SC upholds amended definition of Non-Performing Assets in the SARFAESI Act [Read the Judgment]

SC upholds amended definition of Non-Performing Assets in the SARFAESI Act [Read the Judgment]

In a judgment delivered on 28th January, an apex Court bench comprising of Justice J. Chelameswar and Justice S.A. Bobde upheld the 2004 amendment of the SARFAESI Act.

The Amendment of 2004 had amended the definition of Non-Performing Assets (NPA). This amended definition was the subject matter of dispute. This amended definition was challenged in various High Courts. Gujarat High Court had declared the amendment unconstitutional in April 2014. While Madras High Court rejected the challenge in May.

Prior to its amendment, NPA was defined as ‘an account of a borrower which has been classified’ by a creditor either ‘as a sub-standard asset or a doubtful asset or a loss asset’ of the creditor and such a classification is required to be made in accordance with the directions or guidelines relating to assets classification issued by the Reserve Bank.

But, under the amended definition, such a classification of the account of a borrower by the creditor is required to be made in accordance with the directions or guidelines issued by an “authority or body either established or constituted or appointed by any law for the time being in force”, in all those cases where the creditor is either administered or regulated by such an authority. If the creditor is not administered or regulated by any such regulator then the creditor is required to classify the account of a borrower as NPA in accordance with the guidelines and directions issued by the Reserve Bank of India.

In other words, by the amendment, the Parliament made it possible that different sets of guidelines made by different bodies may be followed by different creditors depending upon the fact as to who is the administering or regulating authority of such creditor.

Justifying the amendment, the Bench observed, “To make any attempt to define the expression ‘non-performing asset’ valid for the millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of creditors for all time to come would not only be an impracticable task but could also simply paralyze the entire banking system thereby producing results which are counterproductive to the object and the purpose sought to be achieved by the Act. Realizing the same, the Parliament left it to the Reserve Bank of India and other regulators to prescribe guidelines from time to time in this regard.”

The Bench hence opined that it is not necessary that legislature should define every expression it employs in a statute. “If such a process is insisted upon,” it said, “legislative activity and consequentially governance comes to a standstill.”

Therefore, in their opinion, the function of prescribing the norms for classifying a borrower’s account as a NPA is not an essential legislative function.

“If the Parliament chose to define a particular expression by providing that the expression shall have the same meaning as is assigned to such an expression by a body which is an expert in the field covered by the statute and more familiar with the subject matter of the legislation, in our opinion, the same does not amount to any delegation of the legislative powers,” it added.

Finally, commenting upon the decision of the Gujarat High Court which had recorded the amendment as unconstitutional reasoning that it was ultra vires the object of the Act, the Court observed that if the enactment is otherwise within the constitutionally permissible limits, the fact that there is a divergence between the objects appended to the Bill and the tenor of the Act, cannot be a ground for declaring the law unconstitutional.

The SARFAESI Act was preceded by three Committee Reports – two headed by Mr. M. Narasimham (Ex. Governor, Reserve Bank of India) and the third by Mr. T.R. Andhyarujina (Senior Advocate, Supreme Court of India).

The constitutional validity of the Act was examined by this Court in Mardia Chemicals Ltd. & Others v. Union of India & Others, (2004) 4 SCC 311. This Court upheld the constitutionality of the Act except that of Section 17(2).

Read the Judgment here.