Allowed

Ms Agarwal Steels v. City Union Bank Limited

DRT10 Jun 2025SA/136/2024

Case brief

AI extract

What is this about?

The Debts Recovery Tribunal quashed the demand and possession notices issued by a bank under the SARFAESI Act. The court held that the bank failed to serve a prior notice for classifying the loan account as NPA as required by RBI guidelines, rendering subsequent actions vitiated.

What did the court decide?

Quashed the demand notice dated 10.10.2023 and the possession notice dated 09.01.2024.

Ms Agarwal Steels versus City Union Bank Limited — Company and Corporate | DRT (2025)

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IN THE DEBTS RECOVERY^{TRIBUNAL_ II} AT HYDERABAD

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DATED THIS THE TENTH^{DAY OF ]UNE, 2025}

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PRESENT: SH.^{RAMESHWARKOTHE, B.COM,,L'LB. (HONS.), M.A.} PRESIDING OFFICER

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SECURITISATION^{APPLICATION No. 136 OF 2024}

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Agarwal Steels Rep by its ProPrietor Yogesh Kumar^Agarwal Sy. No. 710 to⁷²⁵ 11-6-27/1/A SunshiP ComPound Balanagar, HYderabad Telangana-500 037.

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Yogesh Kumar Agarwal S/o L. N. Agarwal Aged about 48 Years Occ : Business, B-2-603/M/¹³ Road No.70, Banjara Hills Hydera bad, Tela nga^{na -j7.}

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.......Applicants.

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Versus

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City Union bank Credit Recovery and Management DePartment " Narayana", Ad min istrative Office 24-8, Gandhi Nagar Kumbakonam-612 001.

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M/s. Agarwal Global Steels^Ltd. Rep by its Director Laxmi Narayan Agarwal S/o Lat lagannath^Agarwal H. No. 5-4'33/4 Sterling Apartment Distillery Road, Ranigunj Secunderabad. OWorr,

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sA L3612O24

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3.	SriPraveen KumarAgarwal S/o L.N.Agarwat Age:49 years,Occ:Business B-2-603/M/14,RoadNo.70 BanjaraHi Ils, Hyderabad-34.
4.	SriLakshmi NarayanAgarwal S/o lateJagannath Agarwat Age:76years,Occ:Business B-2-603/M/14,RoadNo.10 BanjaraHiIls, Hyderabad-34.
5.	ReserveBankof India Main Building Shahid Bhagat Singh Marg Mumbai-400001. .....Respondents.

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Counsel for the Appticants : Mr. Raja Shekar Rao Salvaji. Counsel for Respondent No.1 : Ms. Ch. Laxmi Chaya. Counsel for Respondents 2 to 4: Mr. Abhay Singh. Respondent No.s : Exparte.

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-:ORDER:-

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The Applicant filed the present Securitisation Application u/s.17 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2OO2 (hereinafter referred to as "SARFAESI Act 2002") assailing demand notice dated 10.10,2023 and possession notice dated 09.01.2024 issued by the 1st respondent bank in respect of SA schedule properties.

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The case of the applicants, in brief, is that 2nd respondent Company had a running account with 1st respondent bank. The 2nd respondent's loan account became NpA. In order to tide over &ure

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sA L36/2024

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the crisis of 2nd respondent, 1't respondent bank sanctioned a Cash Credit limit of Rs.20,00,00,000/- (to be released in two tranches) in favour of 1't applicant which was to be adjusted against the dues of 2nd respondent Company. However, after release of Rs.10 crores and closure of loan account of 2nd respondent, 1tt respondent bank did not release the 2nd tranche of CC limit despite 1't applicant's requirements. Applicants availed overdraft facilities from HDFC Bank to meet their requirements. The ltt respondent in connivance with 3'd respondent is trying to build up pressure on the applicants in the form of withdrawal of his personal guarantee and security. Respondents 3 and 4 are the Directors of 2nd respondent Company. Despite 3'd respondent offered to redeem the property with an equivalent amount, 1tt respondent did not act upon. Applicants were diligent in servicing their loan account with 1't respondent bank. The l't respondent has not given any prior notice about the institution and contemplation of measures under the provisions of SARFAESI Act. Applicants are ready and willing to deposit the EMIs pending disposal of the SA. Applicants have not defaulted in paying instalments as per RBI guidelines as such classification of loan account as NPA is contrary to the^provisions of the RBI master circular. The^1st respondent bank issued recall notice dated 04.07.2023 which was duly replied on 17.07.2023. Applicants are following up with the 1st respondent bank towards excess interest and other charges amounting to Rs.30,72,310/-. As^per the demand notice issued u/s 13(2) dated 10.10.2023, the loan account was turned into NPA on 10.09.2023. Applicants issued a suitable reply to the notice u/s 13(2) and the respondent issued a reply taking a stand that the account was classified as NPf on the basis of M,.ru .,r"-*'a$-

