M/s.Signal Apparels Pvt. Ltd. & Ors. v. Canara Bank P.N.Road Branch & Ors.

W.P.No.5313 of 2010, viz. M/s.Signal Apparels Pvt. Ltd., commencedits production in the year 2002 and started availing creditfacilities from Canara Bank, Tiruppur, the first respondent.According to the petitioner, it has good track record of banking withthe first respondent-bank from 2002 till May, 2009. To the surpriseof the petitioner, the respondent-bank, by its recall notice dated31.12.2009, informed the petitioner that the liability mentionedtherein in their accounts were outstanding without any progress andtherefore, the company was advised to clear the liabilities in fullwith up-to-date interest within fifteen days from the date of thesaid notice. The petitioner was further informed that in the eventit failed to clear the liabilities on or before 15.01.2010, therespondent-bank would initiate appropriate steps for recoveryincluding legal measures. Even before the time for payment, viz.,15.01.2010, was expired, the respondent-bank issued notice dated04.01.2010 under Section 13(2) of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002, which is being challenged in this writ petition.2.The petitioner in W.P.No.5314 of 2010, M/s.Signal Export,Tiruppur, commenced its production in the year 2007 and it began toavail credit facilities from the very same first respondent-bank andit also had good track record of banking till May 2009. Thepetitioner was issued with a recall notice dated 31.12.2009 by therespondent-bank wherein the company had been directed to clear theliabilities on or before 15.01.2010. Even before the expiry of thetime, the respondent-bank issued the impugned notice dated 04.01.2010under Section 13(2) of the SARFAESI Act. 3.On receipt of the notices dated 04.01.2010, both the companiessubmitted their representations dated 02.03.2010 to the respondent-bank. M/s.Signal Apparels Pvt. Ltd., in their representation, hasstated that even after the receipt of the recall notice dated31.12.2009, they had proposed to pay a sum of Rs.20 lakhs on orbefore 26.03.2010, a further payment of Rs.135 lakhs on or before31.08.2010 and the balance payment in full and final settlement on orbefore 31.12.2010. Similarly, M/s.Signal Export, in theirrepresentation, has stated that they proposed to settle a sum of Rs.5lakhs on or before 8th March, 2010, a further sum of Rs.10 lakhs on orbefore 26.03.2010, a sum of Rs.15 lakhs on or before 31.08.2010 andthe balance amount in full and final settlement on or before 31stDecember, 2010. In those representations, both the companies hadspecifically stated that they maintain their banking relationship bykeeping a good track record and the enhanced limits sanctionedearlier were also renewed and extended from time to time. In spiteof that, the respondent-bank had issued the impugned notices. Inthese circumstances, the companies had approached this Courtquestioning the notices issued under Section 13 (2) of theSecuritisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002 (hereinafter referred as 'the Act') ascontrary to law on the grounds that the respondent-bank should nothave invoked the default clause by issuing notice under Section 13(2), that the Reserve Bank guidelines to identify an account as a https://hcservices.ecourts.gov.in/hcservices/ non-performing asset should have been followed and the petitionersshould have been informed prior to the accounts being treated as non-performing assets.4.We have heard Mr.R.Gowthama Narayanan, learned counselappearing for the petitioners and Mr.V.Adhivarahan, learned counselappearing for the first respondent-bank.5.Both the writ petitions raise a substantial question ofimportance as to how an account in respect of a debt could be treatedas a Non-Performing Asset (NPA) and the procedure to be adopted bythe Bank before such account could be declared as Non-PerformingAsset.6.The provision of Section 13(2) and 13(3) of the Act reads asunder:-"13.Enforcement of security interest. - (1) ..(2) Where any borrower, who is under a liability to asecured creditor under a security agreement, makes anydefault in repayment of secured debt or any instalmentthereof, and his account in respect of such debt isclassified by the secured creditor as non-performing asset,then, the secured creditor may require the borrower bynotice in writing to discharge in full his liabilities tothe secured creditor within sixty days from the date ofnotice failing which the secured creditor shall be entitledto exercise all or any of the rights under sub-section (4).