M/s Shiv Shankar Rice Mills v. The State Bank of Patiala, the Mall, Patiala, Punjab

Judgment

2. 3. Whether reporters of local newspapers may be allowed to see the judgment ? To be referred to the reporters or not? Whether the judgment should be reported in the digest? ****** K. Kannan, J .

1. To a non-performer who fails to return the credit availed from a financial institution as per the terms of contract, the law still allows to him a breather. A one time settlement (OTS) is a method of amelioration and save to a debtor at least one last straw on his own terms of what is still meaningful and acceptable to a financial institution. The CWP No.2945 of 2007(O&M) 2 right to enforce a one time settlement is the subject of controversy in this writ petition.

2. The State Bank of Patiala granted to the petitioner a credit limit of Rs.100-130 lacs with other contingency limit of Rs.135 lacs by way of term loans and cash credit facilities, on collateral securities of immovable properties offered by the petitioner. The credit limits could not have been without a definite time frame of payments but the petitioner went into trouble of not keeping with the terms of contract as regards repayment of the loans. The petitioner had originally filed CWP No. 13895 of 2003 in which this Court directed the respondent to consider the request of the petitioner for working out a mutually acceptable repayment programme. The Bank had its own reasons to the resort to the SARFAESI Act. The

petitioner again some time challenged the value made by the Bank and at the same time was pressing the financial institution to come to negotiating table with an offer of One Time Settlement. The Bank would have nothing of it and put the property for sale on 31.1.2004. Two properties had been auctioned for 1.65 crores. This brings us to the next phase of litigation.

3. The Reserve Bank of India had laid down non- discretionary, non-discriminatory and mandatory guidelines under the provisions of the Reserve Bank of India Act for involving Non Performing Assets action holders in a scheme of One Time Settlement. The petitioner had made his own application on 8.3.2005 and made again a claim for the application of the guidelines on 28.8.2006. The Bank hastened to reject the plea by its letter dated 24.4.2006 and proceeded to issue sale certificate to the purchaser of the property, M/s Sadhu Ram and Company. The petitioner had approached the High Court of Delhi and the Delhi High Court stayed dispossession subject to payment or Rs.1 crore by its order dated 5.10.2006 but ultimately the Court dismissed the petition as withdrawn for lack of territorial jurisdiction with liberty to approach this CWP No.2945 of 2007(O&M) 3 Court. The writ petition has come about in such a situation when the petitioner seeks for quashing the letter rejecting a plea for One Time Settlement by its letter dated 24.4.2006 and to set aside the auction sale and sale certificate issued on 29.9.2006.

4. Since the rejection of one time settlement and the subsequent confirmation of sale constitute the cause of action for the writ petition it becomes necessary to examine the reasons for the request as set out in the impugned letter. The impugned letter reads as follows:- “The guidelines of Reserve Bank of India for compromise settlement of chronic Non Performing Assets (NPA's) are for SMEs only where recoverable amount of NPAs classified as doubtful or loss as on 31st March, 2004 will be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPAs. Further, as per instructions contained in RBI leteter No. RBI 2005- 06/153/RPCD. PLNFS.BC. No.39/06.02.31/2—5-06 dated the 03.09.05, cases of willful default, fraud and malfeasance are not covered under One Time Settlement Scheme. In this regard, we inform you that your account is not eligible under the scheme due to malfeasance on your part and Bank has already lodged an FIR against all partners & guarantors of this firm at Safidon Police Station on 22.8.2003.”

5. From the letter it becomes clear that the application of One Time Settlement through the Reserve Bank of India letter excepts cases of willful default, fraud and malfeasance. The letter also adverts to the fact that has lodged FIR against partners and guarantors of the firm at Safidon Police Station on 22.8.2003. The issue whether a directive by Reserve Bank of India for affording to a borrower a proposal for one time settlement is mandatory or not was considered by the CWP No.2945 of 2007(O&M) 4 Hon'ble Supreme Court in a recent judgment in Sardar Associates and another Vs. Punjab and Sind Bank and others reported in III (2009) BC 705, the Hon'ble Supreme Court held that the guidelines issued by the Reserve Bank of India provide simplified, non-discretionary and non- discriminatory mechanism in SME Sector. Adverting to Section 21 of the Reserve Bank of India Act empowering the Reserve Bank of India to issue circulars and guidelines, the Supreme Court held that if a public sector Bank would be otherwise bound by any guidelines issued by the Reserve Bank of India Act there was no reason why the same could not be applied to the directives for One Time Settlement. It held that a Bank is a 'State' within the meaning of Article 12 of the Constitution amenable to jurisdiction of the Court, apart from the fact that it was bound to follow the guidelines issued by the Reserve Bank of India. In terms of Reserve Bank of India guidelines a right is created to a borrower and there was no reason why a writ of mandamus could not be issued. To a contra position was an earlier view of this Hon'ble Court in Knitex India Ltd. Vs. State Bank of Patiala in CWP No. 1152 of 2007 dated 30.10.2007 and it was also reaffirmed in yet another judgment in Punjab and Sind Bank Vs. Debt Recovery Tribunal in 2008 Vol.149 PLR 203 to the extent that the above said rules of the respective Division Benches that One Time Settlement lack statutory content and they do not confer any right on a borrower. They are no longer good law in view of the decision of the Hon'ble Supreme Court in Sardar Associates's case (supra).

