Sundar Rajan, Mr.Shivakumar, Mr.S.Sethuraman and Mr.K.S.Viswanathan, learned counsel appearing for respondents. We have also perused at length the various documents filed, judgments relied upon as well as the provisions of enactments.
5. Since number of counsels made their submissions on behalf of both petitioners and the respondents, for the sake of brevity, we summarise the submissions as a whole instead of referring them individually.
6. Role of Reserve Bank of India:-
When a mission was sent by then British Government, which was wobbling in its last leg, not satisfied with the offers made, the father of the Nation has rejected the same by saying that the sleuth of measures offered would constitute a “post-dated cheque on a falling Bank”. Averting such a situation is precisely the role of the Reserve Bank of India in maintaining, monitoring, improving and developing health of the Banking Companies and Banking in India. A stable vibrant Banking system is a sine qua non of a country's economy. This important function has been bestowed upon the Reserve Bank of India as a Central Bank for the country, being the Bankers' Bank. The Reserve Bank of India is the monitoring regulator empowered to form the Banking policy. Such is the policy being evolved in the interest of Banking system, monetary stability and sound economic growth. The role of the Reserve Bank of India has been recognised by the Supreme Court in JOSEPH KARUVILLA VELLUKUNNEL VS. THE RESERVE BANK OF INDIA AND OTHERS, (AIR 1962 SC 1371), wherein it was held as under:
“13. The power conferred on the Reserve Bank, by the section is said to be had under Article 14, because it enables a discriminatio
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