(3) The notice referred to in sub-section (2) shall givedetails of the amount payable by the borrower and thesecured assets intended to be enforced by the securedcreditor in the event of non-payment of secured debts bythe borrower.By the above provision, the right of the banks/financial institutionsto resort to the provisions of the Act would arise only in the eventwhere any borrower, who is under liability to a secured creditorunder a security agreement, makes any default in payment of a secureddebt or any instalment thereof and his account in respect of suchdebt is classified by the secured creditor as non-performing asset.Therefore, from a careful reading of the above provisions, thefollowing evantualities can be culled out, viz.,(i)there must be a debt by a borrower from a securedcreditor under a security agreement;(ii)there must be a default in repayment of secured debt orany instalment thereof by the borrower;(iii)the borrower's account in respect of such debt isclassified by the secured creditor as 'non-performingasset'; https://hcservices.ecourts.gov.in/hcservices/ (iv)a notice in writing should be issued by the securedcreditor to the borrower to discharge in full hisliabilities within sixty days from the date of thenotice;(v)in terms of sub-section (3) of section 13, the noticeshall also give details of the amount payable by theborrower and the secured assets intended to be enforcedby the secured creditor.7.At the time when Section 13(2) of the Act was considered bythe Supreme Court in Mardia Chemicals Ltd. v. Union of India,(2004) 4 SCC 311, there was no specific provision contemplating anyopportunity for the borrower to make any objection or representationto the notice issued under Section 13(2) of the Act. When theprovision of Section 13(2) was considered by the Apex Court, it wasobserved that it was necessary that the borrowers should have remedyto ventilate their grievance by submitting a reply explaining thereasons as to why measures may or may not be taken under sub-section(4) of section 13, in case of non-compliance of notice within sixtydays. That explanation must be considered by the secured creditor byapplying its mind and an internal mechanism must be evolved toconsider such objections raised in the reply notice. 8.Based on the above observation of the Apex Court, sub-section(3A) of Section 13 was inserted by the Enforcement of SecurityInterest and Recovery of Debts Laws (Amendment) Act, 2004, witheffect from 11.11.2004. By that newly inserted provision, a borroweris made entitled to make a representation or objection to the securedcreditor on receipt of notice under sub-section (2) of Section 13 andthe secured creditor shall consider such representation or objectionand if the secured creditor comes to the conclusion that suchrepresentation or objection is not acceptable or tenable, he shallcommunicate within one week of receipt of such representation orobjection, the reasons for non-acceptance of the representation orobjection to the borrower. By that provision, a right is conferredon the borrower to make a representation or objection to the noticeunder sub-section (2) of Section 13 and a corresponding duty upon thesecured creditor to communicate the conclusion if such representationor objection is not acceptable or tenable. In the event, nocommunication is received by the borrower within a week from the dateof receipt of the representation or objection, it could be consideredthat the secured creditor had accepted such representation orobjection and would not proceed further pursuant to the notice undersub-section (3) of Section 13. In the event, the conclusion that therepresentation or objection is not acceptable or tenable iscommunicated, that communication is only for the purpose of bringingthe same to the notice of the borrower and the borrower has no rightto question such conclusion at that stage. This law has been laid https://hcservices.ecourts.gov.in/hcservices/ down by a Division Bench of this Court in the judgment reported inAIR 2007 Madras 173 (Industrial Development Bank of India Ltd.,Chennai v. M/s.Kamaldeep Synthetics Ltd.). 