-: 2nd TUTORIAL: -

Subject
COMPARATIVE BANKING AND INSURANCE LAW
Submitted To
Ms. ADITEE GODBOLE
(Faculty of Comparative Banking and Insurance Law)

Submitted By

Teena Devendra Batra

LL.M. Student
Semester – I, Batch 2020-21
PRN No: 20010441010

Submitted on:
09th December, 2020

Symbiosis Law School | Nagpur

Mouza, Wathoda Layout, Nagpur, Maharashtra- 440008
 Page |1

CASE ANALYSIS

Supreme Court of India

KESHAVLAL KHEMCHAND AND SONS PRIVATE LIMITED &
OTHERS VERSUS UNION OF INDIA & OTHERS,2015

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

WRIT PETITION (CIVIL) NO. 901 OF 2014

Keshavlal Khemchand And Sons Private Limited

& Other
...Petitioner(s)
Versus

Union of India & Others.

...Respondent(s)
WITH

CIVIL APPEALS APPEAL NOS. 1230-1231 and 1233-1293 OF 2015

WRIT PETITION (CIVIL) NO. 902-905,907,925-926,937-940,945-948 OF

2014

KESHAVLAL KHEMCHAND AND SONS PRIVATE LIMITED & OTHERS VERSUS UNION
CASE NAME
OF INDIA & OTHERS

Court Before the Supreme Court of India

Decided on 28.01.2015

Bench Justice Jasti Chemlameshwar and Justice S.A. Bobde.

Author of the Justice Jasti Chemlameshwar

judgment

Abstract In the present case, in which the Hon’ble Supreme Court of India upheld the amended
definition of the expression NPA under section 2(1)(o) of the SRFAESI Act,2002 is
constitutionally valid

Author of the Teena D. Batra, Student at Symbiosis Law School, Nagpur.

brief

Keywords Non-Performing Assets, Essential Legislative Function, Delegated Legislation

 Page |2

FACTS OF THE CASE

 INTRODUCTION

This is a Landmark Case in which seventy petitions questioning

the legitimacy of the amended definition of Non-Performing Asset
(“NPA”) providing under section 2(1)(o) of SARFAESI Act, 2002.
Supreme Court supports the constitutional validity of modified
definition of "non-performing assets" under SARFAESI Act.
Supreme Court considers that the function of stipulating the
norms for classifying a NPA is not an essential legislative
function and as all creditors do not found a
uniform/homogenous class, so by imposing different norms for
the identification of a NPA with address to different creditors,
does not sum to unreasonable classification. Supreme Court
specifies much required explanation as there existed conflicting
verdicts by two different High Courts on the constitutional
legitimacy of the amended definition of NPA.

 BACKGROUND OF THE CASE

Section 2(1) (o) of the SARFAESI Act explains "non-performing

assets" ("NPA") and the said definition came to be revised in
2004.The amended definition has been the bone of debate in
various high courts across the country. Though Gujarat High
Court by a mutual verdict dated April 24, 2014 held that the
amended definition of Non-performing assets Section 2 (1) (o)
Section 2 (1) (o) of the SARFAESI Act is unconstitutional, then
yet again, in another common judgment dated May 18, 2014, the
Madras High Court discarded the challenge. Hence, aggrieved
parties (i.e. borrowers or the secured creditors) filed several writ
petitions appealing under Article 32 of the Constitution afore
 Page |3

Supreme Court. Again, by a common judgment in Keshavlal

Khemchand and Sons Pvt Ltd & Ors v. Union of India & Ors, the
Supreme Court make a decision seventy petitions questioning
the validity of the amended definition of Non-Performing Asset
(“NPA”) provided under section 2(1)(o) of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (the “Act”)and has upheld the constitutionality
of the revised definition of NPA under the SARFAESI Act.

