Supreme Court of India
ICICI BANK LIMITEDversusOFFICIAL LIQUIDATOR OF APS STAR INDUSTRIES LTD. AND ORS.
- Citation
- 2010 INSC 663
- Decided
- 30 September 2010
- Disposal
- Appeal(s) allowed
- Bench
- S H KAPADIA
Holding
Inter‑bank assignment of debts, including NPAs, is permissible under the Banking Regulation Act, 1949 as it falls within the banking business authorized by RBI guidelines under sections 21 and 35A, and therefore the assignee bank may be substituted as the secured creditor.
Summary
ICICI Bank assigned a portfolio of non‑performing assets (NPAs) worth Rs 52.45 crore to Kotak Mahindra Bank under a deed of assignment. One of the borrowers, APS Star Industries Ltd., entered liquidation and Kotak sought to be substituted as the secured creditor in the winding‑up proceedings. The Company Court and the Gujarat High Court rejected the substitution, holding that inter‑bank assignment of debts is impermissible under the Banking Regulation Act, 1949. On appeal, the Supreme Court examined the Act’s provisions, especially sections 6, 8, 9, 21 and 35A, and the RBI’s 13 July 2005 guidelines, concluding that such assignments are a permissible banking activity within the scope of RBI policy. Consequently, the Court set aside the High Court judgment, held the deed of assignment valid, and allowed the assignee bank to be substituted as creditor, remitting the matter to the High Court for other issues. The appeals were allowed.
Issues considered
- Whether assignment of debts by banks inter se is an activity impermissible under the Banking Regulation Act, 1949, rendering such contracts illegal.
- Whether the assignee bank is entitled to substitution in place of the original lender in winding‑up proceedings before the Company Court.
Legislation cited
Subjects
Banking Regulation Actassignment of debtsnon‑performing assetsRBI guidelinesbanking policysection 6section 21section 35Ainter‑bank transfersubstitution of creditorwinding‑up proceedingscorporate insolvencyNPA restructuring
Judgment
[2010] 12 S.C.R. 644
A ICICI BANK LIMITED
V.
OFFICIAL LIQUIDATOR OF APS STAR INDUSTRIES LTD.
AND ORS.
(Civil Appeal No. 8393 of 2010)
B SEPTEMBER 30, 2010
[S.H. KAPADIA, CJI AND SWATANTER KUMAR, J.]
Banking Regulation Act, 1949 - Enactment of - Object
C and purpose - Discussed - Provisions of the Act analysed.
Banking Regulation Act, 1949 - ss.6, 8, 9, 21 and 35A
- RBI Guidelines dated 13th July, 2005 - Deed providing for
assignment of debts - Non-Performing Assets (NPAs) - Held:
Dealing in NPAs as part of the Credit Appraisal Mechanism
and as a part of Restructuring Mechanism falls within Section
21 rlw Section 35A of the Act - Hence, it cannot be said that
"transfer of debts!NPAs" inter se between banks is an activity
which is impermissible under the Act - Consequently, on
facts, the executed contracts of assignment of debts were not
illegal - The assignee bank was entitled to substitution in
place of the original lendor (assignor) in the pending winding
up proceedings before the Company Court relating to one of
the borrowers of the assignor - Contract - Deeds and
Documents - Deed of Assignment - Interpretation of Statutes
- New concepts - Relevance of
Banks/Banking - Role of Reserve Bank of India (RBI) -
Discussed.
A Deed of Assignment was executed between Kotak
Mahindra Bank Ltd. as assignee on one hand and ICICI
Bank Ltd. as assignor. The ICICI Bank, in the course of
its business, had granted various credit facilities to
various borrowers (clients). An aggregate of Rs. 52.45
644
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 645
APS STAR INDUSTRIES LTD.
crores being the principal amount outstanding under the A
trade credit facilities was due and payable by the
borrowers to ICICI Bank Ltd .. 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 B
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. c
One of the borrowers of ICICI Bank Ltd. was 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 the Company Court for being D
substituted in place of original secured creditor, ICICI
Bank Ltd. The secured creditor, ICICI Bank Ltd. admitted
the execution of the Deed of Assignment and supported
the substitution of Kotak Mahindra Bank Ltd. in the said
application. However, such substitution was objected by E
the borrowers, who contended that the deed of
assignment had not lawfully conveyed rights to the
assignee to step into the shoes of ICICI Bank Ltd.