9.In the event of failure by the borrower to discharge in fullthe liabilities within sixty days from the date of the notice and therepresentation or the objection, if any made, was not accepted by thesecured creditor and a communication of the conclusion was also madeto the borrower, then the secured creditor may take recourse to oneor more of the following measures in terms of Section 13(4) of theAct:-(a)take possession of the secured assets of the borrowerincluding the right to transfer by way of lease,assignment or sale for realising the secured asset;(b)take over the management of the business of the borrowerincluding the right to transfer by way of lease,assignment or sale for realising the secured asset;(c)appoint any person to manage the secured assets thepossession of which has been taken over by the securedcreditor; and(d)require at any time by notice in writing, any person whohas acquired any of the secured assets from the borrowerand from whom any money is due or may become due to theborrower, to pay the secured creditor, so much of themoney as is sufficient to pay the secured debt.The secured creditor may also approach the Chief MetropolitanMagistrate / District Magistrate for assistance in taking possessionof the secured assets as provided under section 14 of the Act. Thepowers of Chief Metropolitan Magistrate or District Magistrate areonly ministerial and the orders of such judicial officers passed inexercise of the provision of section 14 shall not be called inquestion in any Court or before any authority meaning thereby thatthe said order is not amenable to appeal under section 17 of the Act.The scope of powers by the Chief Metropolitan Magistrate/JudicialMagistrate under Section 14 is very limited in the sense that theofficers should satisfy as to whether secured asset falls within histerritorial jurisdiction and whether notice under Section 13(2) isgiven or not.10.In the wake of the above provisions, where the borrower hasonly an opportunity to make representation or objection in terms ofsub-section 3A of section 13 and even such representation orobjection is not accepted by the secured creditor, the borrower hasno option to challenge the same and the secured creditor, in theevent of failure of the borrower to comply with the notice underSection 13(2), can resort to the provision of Section 13(4) fortaking possession and the right to make any appeal in exercise of thepower under Section 17 would be available to the borrower only afterthe proceedings under Section 13(4) and that power of appeal is alsodenied in the event the secured creditor straight away approaches theChief Metropolitan Magistrate or District Magistrate under section https://hcservices.ecourts.gov.in/hcservices/ 14, strict compliance of provision of section 13(2) assumesimportance which is mandatory.11.Section 2(o) defines "non-performing asset" as hereunder:"non-performing asset" means an asset or account of aborrower, which has been classified by a bank or financialinstitution as sub-standard, doubtful or loss asset, -(a)in case such bank of financial institution isadministered or regulated by any authority or bodyestablished, constituted or appointed by any law for thetime being in force, in accordance with the directionsor guidelines relating to assets classifications issuedby such authority or body;(b)in any other case, in accordance with the directions orguidelines relating to assets classifications issued bythe Reserve Bank."Non-performing Asset" means that an asset or account of a borrower,which does not either generate income from the bank on actualrealisation basis or ceases to generate the said income. In anothersense, non-performing asset means an asset or account of a borrowerwhich has been classified by a bank or financial institution as sub-standard, doubtful or loss asset. In order to declare an asset oraccount to be a non-performing asset, the secured creditor mustsatisfy itself that such asset is not effectively producing income onactual realisation and consequentially, such asset or account couldbe declared as sub-standard, doubtful or loss asset. Though theprovisions of Section 2(o) defines non-performing asset, no set ofprocedures are contemplated under that provision or under any otherprovisions of the Act enabling the banks or financial institutions tofollow the same before declaring such asset or account as non-performing asset. However, that provision contemplates that in case,a bank or financial institution is administered or regulated by anyauthority or body established, constituted or appointed by any law,then the declaration must be in accordance with the directions orguidelines relating to assets classifications issued by suchauthority or body. In all other cases, the bank or financialinstitution should follow the directions or guidelines relating tothe assets classifications issued by the Reserve Bank. 12.In Mardia Chemicals' case, referred supra, the Apex Court,while dealing with the rights of the secured creditor to declare adebt as non-performing asset, has held in paragraph 44 as follows:-"44. As a matter of fact, the Narasimhan Committee alsoadvocates for a legal framework which may clearly