2010 Supreme(SC) 936

IN THE SUPREME COURT OF INDIA
S. H. Kapadia, CJI., Swatanter Kumar, J.
ICICI Bank Limited-Appellant(s)
versus
Official Liquidator of APS Star Industries Ltd. & Ors.-Respondent(s)
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No.8393 OF 2010
Civil Appeal Nos.8394-8406 of 2010 (@ SLP(C) Nos. 2241-2253/09),
Civil Appeal Nos.8407-8425 of 2010 (@ SLP(C) Nos. 2254-2272/09),
Civil Appeal No.8426 of 2010 (@ SLP(C) No. 25151/09),
Civil Appeal No.8427 of 2010 (@ SLP(C) No. 20617/09).
(Arising out of S.L.P.(C) No. 2240 of 2009)
Decided on : September 30, 2010.

Headnote:(a) Banking Regulation Act, 1949 – Section 6(1)(a) r/w Section 6(1)(n) – Business of banking – Section 6 empowers RBI to develop a healthy secondary market, by allowing banks inter se to deal in NPAs in order to clean their balance sheets – Only test is whether trading in NPAs is a bona fide banking business – Instantly, RBI authorising banks to deal inter se in NPAs u/s 21 and 35A – RBI guidelines have statutory force of law – Therefore, it cannot be said that assignment of debts/NPAs is not an activity permissible under the Act. (Para 13, 14)

       (b) Banking Regulation Act, 1949 – Section 21 r/w Section 35A and RBI guidelines 2005 – To manage and regulate NPAs, not to eliminate them – Aims at restructuring NPAs – Provisions of Transfer of Property Act has no application. (Para 15, 16)

       (c) Banking Regulation Act, 1949 – Section 21 and 35A – Assignment of debt and trading in debt – Two different things – Distinction to be kept in mind – Debt is an asset which can always be transferred – The On transfer of debt with underlying security by assignor bank, borrower(s) ceases to be its borrower(s) – They becomes the borrower(s) of assignee bank – Only Account Receivables in the books of assignor being transferred to assignee bank – Obligations of assignor bank towards its borrower(s) (customer) under the loan agreement secured by deed of hypothecation/mortgage not assigned – Deed of Assignment valid. (Para 18, 21)

       (1963) 3 SCR 183 – Relied upon

       (1998) Q.B. 22 (CA) – Referred

       Facts of the case:

       The question arising in this batch of cases is “whether inter se transfer of Non Performing Assets ("NPA") by banks is illegal under Banking Regulation Act, 1949?

       On 31.3.2006 a Deed of Assignment was executed between Kotak Mahindra Bank Ltd. as assignee (Applicant) on one hand and ICICI Bank Ltd. as assignor. The recitals in the Deed show that ICICI Bank, in the course of its business, had granted various credit facilities to various borrowers (clients). These facilities are evidenced by various Financial Instruments executed by the borrowers and/or their respective guarantors/pledgers. In the recitals, it has been stipulated that ICICI Bank Ltd. as assignor was the absolute and beneficial owner of Financial Instruments and receivables thereunder. An aggregate of Rs. 52.45 crores being the principal amount outstanding under the trade credit facilities was due and payable by the borrowers to ICICI Bank Ltd. (assignee). The assignor had agreed to sell and assign to the assignee, Kotak Mahindra Bank Ltd., all debts together with interest on "as is where is" basis. Kotak Mahindra Bank Ltd., in turn, agreed to acquire the said debts on "as is where is" basis. In consideration of Kotak Mahindra Bank Ltd. paying the purchase price to ICICI Bank Ltd. for purchase of the debts, the assignor agreed to assign absolutely unto the assignee on "as is where is" basis, without the assignee having any recourse to the assignor. Consequently, Kotak Mahindra Bank Ltd., assignee, became the full and absolute legal owner of the debts and as such the only person legally entitled to receive the repayments of debts.

       One of the borrowers of ICICI Bank Ltd. at the relevant time was M/s A.P.S. Star Industries Ltd., a company which subsequently went under liquidation. By way of Company Application in the pending winding up proceedings before the Company Court, Kotak Mahindra Bank Ltd. moved Company Application for being substituted in place of original secured creditor, ICICI Bank Ltd. This was pursuant to the Deed of Assignment dated 31.3.2006. The Company Court came to the conclusion that the impugned Deed was not presented in terms of Section 21 and also that the impugned Deed did not meet the requirement of the said section. On the acquisition of rights by Kotak Mahindra Bank Ltd., the Company Court, however, held that the claimed rights were not acquired by the assignee, Kotak Mahindra Bank Ltd., through the process known in law and therefore they cannot be permitted to be substituted in place of ICICI Bank Ltd. as secured creditor of the company in liquidation.

       The Division Bench upheld the order of the Company Court only on the ground that assignment of debts by banks is not an activity which is permissible under the BR Act, 1949 and consequently the impugned Deed(s) was illegal and the assignee bank(s) was not entitled to substitution in place of ICICI Bank Ltd. (assignor).

       Finding of the Court:

       Impugned judgment(s) deserve to be set aside on the question of assignment of debts as an activity permissible under the Banking Regulation Act, 1949.

       Result:

       Appeals allowed except remitting the matters to the Division Bench of the High Court(s) for consideration of other issues raised in this batch of cases.