(secured creditor).
F
The Company Court 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 G
liquidation. Aggrieved, the assignee, Kotak Mahindra
Bank Ltd. carried the matter in appeal to the Division
Bench of the High Court. 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
H
646 SUPREME COURT REPORTS [2010] 12 S.C.R.
A permissible under the Banking Regulation 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).
B In the instant appeal, the questions arising for
consideration were:- i) Whether assignment of debts by
banks inter se was not an activity permissible under the
1949 Act and consequently all executed contracts of
assignment of debts were illegal and ii) Whether the the
assignee bank (s) was not entitled to substitution in place
C of the original lendor (assignor) in proceedings relating
to companies in liquidation pending in the Company
Court.
Allowing the appeals, the Court
D
HELD:1. The Banking Regulation Act, 1949 provides
for the comprehensive definition of "banking" so as to
bring within its scope all institutions which receive
deposits for lending or investment and to give the
E Reserve Bank of India (RBI) a control over banking
companies. RBI is empowered to regulate the business
of the banking companies. It is empowered to lay down
conditions on which the banking companies will operate.
It is empowered to regulate paid-up capital, reserve fund,
cash fund and above all to lay down policies in the matter
F of advances to be made by the banking companies,
allocation of resources etc. While laying down such
policies under the said Act, RBI can lay down parameters
enabling banking companies to expand its business.
[Paras 12, 13] [681-F; 683-D-F]
G
2. Apart from the principal business of accepting
deposits and lending, the said 1949 Act leaves ample
scope for the banking companies to venture into new
businesses subject to such businesses being subject to
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 647
APS STAR INDUSTRIES LTD.
the control of the Regulator, viz. RBI. In other words, the A
1949 Act allows banking companies to undertake
activities and businesses as long as they do not attract
prohibitions and restrictions like those contained in
Sections 8 and 9. [Para 13] [683-G-H; 684-A-B]
B
3. Section 6(1)(n) of the 1949 Act enables a banking
company to do all things as are incidental or conducive
to promotion or advancement of the business of the
company. Section 6(1) enables banking companies to
carry on different types of businesses. Under Section 6(1 ),
these different types of businesses are in addition to C
business of banking, viz., core banking. The importance
of the words "in addition to" in Section 6(1) is that even
if different businesses under clauses (a) to (o) are shut
down, the company would still be a banking company as
long as it is in the core banking of accepting deposits and D
lending so that its main income is from the spread or what
is called as "interest income". Thus, the functions of the
banking company can be broadly categorized into two
parts, viz., core banking of accepting deposits and
lending and miscellaneous functions and services. E
Section 6 of the BR Act, 1949 provides for the form of
business in which banking companies may engage.
Thus, RBI is empowered to enact a. policy which would
enable banking companies to engage in activities in
addition to core banking and in the process it defines as F
to what constitutes "banking business". [Para 13] [684-
C-E]
4. In the cases in hand, one is not concerned with the
definition of banking but with what constitutes "banking G
business". The BR Act, 1949 is an open-ended Act. It
empowers RBI (regulator and policy framer in matter of
advances and capital adequacy norms) to develop a
healthy secondary market, by allowing banks inter se to
deal in NPAs in order to clean the balance sheets of the
banks which guideline/policy falls under Section 6(1)(a) H
648 SUPREME COURT REPORTS [2010J 12 S.C.R.
A r/w Section 6(1 )(n). Therefore, it cannot be said that
assignment of debts/NPAs is not an activity permissible
under the BR Act, 1949. Thus, accepting deposits and
lending by itself is not enough to constitute the
"business of banking". The dependence of commerce
B on banking is so great that in modern money economy
the cessation even for a day of the banking activities
would completely paralyse the economic life of the nation.
Thus, the BR Act, 1949 mandates a statutory
comprehen~ive and formal structure of banking
C regulation and supervision in India. [Para 13) [684-F-H;
685-A-B]
5. The test to be applied is - whether trading in NPAs
has the characteristics of a bona fide banking business.