definethe rights and liabilities of the parties to the contractand provisions of speedy resolution of disputes, which is asine qua non for efficient trade and commerce, especiallyfor financial intermediation. Even the guidelines ofReserve Bank of India in relation to classifying NPAs, https://hcservices.ecourts.gov.in/hcservices/ while stressing the need of expeditious steps in taking adecision for classifying and identification of NPAs says, asystem be evolved which should ensure that the doubts inasset classification are settled through specified internalchannels within the time specified in the guidelines. It isthus clear that while recommending speedier steps forrecovery of the debts it is envisaged by all concerned thatwithin the legal framework, such provisions may becontained which may curtail the delays. Nonetheless, duesor disputes regarding classification of NPAs should beconsidered and resolved by some internal mechanism. In ourview, the above position suggests the safeguards for aborrower, before a secured asset is classified as NPA. Ifthere is any difficulty or any objection pointed out by theborrower by means of some appropriate internal mechanism itmust be expeditiously resolved."Subsequently, the Apex Court in M/s.Transcore v. Union of India, AIR2007 SC 712, in paragraph 45, has once again reiterated as follows:-"45.Therefore, when Section 13(4) talks about takingpossession of the secured assets or management of thebusiness of the borrower, it is because a right is createdby the borrower in favour of the bank/FI when he takes aloan secured by pledge, hypothecation, mortgage or charge.For example, when a company takes a loan and pledges itsfinancial asset, it is the duty of that company to see thatthe margin between what the company borrows and the extentto which the loan is covered by the value of the financialasset hypothecated is retained. If the borrower companydoes not repay, becomes a defaulter and does not keep upthe value of the financial asset which depletes then theborrower fails in its obligation which results in a mis-match between the asset and the liability in the books ofthe bank/FI. Therefore, Sections 5 and 9 talks ofacquisition of the secured interest so that the balancesheet of the bank/FI remains clean. Same applies toimmovable property charged or mortgaged to th \e bank/FI.These are some of the factors which the Authorised Officerof the bank/FI has to keep in mind when he gives noticeunder Section 13(2) of the NPA Act. Hence, equity exists inthe bank/FI and not in the borrower. Therefore, apart fromobligation to repay, the borrower undertakes to keep themargin and the value of the securities hypothecated so thatthere is no mis-match between the asset-liability in thebooks of the bank/FI. This obligation is different anddistinct from the obligation to repay. It is the formerobligation of the borrower which attracts the provisions ofNPA Act which seeks to enforce it by measures mentioned inSection 13(4) of NPA Act, which measures are notcontemplated by DRT Act and, therefore, it is wrong to saythat the two Acts provide parallel remedies as held by thejudgment of the High Court in M/s.Kalyani Sales Co. (AIR2006 P&H 107). As stated, the remedy under DRT Act falls https://hcservices.ecourts.gov.in/hcservices/ short as compared to NPA Act which refers to acquisitionand assignment of the receivables to the assetreconstruction company and which authorizes banks/FIs totake possession or to take over management which is notthere in the DRT Act. It is for this reason that NPA Act istreated as an additional remedy (Section 37), which is notinconsistent with the DRT Act."The Apex Court in Mardia Chemicals' case, has stressed that theguidelines of the Reserve Bank of India in relation to classifyingnon-performing asset should be followed by the secured creditor andhas also observed that a system be evolved in order to ensure thatthe doubts in asset classification are to be settled throughspecified internal channels within the time specified in theguidelines. Our attention is not drawn as to whether such internalmechanism is evolved so far to resolve such a dispute.13.Again, in Mardia Chemicals' case, while considering the rightsof the banks or financial institutions and to follow the Reserve Bankguidelines issued through a circular dated 30.08.2001 by the banksbefore declaring a debt as "non-performing asset", the Apex Court hadobserved in paragraph 37 as follows:-37.Next we come to the question as to whether it is onwhims and fancies of the financial institutions to classifythe assets as non-performing assets, as canvassed