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sA L3612024

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there being a threat of loss and the recoverability of loans in doubt in terms of RBI guidelines No.2.2.1. The value of collateral security being 130o/o of the loan amount, the plea of there being a threat of loss and doubt recoverability is wholly untenable. However, the 1't respondent basing on the illegal classification of NPA issued impugned notices u/s 13(2) and 13(4) of the SARFAESI Act without following due process of law. Applicants rely on the judgement of Hon,ble High Court of Punjab and Haryana at Chandigarh in Amar Alloys pvt. Ltd. vs. State Bank of India 2019 SCC Online p & H 571 : pLR (2019) 195 P & H 81, the judgement of Hon,ble Jharkhand High Court in M/s. Stan Commodities Pvt. Ltd., vs. punjab & Sind Bank 2008 SCC Online Jhar and the judgement of Hon,ble Supreme Court in SBI vs. Rajesh Agarwal (2023) 6 SCC 1 in support of their pleading as to the requirement of prior intimation before the account was classified as NpA.

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The 1st respondent bank filed reply statement denying any violation of the procedure laid under the SARFAESI Act and the Rules thereunder. The applicants have not placed the true facts before this Hon'ble Tribunal. It is not true that the OLCC was sanctioned for closure of the account of respondent No.2. The facts leading to the present case are that applicant No.1 represented by applicant No.2 availed OLCC limit of Rs.2000 lakhs on 31.03.2021 and 2nd applicant's wife Mrs. Ruchi Agarwal stood as co-obligant and respondent No.3 stood as guarantor/ mortgagor to the said credit facilities, As the applicants have deposited the title deeds of only two properties, the credit limit was restricted to Rs.1000 lakhs and balance limit of Rs.1OO0 lakhs was not released. Item No.1 of SA schedule property

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ffi,ou*

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sA L36/2O24

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belongs to 2nd applicant and item No.2 belongs to respondent No.3. The applicants started to route the business transactions through HDFC Bank and were only servicing the interest portion of the loan amount through OLCC account. The respondent bank issued recall notice dated 04.07.2023. As no payment was forthcoming despite recall notice dated 04.07.2023, the loan account was classified as NPA on 30.09.2023 as per RBI guidelines, followed by demand notice u/s 13(2) on 10.10.2023. Applicants raised objections to the demand notice on 27.LL.2023 and 1't respondent issued reply to the same vide letter dated 17.12.2023. Thereafter, respondent bank issued possession notice u/s 13(4) dated 09.0L.2024 which is under challenge in the present SA. The possession notice was served on the borrowers, affixed on the secured assets and published in New Indian Express and Andhra Jyothi Dailies on t2.01.2024.

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Respondents 2 to 4 filed reply statement submitting that applicants filed the present SA solely for the purpose of avoiding liability by making false allegations against the respondents 2 to 4. Applicant No.2, respondents 3, 4 and one Mrs. Ruchi Agarwal are the shareholders of the 2nd respondent company. Applicant No.2 and respondent No.3 are the sons of respondent No.4. Respondents 2 to 4 are nothing to do with the transactions between applicants and respondent No.1 bank. However, respondent No.3 has given the title documents belonging to his property to be returned within one year after closing the loan facilities or by substitute properties belonging to applicant No.2. SA No. 176 of 2024 filed by respondent No.3 and OA.927^of 2023 filed by the respondent No.1 are^pending adjudication before this Tribunal. Applicants suppressed-the^{fact relating to} /nAn' 117ffouL'

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the petition filed by them before the National Company^Law Tribunal against respondents 3 and 4 and its dismissal on 04.12.2023.

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Respondent No.5 was set exparte vide docket order dated t6.07.2024.

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Heard the arguments of learned counsel appearinq for the respondent No.1 bank. Right of advancing arguments by applicants and respondents 2 to 4 was set expate vide docket order dated 28.04.2025. Perused the written arguments^filed by the applicants and the 1't respondent bank and the^material placed on record.