That test is satisfied in this case. The guidelines issued
D by RBI dated 13.7.2005 itself authorizes banks to deal
inter se in NPAs. These guidelines have been issued by
the Regulator in exercise of the powers conferred by
Sections 21 and 35A of the Act. They have a statutory
force of law. They have allowed banks to engage in
E trading in NPAs with the purpose of cleaning the balance
sheets so that they could raise the capital adequacy ratio.
All this comes within the ambit of Section 21 which
enables RBI to frame the policy in relation to Advances
to be followed by the banking companies and which
F empowers RBI to give directions to banking companies
under Section 21 (2). These guidelines and directions
following them have a statutory force. When a delegate
is empowered by the Parliament to enact a Policy and to
issue directions which have a statutory force and when
G the delegate (RBI) issues such guidelines (Policy) having
statutory force, such guidelines have got to be read as
supplement to the provisions of the BR Act, 1949. The
"banking policy" is enunciated by RBI. Such policy
cannot be said to be ultra vires the Act. The idea behind
H empowering RBI to determine the Policy in relation to
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 649
APS STAR INDUSTRIES LTD.
Advances is to enable banking companies to expand A
their business of banking and in that sense such
guidelines also define - as to what constitutes banking
business. [Para 14] [685-C-G]
6. When a borrower, who is under liability to pay to B
secured creditors, makes default in repayment of secured
debt or any installment thereof, the account of borrower
is classified as Non-Performing Asset (NPA). Such NPAs
cannot be used for any productive purpose. Continuous
growth in NPAs threatens the repayment ca1pacity of the C
banks. They have an adverse impact on ~he financial
strength of the banks which in the present era of
globalization are required to conform to International
Standards. Thus, NPA means an asset or account
receivable of a borrower, which has been classified by
banks or financial institutions in terms of RBI Guidelines D
as sub-standard, doubtful etc. These guidelines are
issued to improve quality of assets of the banks. The 2005
guidelines of RBI are not to eliminate NPAs but to
restructure them. The BR Act, 1949 by Section 21
empowers RBI in the interest of the Banking Policy to lay E
down guidelines in relation to advances to be followed
by banking companies. The 2005 guidelines have been
issued as "a restructuring measure" in order to avoid
setbacks in the banking system. NPAs do not generate
interest. 85% of the Indian Banks' income comes from F
interest. Thus, NPAs adversely impact profits of the
banks and hence, as a matter of Banking Policy, RBI as
Regulator seeks through its guidelines under Section 21
rlw Section 35A to manage these NPAs and not to
eliminate them. The said guidelines deal with G
restructuring of the banking system which is one of the
objects behind giving authority to RBI to frame "banking
policy". [Para 15] [686-A-F]
7. In this batch of cases the Court is dealing with
H
650 SUPREME COURT REPORTS [2010] 12 S.C.R.
A assets in the hands of banks. NPAs are "Account
Receivables". The impugned guidelines show that RBI
considers inter se NPA assignment between banks to be
a tool for resolving the issue of NPAs and in the interest
of banking policy under Section 21 of the BR Act, 1949.
B The object is to minimize the problem of credit risk. The
corporate debt restructuring is one of the methods for
reducing NPAs. Thus, such restructuring as a matter of
banking policy cannot be treated as "trading". One has
to keep in mind the object behind enactment of BR Act,
c 1949. Thus, the said Guidelines fall under Section 21 of
the 1949 Act. These Guidelines are a part of Credit
Appraisal Mechanism. Thus, the impugned Guidelines are
not ultra vires the BR Act, 1949. Dealing in NPAs as part
of the Credit Appraisal Mechanism and as a part of
Restructuring Mechanism falls within Section 21 r/w
0
Section 35A of the Act. Hence, it cannot be said that
"transfer of debts/NPAs" inter se between banks is an
activity which is impermissible under the 1949 Act. The
BR Act, 1949 is an Act enacted to consolidate and amend
E the law relating to banking. Thus, while interpreting the
Act one needs to keep in mind not only the framework
of the banking law as it stood in 1949 but also the growth
and the new concepts that have emerged in the course
of time. [Para 15] [686-F-H; 687-A-C]
F Principles of Statutory Interpretation by G.P. Singh, 11th
edition at page 328 - relied on.