6. If the petitioner has therefore a right to demand a One Time Settlement, it can be refused to be applied to the petitioner only on the exceptions provided by Reserve Bank of India guidelines itself. A borrower who is defaulter, is alone the person who will have an occasion to ask for one time settlement. A mere defaulter therefore cannot be excluded. It is absolutely necessary therefore that he should be treated as CWP No.2945 of 2007(O&M) 5 a 'willful defaulter'. Learned counsel appearing for the Bank therefore tried to defend its action by saying that the Reserve Bank of India had placed the petitioner at S.No.116 in the willful defaulter list circulated by Reserve Bank of India as on 31.12.2004 for actions with outstanding of Rs.25 lacs and above. In my view if a right is created to a borrower it could be withdrawn on certain conditions like a borrower being willful defaulter or of being guilty of malfeasance etc., since it has the effect of annulling the right, there must be transparent mechanism by which such an assessment is made so that a right guaranteed to a borrower is denied to him only for valid reasons. Even now, when there was specific challenge made that the refusal of the bank not to go to a negotiating table for OTS proposal, one would expect the bank to set out the parameters for taking a decision that person was a willful defaulter. No such explanation is given. We may note in this case that for an outstanding loan which was to the tune of Rs.1.5 crores at the time when auctions were being initiated for recovery by resort to SARFAESI, the petitioner had at all times been expressing willingness to repay the loan. In fact pursuant to a direction from the High Court of Delhi the petitioner had repaid Rs.1 crore in two installments of Rs.50 lacs each. The same way, yet another ground for not affording to the petitioner the benefit of OTS was purported to be on the ground that FIR was pending. The learned counsel for the petitioner contends that Inspector at Police Station Safidon had given a certificate that there was no case pending against the petitioner and no FIR was registered. Learned counsel appearing for the bank would contend that the Branch Manager had visited the premises of the petitioner when he would found that the stocks which had been stored had been found missing and a complaint had also been lodged on 30.8.2007. This was far beyond the time when a decision was taken to deny the OTS and I am only examining whether on the day when the impugned decision was taken on 24.2.2006, there was a CWP No.2945 of 2007(O&M) 6 basis for the bank to refuse the OTS. If there was willful default how such a conclusion came to be made the respondent Bank or how Reserve Bank of India listed the petitioner as a willful defaulter does not find an utterance anywhere. Similarly, if the petitioner denied the fact that there was any fraud or malfeasance on his part, a mere reference to alleged FIR which is denied even by the Police Station, Safidon cannot be the basis for denying the OTS.

