M/S. G.R.Engineers vs. The Union Of INDIA And Another

Held

The Court held that the 2nd respondent bank committed a grave error in classifying the petitioner's loan accounts as NPA. The bank failed to correctly apply the RBI circular dated June 6, 2018, which allowed for a 180-day grace period for MSMEs before classifying their accounts as NPA. Instead, the bank relied on its Head Office's circular No.1903, dated June 6, 2018, which did not incorporate the extended period from the RBI circular. The Court found that the bank applied a 90-day norm, ignoring the 180-day norm mandated by the RBI circular. Consequently, the classification of the petitioner's Cash Credit account and term loan account as NPA was declared illegal, arbitrary, and violative of Article 14 of the Constitution and the RBI circular dated June 6, 2018. The Court set aside all actions taken by the bank under the SERFAESI Act, including the dispossession of the petitioner, and directed the bank to forthwith restore the petitioner's property possession.

Facts

The petitioner, a registered MSME, challenged the classification of its loan accounts as Non-Performing Assets (NPA) by the 2nd respondent bank. The bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SERFAESI Act), classifying the petitioner's accounts as NPA on February 6, 2019, and subsequently issuing a sale notice for its properties on December 16, 2019, leading to dispossession on November 13, 2019. The petitioner contended that Reserve Bank of India (RBI) circulars dated February 7, 2018, and June 6, 2018, which extended the period to classify loans as NPA for MSMEs to 180 days, were not correctly applied. The bank argued that the petitioner failed to pay regular installments and service interest, leading to the NPA classification. While initially regularized, the accounts were reclassified as NPA on December 31, 2018, due to non-servicing of interest for the quarter.

Key Issues

1. Whether the 2nd respondent bank correctly applied the Reserve Bank of India (RBI) circular dated June 6, 2018, regarding the classification of MSME loan accounts as NPA? Petitioner's arguments: The petitioner argued that the RBI circular dated June 6, 2018, which modified the earlier circular of February 7, 2018, extended the delinquency period for classifying MSME loans as NPA to 180 days. Therefore, the bank's action of classifying the petitioner's accounts as NPA based on a shorter period was illegal. They relied on the RBI circulars of February 7, 2018, and June 6, 2018. Revenue/State's arguments: The 2nd respondent bank contended that the petitioner did not pay regular installments and service interest, justifying the NPA classification. While acknowledging the RBI circulars, they argued that their internal circular (Circular No.1903, dated June 6, 2018) did not alter the terms of the February 7, 2018 circular and that the petitioner failed to meet the payment obligations for the quarter between October 1, 2018, and December 31, 2018. They claimed the petitioner only paid Rs.12,000/- during that quarter.