beforeus. We find it not to be so. As a matter of fact apolicy has been laid down by the Reserve Bank of Indiaproviding guidelines in the matter for declaring an assetto be a non-performing asset known as "RBI's prudentialnorms on income recognition, asset classification andprovisioning - pertaining to advances" through a Circulardated August 30, 2001. It is mentioned in the saidCircular as follows :"1.1 In line with the international practices and as perthe recommendations made by the Committee on theFinancial System (Chairman Shri M.Narasimham), theReserve Bank of India has introduced, in a phasedmanner, prudential norms for income recognition, assetclassification and provisioning for the advancesportfolio of the banks so as to move towards greaterconsistency and transparency in the published accounts."2.1 Non-performing Assets:"2.1.1 An asset, including a leased asset, becomes non-performing when it ceases to generate income for thebank. A 'non-performing asset' (NPA) was defined as acredit facility in respect of which the interest and/orinstalment of principal has remained 'past due' for aspecified period of time. The specified period was https://hcservices.ecourts.gov.in/hcservices/ reduced in a phased manner as under:Year ending March 31Specified period1993four quarters1994three quarters1995 onwardstwo quarters2.1.2 An amount due under any credit facility is treatedas "past due" when it has not been paid within 30 daysfrom the due date. Due to the improvements in thepayment and settlement systems, recovery climate,upgradation of technology in the banking system, etc.,it was decided to dispense with 'past due' concept, witheffect from March 31, 2001. Accordingly, as from thatdate, a Non-performing Asset (NPA) shall be an advancewhere(i)interest and/or installment of principalremain overdue for a period of more than 180 days inrespect of a Term Loan,(ii)the account remains 'out of order' for aperiod of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC),(iii)the bill remains overdue for a period of morethan 180 days in the case of bills purchased and discounted,(iv)interest and/or installment of principalremains overdue for two harvest seasons but for a periodnot exceeding two half years in the case of an advance granted for agriculturalpurposes, and (v)any amount to be received remains overdue fora period of more than 180 days in respect of otheraccounts.4.2.2 Banks should establish appropriate internalsystems to eliminate the tendency to delay or postponethe identification of NPAs, especially in respect ofhigh value accounts. The banks may fix a minimum cutoff point to decide what would constitute a high valueaccount depending upon their respective business levels.The cut off point should be valid for the entireaccounting year. Responsibility and validation levelsfor ensuring proper asset classification may be fixed bythe banks. The system should ensure that doubts inasset classification due to any reason are settledthrough specified internal channels within one monthfrom the date on which the account would have beenclassified as NPA as per extant guidelines."From what is quoted above, it is quite evident thatguidelines as laid down by the Reserve Bank of India whichare in more details but not necessary to be reproducedhere, laying down the terms and conditions andcircumstances in which the debt is to be classified as non- https://hcservices.ecourts.gov.in/hcservices/ performing asset as early as possible. Therefore, we findno substance in the submission made on behalf of thepetitioners that there are no guidelines for treating thedebt as a non-performing asset."14.The Apex Court has held in categorical terms that there mustbe transparency in the conclusion arrived by the secured creditor andfor such transparency, the guidelines of the Reserve Bank of Indialay down the terms and conditions and circumstances in which the debtis to be classified as non-performing asset as early as possible.The Reserve Bank of India has come up with revised guidelines dated01.07.2009 and they read as under:-3. ASSET CLASSIFICATION3.1 Classification3.1.1 Banks should classify their assets into thefollowing broad groups. (i)Standard Assets (ii)Sub-standard Assets (iii)Doubtful Assets (iv)Loss Assets3.2 Definitions3.2.1 Standard AssetsStandard Asset is one which does not disclose anyproblems and which does not carry more thannormal risk attached to the business. Such anasset should not be an NPA.3.2.2Sub-standard Assets(i)With effect from March 31, 2005 an asset wouldbe classified as sub-standard if it remainedNPA for a period less than or equal to 12months. In such cases, the current net worthof the borrowers/guarantors or the currentmarket value of the security charged is notenough to ensure recovery of the dues to thebanks in full. In other words, such assetswill have well defined credit weaknesses thatjeopardies the liquidation of the debt and arecharacterised by the distinct possibility thatthe banks will sustain some loss, ifdeficiencies are not corrected.