8. On a combined reading of the provisions of the
BR Act, 1949 with the Guidelines of RBI issued from time
G to time in relation to Advances and Re-structuring/
Management of NPAs, it is clear that the BR Act, 1949 is
a complete Code on banking and that the dealing in NPAs
inter se by the banks needs to be looked in the larger
framework of "Re-structuring of banking System". [Para
H 16] [687 -D-E]
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 651
APS STAR INDUSTRIES LTD.
9. An outstanding in the account of a borrower(s) A
(customer) is a debt due and payable by the borrower(s)
to the bank. Secondly, the bank is the owner of such
debt. Such debt is an asset in the hands of the bank as
a secured creditor or mortgagee or hypothecatee. The
bank can always transfer its asset. Such transfer in no B
manner affects any right or interest of the borrower(s)
(customer). Further, there is no prohibition in the BR Act,
1949 in the bank transferring its assets inter se. Even in
the matter of assigning debts, it cannot be said that the
banks are trading in debts, as held by the High Court(s). c
The assignor bank has never purchased the debt(s). It
has advanced loans against security as part of its
banking business. The account of a client in the books
of the bank becomes Non Performing Asset when the
client fails to repay. In assigning the debts with D
underlying security, the bank is only transferring its asset
and is not acquiring any rights of its client(s). The bank
transfers its asset for a particular agreed price and is no
longer entitled to recover anything from the borrower(s).
The moment ICICI Bank Ltd. transfers the debt with
E
underlying security, the borrower(s) ceases to be the
borrower(s) of the ICICI Bank Ltd. and becomes the
borrower(s) of Kotak Mahindra Bank Ltd. (assignee). The
debts are assets of the assignor bank. The High Court
has erred in not appreciating that the assignor bank is
only transferring its rights under a contract and its own F
asset, namely, the debt as also the mortgagee's rights in
the mortgaged properties without in any manner affecting
the rights of the borrower(s)/mortgagor(s) in the contract
or in the assets. None of the clauses of the impugned
Deed of Assignment transfers any obligations of the G
assignor towards the assignee. [Para 18] [688-B-H; 689-
A]
10. An assignment of a contract might result by
transfer either of the rights or by transfer of obligations H
652 SUPREME COURT REPORTS [2010] 12 S.C.R.
A thereunder. There is a well recognized distinction
between the two classes of assignments. As a rule,
obligations under a contract cannot be assigned except
with the consent of the promisee, and when such
consent is given, it is really a novation resulting in
B substitution of liabilities. That, rights under a contract are
always assignable unless the contract is personal in its
nature or unless the rights are incapable of assignment,
either under the law or under an agreement between the
parties. A benefit under the contract can always be
C assigned. There is, in law, a clear distinction between
assignment of rights under a contract by a party who has
performed his obligation thereunder and an assignment
of a claim for compensation which one party has against
the other for breach of contract. [Para 18] [689-A-D]
D Khardah Company Ltd. v. Raymon & Co. (India) Private
Ltd. (1963) 3 S.C.R. 183 - referred to.
Camdex International Ltd. v. Bank of Zambia (1998) Q.B.
22 (CA) - referred to.
E
Chitty on Contracts, 27th edn. (1994) at para 19.027 -
referred to.
11. Under the impugned Deed of Assignment only
the Account Receivables in the books of ICICI Bank Ltd.
F has been transferred to Kotak Mahindra Bank Ltd. The
obligations of ICICI Bank Ltd. towards its borrower(s)
(customer) under the loan agreement secured by deed of
hypothecationlmortgage have not been assigned by ICICI
Bank Ltd. to the assignee bank, namely, Kotak Mahindra
G Bank Ltd. Hence, it cannot be said that the impugned
Deed of Assignment is unsustainable in law. The
obligations referred to in the impugned Deed of
Assignment are the obligations, if any, of ICICI Bank Ltd.
towards Kotak Mahindra Bank Ltd. (assignee) in the
H matter of transfer of NPAs. For example, when an
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 653
APS STAR INDUSTRIES LTD.