Brief proceedings before Madras High Court

Madras High Court disallowed the submission that the amended

definition presents from the vires of excessive delegation on the
comprehending premises:

In the year 1992, Reserve Bank of India ("RBI") initiated the

practical norms of "income recognition, asset classification,
provisioning and other related matters" and such standards were
amended periodically possessing in mind many developments in
the banking system, equally nationally and internationally.
RBI in application of the statutory authority in Sections 21 and
35A of the Banking Regulation Act, 1949 recommends standards
for the several attributes of banking defined under the SARFAESI
Act. Parliament while defining a non-performing asset in Section
2 (1) (o) of the SARFAESI Act only implemented the standards
imposed from time to time by the RBI for the objective of
recognizing the NPA.

Brief proceedings before Gujarat High Court

Gujarat High Court ("Gujarat HC") pronounced that the amended

definition of the statement "NPA" initiates two classes of
borrowers and in this framework, although one class of
borrowers are regulated by the guideline’s issues by the RBI,
another class of borrowers are administrated by the guidelines
 Page |4

issued by different authorities. Gujarat HC depend on the

statement of objects and reasons of the SARFAESI Act,
apprehended that the Parliament diverged from the primary aims
and objects proposed by it. Furthermore, observe the fact that
Supreme Court in Mardia Chemicals resisted the attack on the
first definition of a NPA in the opinion that the creditors are
obliged by the policy guidelines declared by the RBI, and hence,
there is no probability of the creditors arbitrarily or whimsically
categorizing the account of any borrower as an NPA. Therefore, it
was concluded that the deviance from the primary objects and
reasons would be violative of Article 14 of the Constitution of
India.

 ISSUES INVOLVED
The issue afore the Supreme Court was to examine the constitutional
validity of the definition of NPA. In instance, the Supreme Court
observed the following aspects:

1) Whether by delegation the duty to an authority or body to

framework the guidelines for asset categorization in the
revised definition of NPA sums to delegation of essential
legislative function?
2) Whether the different norms for attaining at the definition
of NPA (in outcome the differentiation between two classes
of borrowers) sums to a violation of Article 14 of the
Constitution?

 Arguments Advanced
 
PETITIONER:

The Petitioner presented that:

1. Through sanctioning various bodies to frame guidelines for

categorizing borrower's account as "NPA", the same abdicated
 Page |5

Parliament's essential legislative function by constituting an

excessive delegation;
2. the un-amended Section 2(1)(o) of the SARFAESI Act provided a
uniform standard for classification of "NPA" by applying the
guidelines circulated by the RBI, while the amended provision
empowers different Creditors to implement different guidelines
stipulating different standards for NPA categorization. Such an
amendment is violative of Article 14 of the Constitution of India
as it sums to a class legislation prohibited by Article 14 of the
Constitution;
3. The SARFAESI Act acknowledges the possibility of acquisition of
a "financial asset" of a Creditor by any "securitization company"
or a "reconstruction company" initiating ambiguity in the
application of the guidelines suitable for classification of an
account of a borrower as a NPA and only depending on who the
current owner of such financial asset is when the proceedings
under Section 13 are pursued to be invoked.
4. The SARFAESI Act does not stipulate for a reasonable
opportunity to validate that the categorization of the borrower's
account as a NPA is untenable, the authority to make such a
classification itself turn out to be arbitrary and violative of Article
14 of the Constitution.

RESPONDENT:

The Respondent presented that:

1. The evaluation of an account of borrower as NPA is influenced by

countless factors which regularly keep changing, as an outcome
it was deemed fit that such assessment should be formulated in
light of the guidelines made either one by the RBI or many other
regulators regulating the actions of various creditors. There is
not any delegation of any essential legislative functions.
2. The classification of NPA to be formulated on the basis of the
guidelines framed by different bodies legalizing different creditors
is not constitutionally acceptable taking respective to the nature
 Page |6

of the different credit facilities enlarged by many creditors to

different categories of borrowers and on different terms and
conditions.
3. Even supposing that assets are attained either one by a
securitization company or a reconstruction company and hence
governed by guidelines other than those pronounced by the RBI,
it has not been demonstrated that such guidelines are less
advantageous to the borrowers than the guidelines prescribed by
RBI.