(ii)An asset where the terms of the loanagreement regarding interest and principalhave been re-negotiated or rescheduled aftercommencement of production, should beclassified for at least 12 months ofsatisfactory performance under the re-negotiated or rescheduled terms. In otherwords, the classification of an asset shouldnot be upgraded merely as a result ofrescheduling, unless there is satisfactorycompliance of this condition. https://hcservices.ecourts.gov.in/hcservices/

3.2.3Doubtful AssetsWith effect from March 31, 2005, an asset isrequired to be classified as doubtful, if it hasremained NPA for more than 12 months. For Tier Ibanks, the 12-month period of classification of asubstandard asset in doubtful category iseffective from April 1, 2009. As in the case ofsub-standard assets, rescheduling does notentitle the bank to upgrade the quality of anadvance automatically. A loan classified asdoubtful has all the weaknesses inherent as thatclassified as sub-standard, with the addedcharacteristic that the weaknesses makecollection or liquidation in full, on the basisof currently known facts, conditions and values,highly questionable and improbable.Note: Consequent to change in assetclassification norms w.e.f. March 31, 2005 banksare permitted to phase the consequent additionalprovisioning over a five year period commencingfrom the year ended March 31, 2005, with aminimum of 10% of the required provision in eachof the first two years and the balance in equalinstalments over the subsequent three years.3.2.4Loss AssetsA loss asset is one where loss has beenidentified by the bank or internal or externalauditors or by the Co-operation Department or bythe Reserve Bank of India inspection but theamount has not been written off, wholly orpartly. In other words, such an asset isconsidered un-collectible and of such littlevalue that its continuance as a bankable asset isnot warranted although there may be some salvageor recovery value.3.3.Guidelines for Classification of Assets3.3.1Basic Considerations(i)Broadly speaking, classification of assetsinto above categories should be done takinginto account the degree of well defined creditweaknesses and extent of dependence oncollateral security for realisation of dues.(ii)In respect of accounts where there arepotential threats to recovery on account oferosion in the value of security and existenceof other factors such as, frauds committed byborrowers, it will not be prudent for thebanks to classify them first as sub-standardand then as doubtful after expiry of 12 monthsfrom the date the account has become NPA. Suchaccounts should be straight away classified asdoubtful asset or loss asset, as appropriate, https://hcservices.ecourts.gov.in/hcservices/ irrespective of the period for which it hasremained as NPA.3.3.2Advances Granted under Rehabilitation PackagesApproved by BIFR/Term Lending Institutions(i)Banks are not permitted to upgrade theclassification of any advance in respect ofwhich the terms have been re-negotiated unlessthe package of re-negotiated terms has workedsatisfactorily for a period of one year. Whilethe existing credit facilities sanctioned to aunit under rehabilitation packages approved byBIFR/term lending institutions will continueto be classified as sub-standard or doubtfulas the case may be in respect of additionalfacilities sanctioned under the rehabilitationpackages the income recognition and assetclassification norms will become applicableafter a period of one year from the date ofdisbursement.(ii)A similar relaxation be made in respect ofSSI units which are identified as sick bybanks themselves and where rehabilitationpackages/nursing programmes have been drawn bythe banks themselves or under consortiumarrangements.3.3.3Internal System for Classification of Assets asNPA(i)Banks should establish appropriate internalsystems to eliminate the tendency to delay orpostpone the identification of NPAs,especially in respect of high value accounts.The banks may fix a minimum cut-off point todecide what would constitute a high valueaccount depending upon their respectivebusiness levels. The cut-off point should bevalid for the entire accounting year.(ii)Responsibility and validation levels forensuring proper asset classification may befixed by the bank.(iii)The system should ensure that doubts inasset classification due to any reason aresettled through specified internal channelswithin one month from the date on which theaccount would have been classified as NPA asper extant guidelines.(iv)RBI would continue to identify thedivergences arising due to non-compliance, forfixing accountability. Where there is wilfulnon-compliance by the official responsible forclassification and is well documented, RBIwould initiate deterrent action includingimposition of monetary penalties. https://hcservices.ecourts.gov.in/hcservices/