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Learned counsel for the 1't respondent bank submits thatⁱⁿ terms of Clause II of the Sanction letter, the Bank can recall the loan amount at any time. As per the operational terms and conditions of sanction letter dated 30.03.2021, the^working capital facilities are to be repayable on demand and the^facilities are available for a^period of 12 months subject to^{review at} periodical intervals. Learned counsel would further submit that the applicants started routing the transactions through the account of HDFC Bank, failed to^provide substitute^propertyin place of security of 3'd respondent and that the turnover of the business between 26.06.2023 and 27.12.2023 was less than six times of the limit allowed. All these factors constitute threat of loss and recoverability of loan being in doubt. The applicants were put on notice by a letter dated 04.07.2023 demanding entire dues of Rs.10,08,87,827/-. Assuming but not admitting that the applicants' loan account not falling under the category of NPA, there is no denial of the fact that the respondent bank i%*,

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sA L36 I 2024

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has every right to recall the advance in view of the mortgaged asset being withdrawn by 3'd respondent mortgager and the diversion of business transactions through HDFC account.

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B. Now the points that arise for adjudication are: -

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i) Whether the Applicant made out any valid ground for quashing the demand nbtice dated 10.10.2023 ond possession notice dated 09.01 .2024 issued under sections I 3 (2) and l3(a) of Securitisation Act?

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ii) To what relie/?

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Point No,(i):

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The core issue raised by the applicants is classification of loan account as NPA on the theory of^6'threat of loss or doubtful recoverability" enunciated in para 2.2.t of RBI Circular dated 02.07.202t. For better appreciation, Para 2.2.L of the above referred RBI Circular is reproduced below:

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"2.2 Treatment of Accounts as NPAs:

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2.2. I Rec'orcl o.f' Recovery:

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(i) The treatment o/' un asset as |IPA should be ba.vetl on the record of recovery. Banks should not treat an advance as NPA merely due to existence of sorne deJiciencies which are o.f temporary in nature such us non-availability of adequate drawing power, balance outstunding exceeding the limil, non-submission qf stock statements and lhe non-renewul ofthe limits on the due dute, etc. l(here there is a threat of loss, or the recoverability ef the advancgs is in doubt, the asset .shoultl he trerrteil a,s xra.,"(fu;* :_-y __-g.v)

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sA 136/2024

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Learned counsel for the applicants relies on the settled legal position in judgement of Hon'ble High Court of Punjab and Haryana in Amar Alloys Pvt, Limiled vs. State Bank of India 2019 SCC Online P & H 571 decided on 17.05.2019 in support of his contention on the requirement of a prior notice before classifying a loan account as NPA. The 1't respondent bank has not placed any material evidencing issuance of a notice before the applicants' loan account was classified as NPA except claiming the recall notice dated 04.07.2023 to be the prior notice of classification.

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The preamble of guidelines notified by RBI Circular mentions that the prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks were introduced to reflect a bank's factual financial health in its balance sheet. The stand of respondent bank that by virtue of RBI guidelines, it is vested with an option to treat a particular account as NPA basing on the record of recovery as stipulated in 2.2 of the guidelines. The treatment of a particular account as NPA is the right of creditor bank and the borrower cannot question such a right.

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Further, learned counsel for the respondent bank would submit that since the applicant breached the terms and conditions annexed to the sanction letter dated 30.03.2021 as to (i) confining their entire dealings to the bank and (ii) they should not borrow from any other source ..... durirrg the currency of the advance, it would entitle the creditor bank to withdraw partially/ wholly or regulate such credit facility(ies) on the occurrence of any one of the said events.fu6.*

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It is an admitted fact that the interest was being serviced. As stated supra, the respondent has treated the loan account as NPA not on account of default in repayment but on account of 2.2.L of the RBI guidelines. As per the decision in the cited judgement, a prior notice before crassification of a loan account as NPA is a pre-requislte. Respondent bank has not placed on record compliance of this requirement. Hence, to this extent applicants have proved their contention that the respondent bank failed to serve a notice prior to crassification of roan account as NPA. Therefore, all further actions of respondent bank in issuing demand notice u/s 13(2) and possession notice u/s l3(4) of the SARFAESI Act are vitiated. Accordingly, applicants have made out a valid ground for setting aside the demand notice dated 10.10.2023 and possession notice dated 09.01.2024. Thus, the SA deserves to be allowed by quashing the demand notice dated 10.10.2023 and the possession notice dated 09,01.2024.

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Point No.(ii):

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