7. The objection comes from another quarter as well, namely, of a third party purchaser who had bid at the auction already pursuant to the proceedings under SARFAESI and when the purchaser appears to have paid a huge sum of Rs.1.65 crores for purchase of two of the items. It must be noticed that the sale proceedings were pursued and the sale had been conducted, when there was a demand by the petitioner for the OTS scheme to be applied and when there was an offer by the petitioner to conform to the OTS and make repayment of the loan. The anxiety of the bank to press its rights through bringing the properties to sale could be easily seen and that is what the provisions of the SARFAESI enable the financial institutions do. However this right of a bank is not without its checks and balances. The amplitude of discretion available to a financial institution and how this power to recover the amount should be enforced was examined by the Hon'ble Supreme Court in Mardia Chemicals Ltd. And others Vs. Union of India (2004) 4 SCC 311 in para 71 of the judgment of the above case. The Supreme Court held as under :- The financial institutions namely the lender owe a duty to act fairly and good faith. There has to be fair dealing between the parties and the financial companies/ institutions are not free to ignore performance of their part of the obligation as the party to the contract. They cannot be free from it..... This is also the basic principle CWP No.2945 of 2007(O&M) 7 of the concept of lender's liability. It cannot be a one sided affair shutting all reasonable remedies to the other party, namely, borrowers and assume all drastic powers for speedier recovery of NPAs. Possessing more drastic powers calls for exercise of higher degree of good faith and fair play. The borrower cannot be left remediless in case they have been wronged against or subjected to unfair treatment violating the terms and conditions of the contract.” The petitioner had been complaining that the property could not be sold and when he was contending that the value of the properties as assessed by certified valuers and that associates were more than 4 lacs and when it was being contended that the properties had been deliberately undervalued the financial institution that has invoked the powers of recovery mechanism under the Enforcement of Security Rules ought to have secured the value of the property done through a valuer appointed by the Court. Normally if any person is aggrieved about the conduct of sale and valuation of the properties, he would have the remedy under the provisions of the SARFAESI Act itself. The existence of an alternative remedy would normally bar the jurisdiction of a Court under Article 226. Even this situation has not been without exceptions. The Hon'ble Supreme Court has carved out a niche to High Court's an arena of operation of Article 226 and 227 respectively when sufficient circumspection is undertaken to prevent its misuse and if interest of justice would require. To name but a few decisions on this subject, vide State of Tripura Vs. Manoranjan Chakraborty and others (2001) 10 SCC 740, Radha Raman Samanta Vs. Bank of India (2004) 1 SCC 605, Kamlakar Bhimrao Patil Vs. Maharashtra Industrial Development Corporation (2009) 2 SCC

655. The Supreme Court said in BCPP Mazdoor Sangh Vs. NTPC that CWP No.2945 of 2007(O&M) 8 alternative remedy itself is only a rule of discretion and not a rule of law. In this case, since the action of the bank was being pursued, in spite of a request of the petitioner to apply the OTS and even the confirmation was of sale was after the rejection of scheme for OTS, the decision whether the petitioner had a right to seek for its enforcement would itself lead to the answer whether the sale held should be upheld or not. If such a former decision is done only in the writ petitions a decision to set aside the sale cannot be caused initially thereof. The decision to set aside the sale could not have been undertaken in another forum. The decision to set aside the sale would be a corollary to a decision on the enforceability of right to demand the OTS.

8. I have already held that the rejection to OTS by the respondent bank was unjustified. The sale that has been held even without exhausting the OTS proposal cannot be stand. The person who has paid at auction and put the money with the bank cannot go without adequate relief. The bank has held its money and appropriated towards its own debt. The amount which it has held shall be repaid to the purchaser with the rate of interest applicable for the fixed deposit on a reinvestment scheme from the day when the amount was deposited with the bank till the date of repayment. The third party purchaser is being denied the right to the property which it had legitimately expected would be confirmed in its favour. The petitioner, as a person who has the benefit of annulment of the sale, shall pour 5% of the price at which the auction was concluded as a solatium to the purchaser on the same principle, as enunciated through the provisions of Order 21 Rule 87 CPC. The expenses for advertisement and sale of the property shall be borne out by the bank itself because the precipitate action for sale without exhausting an offer for OTS was unjustified and such expenses shall not be debited to the petitioner's account. CWP No.2945 of 2007(O&M) 9

9. The ultimate dispensation will therefore be that the impugned letter rejecting the offer for an OTS settlement dated

24.4.2005 is set aside. The auction sale and the sale certificate issued on

29.9.2006 are also set aside. The fifth respondent M/s Sadhu Ram and Company shall be entitled to be refunded the money appropriated by with the bank, with interest as aforesaid. The petitioner shall pay over and above the amount which the bank is liable to refund, an amount calculated at 5% of the price at which the property was sold under auction to the fifth respondent. The amounts shall be repaid within a period of four weeks from the date of receipt of certified copy of this order. If the amount is not paid by the petitioner within the time as aforesaid, the sale shall stand confirmed. The expenses for sale shall not be debited to the petitioner's account. The proposal already made for OTS shall be undertaken and after giving an opportunity to the petitioner to explain it proposals, the decision shall be taken on mutually agreed terms within a period of eight weeks from the date of receipt of certified copy of this order.

10. The writ petition is allowed on the above terms. February 5, 2010 archana (K. KANNAN) JUDGE