 JUDGMENT AND DECISION

Supreme Court upheld the revised definition of NPA taking into

consideration the below stated aspects and analyzing them at
length.
1. First, Supreme Court examined that if NPA is needed to be
defined and holistically made lawful to billions of cases of
loan transactions of numerous classifications of loans and
lent, advances or formulated by different categories of
Creditors for all generations to come, it would not only be
an impossible task but could also easily paralyses the
whole banking system in that way producing results which
are counterproductive to the object and the purpose
required to be achieved by the SARFAESI Act. Realizing the
same, the Parliament assigned it to the RBI and other
regulators to recommend guidelines from time to time in
this regard.
2. Second, the Supreme Court considered that the work of
recommending standards for categorizing a borrower's
account as a NPA is not an important legislative function.
According to Supreme Court, Parliament is solitary
instructing that the term "NPA" must be understood by all
the Creditors in the similar sense in which such term is
understood by the expert body i.e., the RBI or other
Regulators which are in turn is matter to the supervision of
 Page |7

the RBI. Supreme Court apprehended that the revised

definition of NPA is not bad on account of excessive
delegation of essential legislative function.
3. Third, Supreme Court held that it is not essential that
legislature should define each expression it employs in a
statute. If such a process is contended upon, legislative
activity and certainly governance comes to a standstill.
Supreme Court examined that if a statute does not
comprise the definition of a particular term employed in it,
it becomes the responsibility of the courts to explain the
meaning of the undefined terminologies in accord with the
well-established rules of statutory interpretation.
4. Lastly, Supreme Court observed that as all the creditors do
not form a consistent /homogenous class, and so by
recommending different norms for the identification of a
NPA with reference to different creditors does not sum to
unreasonable categorization. According to Supreme Court,
there are uncountable differences among the creditors
grounded on the legal structure of the creditors'
organization, differences founded upon the nature of the
loan advanced by them, and differences based on the terms
and conditions subject to which such loans or advances are
formulated by each of those creditors, etc.

 SIGNIFICANCE AND ANALYSIS OF THE VERDICT

This is a landmark decision by the Supreme Court so far as it gives
explanation on the contradictory approaches taken by many High
Courts while determining on the constitutional validity of the revised
definition of NPA under the SARFAESI Act. The decision of the
Supreme Court is well analyzed and based on the principle that there
is a need for some amount of delegated legislation in the contemporary
world in view of the banking norms and guidelines posed down by
several regulatory bodies for different class of creditors. Supreme
Court`s analysis towards upholding the constitutional validity of the
 Page |8

amended definition of NPA, while be dependent on the categorization

protected under Article 14 of the Constitution and principles of
administrative law is engaging to say the least. More importantly, the
Supreme Court has once more opined that the authorities delegated to
RBI for rule making are constant with Section 21 and 35-A of the
Banking Regulation Act, 1949.

 CONCLUSION
The Act was brought into the Indian legal regime having in mind the
fiscal health of the Nation and to hustle up the lethargic recovery
process, which to greater extent also suffered the impact of
incompetent legal machinery. Before an legal action is initiated by the
secured creditor, a secured creditor is under an obligation to assess
and as evaluate a borrower as defaulting borrower on numerous
factors as the degree of the amount unpaid and outstanding in a given
case, the causes which provoked the borrower to default in the
repayment schedule, the nature of the business carried on by the
defaulting borrower, the overall potentials of the defaulter’s business,
National And International market conditions pertinent to the
business of a defaulter. So, the essence of law herein is that afore an
action is finally taken, a good amount of logical and reasonable
consideration and reconsideration are to be accepted by the secured
creditor. On the other hand, what appears prevalent in practice is
somewhat very parallel to what the intent of law is in paper. The
preliminary steps of issue of demand notices and the answers to the
representations of the borrowers in many cases just do not appear to
come across as a rationalized decision of bank. It is many a times
comes as a hasty piece of hasty relating only to recovery. The essence
of law has to be revealed in action too to support the real intent of this
piece of legislation.
Page |9