The NPA Act, 2002 is a special law dealing with enforcement of security interest, and it does not violate Articles 14 and 19(1)(g) of the Constitution. The Act provides adequate safeguards for borrowers, including the right to appeal and the right to compensation for wrongful seizure of property.

S.H. Kapadia, J.

1. By this writ petition, petitioner seeks to challenge the constitutional validity of The Securitisation & 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]

Background facts :

2. Extraordinary and urgent situations demand extraordinary 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 21st 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 & 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 loans 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 amount lent to the borrowers. Consequently, the assets came 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 asses 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 appointment from time-to-time, but such Receiver had no power to sell the assets pending the suits. Under the circumstances, the Non-performing Asset (NPA) Act, 2002 has been enacted.

Arguments :

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 Assets (NPA) Act, 2002. He, therefore, submitted that hearing should be provide 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 a