Account Receivable is treated as NPA and assigned to A
the assignee bank, the parties have to follow certain
Guidelines issued by RBI. If there is a breach of the
Guidelines or statutory directions issued by RBI by
Assignor in regard to transfer of NPA then the assignee
bank can enforce such obligations vis-a-vis the assignor B
bank. It is these obligations which are referred to in the
impugned Deed of Assignment. An Account Receivable
becomes an NPA only because of the default committed
by the borrower(s) who fails to repay. The Securitisation
and Reconstruction of Financial Assets and Enforcem'ent c
of Security Interest Act, 2002 (SARFAESI Act) was
enacted enabling specified SPVs to buy the NPAs from
banks. However, from that it does not follow that banks
inter se cannot transfer their own assets. Hence the said
SARFAESI Act, 2002 has no relevance in this case. [Para
0
21] [690-B-G]
12. The Division Bench of the High Court upheld the
order of the Company Court only on one ground, namely,
assignment of debts by the banks inter se is an activity
which is impermissible under the Banking Regulation E
Act, 1949. However, the Division Bench did not go into
other issues which arose for determination before the
Company Court, including applicability of the provisions
of the Registration Act, 1908. In the circumstances, the
impugned judgment is set aside on the question of F
assignment of debts as an activity permissible under the .
Banking Regulation Act, 1949. However, the matters are
remitted to the Division Bench of the High Court for
consideration of other issues. [Paras 23, 24] [691-B-D]
G
Case Law Reference:
(1963) 3 S.C.R. 183 relied on Para 18
(1998) Q.B. 22 (CA) referred to Para 19
H
654 SUPREME COURT REPORTS [2010] 12 S.C.R.
A CIVIL APPELLATE JURISDICTION : Civil Appeal No.
8393 of 2010.
From the Judgment & Order dated 12.01.2009 of the High
Court of Gujarat at Ahmedabad in OJ Appeal No. 158 of 2007
B in Company Application No. 489 of 2006.
WITH
C.A. Nos. 8394-8406, 8407-8425, 8426 & 8427 of 2010.
SLP (C) No. 29880 of 2009,
c
SLP (C) No. 29780/10 of 2010 (CC 6913 of 2010).
H.N. Salve, Mukul Rohtagti, T.R. Andhyarujina, P.S.
Narasimha, Jaideep Gupta, Rakesh Dwivedi, Shekhar
'··
D Naphade, E.C. Agrawala, Mahesh Agarwal, Rishi Agrawala,
Sandeep Singlli, Nakul Mohta, Alok Kumar, Agarwal,
Dharmendra Kumar Sinha, Subramonium Prasad, Ruchi Kohli,
Suresh Dobhal. Shiv Sagar Tiwari, Ashok L. Shah, Pavan S.
Godiawala, Soumik Ghosal, David Ra, Vijay Prakash,
E Khwairakpam Nobin Singh, David Rao, Vijay Prakash, Sanjay
H., Amar Dave, P.S. Sudheer, Rishi Maheswari, Lalit Bhasin,
Nina Gupta, Mudit Sharma, Sanjay Gupta, Priyanka Dayal,
Priyanka Gupta, Bina Gupta, Kuldeep S. Parihar, H.S. Parihar,
Pranab Kumar Mullick, Soma Mullick, Sanjay Kapur, Rajiv
F Kapur, Abhishek Kumar, Ashmi Mohan, Suhaas R. Joshi, Arun
Aggarwal, Pallav Saxena, Rajesh Kumar, E.R. Kumar, Shakun
Sharma, Kumar Shashank (for Parekh & Co.), Kavin Gulati,
R.N. Karanjawala, Manik Karanjawala, Nandini Gore, Murli
Kaushik (for Karanjawala & Co.), Kamal Nijhawan, Jitender
Kumar, Sumit Gaur, Mohinder Jit Singh Rupal, Yash Anand,
G Shree Pal Singh, Senthil Jagadeesan, Maneesha Dhir, Purti
Marwaha, R.S. Paliwal, Jayashree Shukla, Tripti Gupta, Gagan
Gupta, Apoorve Karol, Mayank Grover for the appearing parties.
The Judgment of the Court was delivered by
H
•
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 655
APS STAR INDUSTRIES LTD.
