Seniors galore in Constitutionality of definition of ‘Non – Performing Assets’; Hearing progressing in the Supreme Court

Murali Krishnan

The Supreme Court is seized of another interesting issue – the Constitutionality of the definition of ‘Non – Performing Assets’ (NPAs) under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

A batch of petitions filed by various companies is being heard by a Division Bench of Justices Jasti Chelameswar and SA Bobde.

The companies have challenged the Constitutionality of Section 2 (1) (o) of the SARFAESI Act on that ground that it is violative of Article 14 of the Constitution. They have also challenged clause 2.1 of the Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances (Prudential Norms).

There are conflicting High Court judgments on the issue –   the Madras High Court and the Delhi High had upheld the legality of the impugned provisions while the Gujarat High Court had partly allowed the challenge.

The petitions in the Supreme Court include appeals against judgments of High Courts as well as writ petitions under Article 32 of the Constitution.

As per the definition of NPAs under Section 2 (1)(o) of the SARFAESI Act, the power to categorise an asset as an NPA is vested with different authorities. In case of a bank or financial institution which is administered or regulated by any statutory body, the power vests with that statutory body while with respect to any other banks or financial institution, such power is with the Reserve Bank of India (RBI). This differential treatment, according to the petitioners, is violative of Right to Equality under Article 14 of the Constitution.

Further, the challenge to clause 2.1 of the Prudential Norms is on the ground that it violates the law laid down by the Supreme Court in Mardia Chemicals v. Union of India [2004 (4) SCC 311]. In Mardia, the Supreme Court had prescribed 180 days as a reasonable period for an account to be declared as an NPA. However, in clause 2.1, RBI has prescribed 90 days as the period for declaring an account as an NPA.

The petitioners have also contended that definition of NPA under clause 2.1.2 of the Prudential Norms is arbitrary and unreasonable in that it is contrary to the definition of NPA under Section 2 (1)(o) of the parent Act, ie. SARFAESI Act.

The petition filed by one of the petitioners, Blue Bird Arts Manufacturing Limited, states that,

“The impugned RBI Guidelines is contrary to Section 2 [1](o) of the Act, in as much as while Section 2[1](o) of the Act defines NPA to mean those assets which has become substandard, doubtful or loss assets in accordance with RBI Guidelines, the RBI Guidelines defines Sub-standard Assets (para 4.1.1) as an asset which has remained NPA for a period of less than or equal to 12 months.  In other words, under the RBI guidelines an account can became NPA even without becoming a substandard assets. Here it is also pertinent to mention that the definition of NPA under the said guidelines (para 2.1.2) does not even refer to the aspect of the said assets becoming sub-standard, doubtful or loss assets.”

The hearing in the case is progressing. Senior lawyers, including Soli Sorabjee, Amit Sibal, V Giri, Vivek Tankha and Siddharth Luthra have appeared for different parties. Additional Solicitor General Tushar Mehta and Senior advocate BB Sawhney is representing the Central government. The following Senior lawyers have argued till date:



Additional Solicitor General Tushar Mehta, Sr. advocate BB Sawhney

Union of India

Sr. advocate Jaideep Gupta

Reserve Bank of India

Sr. advocate Siddharth Luthra

State Bank of India

Sr. advocate Soli Sorabjee

Fabtech Manufacturing Private Limited

Sr. advocate Amit Sibal

Deccan Chronicle Limited

Sr. advocate PB Majmudar

Pramukh Tiles Limited

Sr. advocate V Giri

Canara Bank

Sr. advocate Vivek Tankha

UCO Bank

The latest order in the matter is given below:

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