15.The decision of the secured creditor should not be arbitrary,since such decision would necessarily lead to drastic consequences,especially when the borrower has no right to question the noticeunder Section 13(2) except a right to make representation orobjection. While considering an asset of a borrower to be declaredas non-performing asset, a secured creditor should act judiciallysupported by materials and there must be transparency in arriving atsuch decision. In that sense, the bank must strictly follow thedirections or guidelines relating to the asset classification issuedby the Reserve Bank of India from time to time. The Apex Court inthe judgment rendered in Sardar Associates v. Punjab & Sind Bank,reported in [2009 (2) DRTC 409 (SC)], has held that the Reserve Bankof India is a statutory authority and it exercises supervisory powersin the matter of functioning of the scheduled banks. The matterrelating to supervision of scheduled banks is also governed by theR.B.I. Act and for the enforcement of the aforementioned purpose, itis entitled to issue guidelines from time to time. With the aboveobservation, the Apex Court ultimately held that such guidelinesissued by the Reserve Bank of India is binding on the every bankingcompany. Hence, it is mandatory for the bank to strictly follow theguidelines or directions issued by the administering or regulatoryauthority of such bank or the Reserve Bank, as the case may be and abreach of such directions or guidelines would invalidate theclassification itself and can render illegal the further stepstowards securitisation or asset reconstruction.16.To put it precisely, for invocation of provision of Section 13(2) of the Act, the declaration of an asset or account to be a non-performing asset is a condition precedent. In the event suchdeclaration is not in accordance with the R.B.I. guidelines and theaccount of a borrower is a performing account, Section 13(2) may notbe pressed into service, as such account cannot be brought underSection 2(o) of the Act. Equally, going by the scheme of the Act,the discretion conferred on the bank to declare an asset to be a non-performing asset is in order to tackle the issue of increase of non-performing asset to high level. That is why, the legislature hadleft the discretion to the bank while declaring a debt as a non-performing asset, qualifying such bank to follow the directions orguidelines issued by the Reserve Bank of India while classifying theassets to be sub-standard, doubtful or loss assets to be known asnon-performing assets. This discretion is on national policy and allthat requires for the secured creditor is to exercise the discretionjudicially. In the wake of the right of the secured creditor todeclare a debt as a non-performing asset, to show the application ofmind for such declaration, it may indicate the reasons thereof in thenotice under Section 13(2) and the Section does not contemplate thatin all cases such reasons should be indicated in the notice. Theapplication of mind could be culled out from the materials that wereexisted on the date of such declaration.17.In the above legal background, it has to be now considered asto whether the declaration of the account of the borrower to be a https://hcservices.ecourts.gov.in/hcservices/ 'non-performing account' could be justified. It is the case of thepetitioners that when the recall notice dated 31.12.2009 was issued,the petitioners were given time to make payment till 15.01.2010.Even before the said time expired, the impugned demand notice dated04.01.2010 was issued. Even after the receipt of the recall notice,the petitioners were agreeable to make payment and in that sense, theaccount cannot be declared to be one of non-performing asset. Thissubmission of the petitioners cannot be accepted. It is true thatwhile the recall notice dated 31.12.2009 was issued, the petitionerswere granted time to clear the liability on or before 15.01.2010 andeven before that date, the impugned demand notice under Section 