5. H. KAPADIA, CJI. 1. Leave granted. A
2. The short question which we are required to decide in
this batch of cases is - Whether inter se transfer of Non
Performing Assets ("NPA" for short) by banks is illegal under
Banking Regulation Act, 1949 ("BR Act, 1949" for short) as held
B
by the Gujarat High Court in the impugned judgment?
According to the impugned judgment(s), assignment of debts
by banks inter se is not an activity which is permissible under
the said BR Act, 1949 and consequently all executed contracts
of assignment of debts were illegal. According to the impugned C
judgment(s), the assignee banks were not entitled to
substitution in place of original lender (assignor) in proceedings
relatable to companies in liquidation pending in the Company
Court.
Facts in Civil Appeal @ S.L.P. (C) No. 2240 of 2009: D
3. 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
E
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
F
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 G
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
H
656 SUPREME COURT REPORTS [2010) 12 S.C.R.
A 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
B of debts. We quote hereinbelow the relevant provision of the
Deed:
"2.2. On and from the date of the Agreement the Assignee
and the Assignor hereby agree, undertake and confirm that
notwithstanding (i) the costs, charges, expense, taxes and
c duties to be paid or incurred by the Assignee towards the
realization of the Debt; and (ii) any settlement or
compromise or restructuring of the Debt or the status of
the Debt or creditworthiness of the Clients, the amounts
to be paid by the Assignee towards Purchase
D Consideration in terms of the Agreement shall remain
irrevocable and unconditional obligation of the Assignee
hereof:
2.2.1 The Assignee shall have the sole and absolute right
E of collecting all amounts representing the Debts in
such manner as the Assignee may in its absolute
discretion determines;
2.2.2 The Assignor shall not be subject to any duties and/
or obligations in respect of the Financial
F Instruments;
2.2.3 The Assignee shall have all the rights and
obligations under the Financial Instruments as if
they were executed by the Clients in favour of the
G Assignee."
4. One of the borrowers of ICICI Bank Ltd. at the relevant
time was Mis A.P.S. Star Industries Ltd., a company which
subsequently went under liquidation. By way of Company
H Application in the pending winding up proceedings before the
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 657
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
Company Court, Kotak Mahindra Bank Ltd. moved Company A
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 Application for
substitution was moved at a stage of provisional/final winding
up proceedings. Before the Company Court, Kotak Mahindra B
Bank Ltd. submitted that, as per BR Act, 1949 read with the
Guidelines of Reserve Bank of India dated 13.7.2005, sale and
purchase of debts, including the rights in immovable properties
being secured creditors, can be sold by loaners and purchased
by banks/financial institutions as assignees. According to .Kotak c
Mahindra Bank Ltd., since proceedings for winding up were
pending before the Company Court at various stages including
the stage for disposal of properties of the companies in
liquidation, they had approached the Company Court to be ·
substituted in place of the original secured creditor, ICICI Bank D
Ltd. Before the Company Court, the secured creditor, ICICI
Bank Ltd. admitted the execution of the Deed of Assignment
dated 31.3.2006. They supported the substitution of Kotak
Mahindra Bank Ltd. in the said application, however, such
substitution was objected by the borrowers, who contended that E
the deed of assignment had not lawfully conveyed rights to the
assignee to step into the shoes of ICICI Bank Ltd. (secured
creditor). They raised various contentions including absence of
proper conveyance and payment of stamp duty which aspects
were not gone into by the impugned judgment of the Division
Bench before us. The Company Court came to tne conclusion F
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. However, the Company Court
clarified that these were its prima facie observations. On the
acquisition of rights by Kotak Mahindra Bank Ltd., the Company G
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 credi.tor
of the company in liquidation. Aggrieved by the said decision H
658 SUPREME COURT REPORTS [2010] 12 S.C.R.
A of the Company Court, the assignee, Kotak Mahindra Bank Ltd.
carried the matter in appeal to the Division Bench of the Gujarat
High Court as can be seen from the impugned order. A number
of questions of law were framed, e.g., whether the Company
Court was justified in holding that a separate documentation
B of assignment of each loan transaction was required to be
registered; whether the Company Court was justified in
concluding that the Deed was not registered as per the
provisions of Section 60 of the Registration Act, 1908 as also
the question as to whether the Company Court was right in
c holding that rights were not acquired by the assignee, Kotak
Mahindra Bank Ltd., through the process known to law and
therefore they cannot be allowed to be substituter in place of
the secured creditor of the company in liquidation, namely, ICICI
Bank Ltd.
