ICICI Bank Ltd v. Official Liquidator of
APS Star Industries Ltd & Ors.

Background

By a deed of assignment dated 31 March 2006, ICICI Bank assigned to Kotak Mahindra Bank, on an “as is where is” basis, debts owed to it by various borrowers. One of those borrowers, APS Star Industries Ltd, was in liquidation, and Kotak Mahindra Bank applied to the Company Court to be substituted in place of ICICI Bank as secured creditor. The borrowers objected and the Company Court refused substitution. A Division Bench of the Gujarat High Court upheld that refusal on a single ground — that assignment of debts by banks inter se is not an activity permissible under the Banking Regulation Act, 1949, so that the deeds of assignment were illegal — without examining the other questions raised. ICICI Bank and others appealed to the Supreme Court.

Issues

• Whether the Gujarat High Court was right in holding that assignment of debts by banks inter se is not an activity permissible under the Banking Regulation Act, 1949, so that all executed contracts of assignment of debts were illegal.
• Whether the High Court was right in holding that the assignee bank was not entitled to substitution in place of the original lender (assignor) in proceedings relating to companies in liquidation pending in the Company Court.

Judgment & Ratio

The Supreme Court (S.H. Kapadia, CJI, speaking for himself and Swatanter Kumar, J.) held that it cannot be said that “transfer of debts/NPAs” inter se between banks is an activity impermissible under the Banking Regulation Act, 1949. The Court read Section 6(1)(a) with Section 6(1)(n), and held that the RBI guidelines of 13 July 2005 on purchase/sale of non-performing financial assets, issued under Sections 21 and 35A, have statutory force and are to be read as a supplement to the Act. On the High Court’s “trading” reasoning, the Court held that the assignor bank “has never purchased the debt(s)”; in assigning debts with underlying security it is only transferring its own asset. Rejecting the borrowers’ argument under Section 130 of the Transfer of Property Act, 1882 that a novation was needed, the Court found that only the account receivable had been transferred, not the assignor bank’s obligations towards the borrowers, and that such a transfer “in no manner affects any right or interest of the borrower(s)”. The impugned judgments were set aside on the question of assignment of debts, and the matters were remitted to the High Court for consideration of the other issues, including the applicability of the Registration Act, 1908.

Significance for Banking & NPA Practice

This judgment is the leading authority that the transfer of debts, including NPAs, between banks is an activity permissible under the Banking Regulation Act, 1949. The Court observed that the Act empowers RBI “to develop a healthy secondary market, by allowing banks inter se to deal in NPAs”. Its reach should not be overstated: it concerned transfers between banks under RBI guidelines, and the Court said in terms that the SARFAESI Act, which enables specified entities to buy NPAs from banks, “has no relevance in this case”. Questions such as registration and stamping of a deed of assignment were not decided and were remitted to the High Court. The decision should be read alongside Sections 6, 21 and 35A of the Banking Regulation Act, 1949 and the RBI directions in force at the time of any transfer.

This case note is general legal information, not legal advice. The applicability of this judgment depends on the facts of each matter.