13(2)had been issued. Nevertheless, even in the recall notice, insofar asthe petitioner in W.P.No.5313 of 2010 is concerned, it has beenindicated that the limit was Rs.110 lakhs; on the other hand, theoverdue was Rs.200.02 lakhs. That was the reason why the bank hadcome to the conclusion that the account was a non-performing account.Even when the recall notice dated 31.12.2009 gave time to thepetitioner till 15.01.2010, there was no response from the petitionertill their reply dated 02.03.2010 was given. Even in the saidreply, all that the petitioner had stated that they are proposing tosettle the accounts by making a payment of Rs.20 lakhs on or before26.03.2010, a further sum of Rs.135 lakhs on or before 31.08.2010 andthe balance payment in full and final settlement on or before31.12.2010, showing that the account did not produce the income evenafter 15.01.2010. Similarly, the petitioner in W.P.No.5314 of 2010was informed in the recall notice that as against the limit of Rs.50lakhs, the overdue liability was Rs.116.45 lakhs. In response to thenotice under Section 13(2), all that the petitioner had replied on02.03.2010 that they are proposing to settle the accounts by making apayment of Rs.5 lakhs on or before 08.03.2010, a sum of Rs.10 lakhson or before 26.03.2010, a sum of Rs.15 lakhs on or before 31.08.2010and the balance payment in full and final settlement on or before31.12.2010.18.It is the further case of the respondent-bank in respect ofthe petitioner in W.P.No.5313 of 2010 that the credit facilitiestowards manufacture of hosiery garments and working capital limitswere first permitted during the year 2002 and was last renewed on23.07.2008 tenable till 22.07.2010. During the last renewal on23.07.2008, the following limits were permitted:Packing Credit:Rs.65 lacsForeign Bills Discounting Limit:Rs.45 lacsOn the other hand, the liabilities of the petitioner were,Packing Credit:Rs.88.70 lacsForeign Bills Discounting Limit:Rs.111.67 lacsCurrent Account Temporary Overdraft:Rs.4.06 lacs.It is the case of the respondent-bank that the overdue in theaccounts started from 15.12.2008, whereas the limits were madeavailable till 08.05.2009 and the petitioner did not submit stockstatements from July 2009 and the audited balance sheet as on https://hcservices.ecourts.gov.in/hcservices/

31.03.2009. Similarly, it is the contention of the bank inW.P.No.5314 of 2010 that the credit facilities towards manufacture ofhosiery garments and working capital limits were first permittedduring the year 2007 and was last renewed on 28.04.2008 tenable till27.04.2010. During the last renewal on 28.04.2008, the followinglimits were permitted:Packing Credit:Rs.25 lacsForeign Bills Discounting Limit:Rs.25 lacsOn the other hand, the liabilities of the petitioner were,Packing Credit:Rs.49.71 lacsForeign Bills Discounting Limit:Rs.60.08 lacsCurrent Account Temporary Overdraft:Rs.7.71 lacs.It is specifically stated that overdue in the accounts started from18.04.2008 whereas the limits were made available till 21.04.2009.The petitioner did not submit stock statement from July 2009 and theaudited balance sheet as on 31.03.2009. The debt of the borrower hadnot produced any income for the secured creditor for more than 180days and also there was default on the part of the borrower asprovided under Section 13(2). In the given case, non- payment ofdues availed is on credit facilities. In such situation, thepetitioners shall fall within the definition of 'borrower' as definedunder Section 2(f) of the Act and the credit facilities shall beconsidered to be overdues beyond the maximum period fixed in theR.B.I. guidelines.19.From the above statements, it cannot be said that the actionof the bank is either arbitrary or unreasonable in declaring theassets of the petitioners as non-performing assets. In view of theavailable materials placed before this Court, it would not be properto interfere with such discretion.20.For the above reason, we find no merit to interfere with theimpugned notice dated 04.01.2010. Accordingly, both the writpetitions are dismissed. No costs. Consequently, connected M.Ps.are also dismissed. Sd/- Asst. Registrar. /true copy/ Sub Asst. Registrar.sraTo1. The Authorised Officer- Chief Manager, Canara Bank, P.N.Road Branch, Sri Bagyalakshmi Complex, P.N.Road, Tirupur. https://hcservices.ecourts.gov.in/hcservices/

2. The General Manager, Reserve Bank of India, Banking Operations Department, Fort Glacis, Rajaji Salai, Chennai.+ 2 ccs to Mr.R.Gowthama Narayanan, SR 48543, 48544 2 ccs to Mr.V.Adhivarahan, SR 48340, 48341 Order in W.P.Nos.5313 and 5314 of 2010 MBS (CO)RH (12.7.10)