D 5. At this stage, it may be noted that by the impugned
judgment, the High Court 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
E assignee bank(s) was not entitled to substitution in place of
ICICI Bank Ltd. (assignor). The Division Bench has not
examined the other questions referred to above.
Submissions:
F 6. Shri Harish N. Salve, learned senior counsel, appearing
on behalf of the appellants submitted that the Division Bench
of the High Court erred in holding that in assigning debts with
underlying security the assignor banks were trading in debts
which was not permissible under the BR Act, 1949 because
G the assignor bank had never purchased debts, it had advanced
loans against security which was a part of its banking business.
That, it was only when the account became NPA that the
assignor bank decided to dispose of the debt(s) which was its
asset along with the underlying security. Similarly, the assignee
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 659
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
bank, Kotak Mahindra Bank Ltd., which acquired the debt along A
with the underlying security also did not sell the debt or the
underlying security acquired as per RBI Guidelines. On the
contrary, the assignee bank seeks to enforce recovery.
Therefore, according to the learned counsel, neither the
assignor bank nor the assignee bank ever traded in the debts B
as wrongly held by the impugned judgment. According to the
learned senior counsel, there is a fundamental error in the
approach of the High Court in the matter of interpretation of BR
Act, 1949. That, "banking company" as defined in Section 5(c)
read with Section 5(d) is, in the first instance, a company c
incorporated under the Companies Act, 19"56. That, such
companies are juridical entities which are.entitled to assign their
debts. That, unsecured debts are assignable as actionable
claims under Transfer of Property Act, 1882 ("TP Act" for short)
whereas secured debts such as mortgages were 1ransferable D
by way of conveyance. Reliance in this connection was placed
on the definition of the wor.ds "actionable claims" read with
Sections 5, 6 and 8 of the TP Act. According to .the learned
counsel, it is clear from Section 2 of the BR Act, 1949that the
provisions of that Act are in addition to and not in derogation
E
of the Companies Act, 1956 or any other law for the time being
in force. Therefore, according to the learned counsel, in order
to take away .the effect of the TP Act, there should be something
in the BR Act, 1949 in the form of express provision so as to
exclude the provisions of the TP Act and in the absence of
express prohibition the provisions of the TP Act.stand excluded. F
Therefore, according to the learned counsel, there is no merit
in the contention advanced on behalf of the borrowers that
assignment of debts is ultra vires Section 5 read with Section
6 of the BR Act, 1949. According to the learned counsel,
Section .5(b) of the BR Act, 1949 refers to the core activity of a G
bank, however, according to the learned counsel, Section 5(b)
is not .exhaustive, the said sub-section does not specify the
range of activities that can be carried on by a bank for
coordination of the .banking business. According to the learned
H
660 SUPREME COURT REPORTS [2010] 12 S.C.R.
A counsel, assignment is not limited to only NPAs but to debts in
general. According to the learned counsel, as per Section
6(1 )(a) of the BR Act, 1949 lending or advancing of money is
indisputably a core activity of the bank. However, realization of
such loans is an integral part of the core activity. In the
B alternative, it was submitted that, in any event, an activity of
assignment of debt would fall within five of the clauses in Section
6(1) of the BR Act, 1949, namely, clause (a), clause (c), clause
(g), clause (I) and clause (n). According to the learned counsel,
only prohibition under the BR Act, 1949 so far as the business
c of a bank is concerned is contained in Sections 8 and 9 and
neither of the said provisions limits or prohibits assignment of
debts. According to the learned counsel, there is one more error
in the impugned judgment. According to the High Court,
Parliament had enacted Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
0
("SARFAESI Act" for short) because the BR Act, 1949 did not
permit banks to assign debts; that the SARFAESI Act is an
exclusive Act for assignment of debts and that the said
SARFAESI Act permitted banks to assign debts not inter se
E but only to certain specified entities like Asset Management
Companies ("AMC" for short)/ Asset Reconstruction
Companies. According to the learned counsel, the High Court
had failed to appreciate the object of the SARFAESI Act. It has
failed to appreciate the provisions of that Act. According to the
learned counsel, the concept of securitization is an economic
F and commercial concept; that, "asset construction" has been
defined under Section 2(b) as acquisition by any securitization
company or reconstruction company of any right or interest of
any bank or financial institution in any financial assistance for
the purpose of realization of such financial assistance; that, the
G expression "financial assistance" was limited to loans and
advances given by banks or financial institutions; that Section
5 of the SARFAESI Act recognizes securitization as acquisition
of any financial assets; that, securitization is a matter of contract
and Section 5 of the SARFAESI Act makes a special machinery
H where financial assets of banks are acquired. According to the .
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 661
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
learned counsel, this concept of securitization is a totally new A
concept as far as India is concerned and consequently the
SARFAESI Act has no relevance as far as the issue in hand is
concerned. Coming to the RBI Guidelines, learned counsel
submitted that RBI is a regulator which has considered
assignment of NPA not merely as part of the business of B
banking but also something which is conducive to the banking
business; that, the RBI directives and guidelines have a statutory
flavour and consequently if one goes through the said
Guidelines they clearly indicate that banking is not confined only
to the core activities enumerated in Section 5(b) of the BR Act, c
1949.
7. One of the arguments advanced before us on behalf of
the borrowers was that before the High Court, Union of India
had taken a position contra to the stand taken by RBI that
trading in debts was not permissible under BR Act, 1949. In D
this connection, learned counsel appearing for the appellants
submitted that Union of India, Ministry of Banking was never a
party to the proceedings before the Company Court; that, in the
winding up proceedings the BIFR was a party along with the
Commissioner of Central Excise as claimant. Before the E
Company Court, the learned ASG appeared on behalf of BIFR
and Central Excise Department; that, no affidavit was filed by
the Union of India commenting on the RBI guidelines. In the
circumstances, learned counsel for the appellants submitted that
position taken on behalf of the Union of India before the F
Company Court was not relevant. Learned counsel further
pointed out that RBI appeared before the Company Court and
supported the case of the appellants herein by placing reliance
on their Guidelines. For the aforestated reasons, learned
counsel submitted that the impugned judgment is erroneous G
and is liable to be set aside.
8. In reply, Shri T.R. Andhyarujina, learned senior counsel
appearing for the borrower, inter alia submitted that the
assignment of financial instruments in possession of ICICI Bank
H
662 SUPREME COURT REPORTS [2010] 12 S.C.R.
A Ltd. to Kotak Mahindra Bank Ltd., transfers not only the right
of recovering debt but also transfers the obligations under the
financial instruments "as if the said financial instruments were
executed by the clients of ICICI Bank in favour of the assignee".
That, the assignment of a debt can never carry with it the
B assignment of the obligations of the assignor. Unless there is
a novation of the contract by all parties, there cannot be a
transfer of the obligations of th€ assignor. In this connection,
Shri Andhyarujina relied upon Section 130 of the TP Act, 1882.
Therefore, according to the learned counsel, such an
C assignment cannot be legally sustained without novation of
original contract executed by the assignor and the debtor.
Consequently, such assignment cannot under any
circumstances come within the permissible mode of business
under Section 6(1) of the BR Act, 1949. According to the
learned counsel, there is no merit in the argument of the
0
appellant that the words in Section 6 of the BR Act, 1949 "in
addition to the business of banking" itself give to the ICICI Bank
(assignor) the right to carry on all kinds of activities including
the authority to assign debts owed to them irrespective of the
enumerated items in Section 6(1 )(a) to (o). According to the
E learned counsel for the borrower, the "business of banking" is
found in the definition of "banking" and "banking company" in
Sections 5(b) and (c) and restricts "banking business" only to
accepting for the purpose of lending or investment of deposits
of money. In other words, according to the learned counsel, the
F business of banking is restricted by the BR Act, 1949 only to
hard core, traditional concept of banking. That, there cannot be
an activity of assigning debts by accepting deposits under
Sections 5(b) and 5(c). Learned counsel further submitted that
securitization involves assignment of debts under the said
G SARFAESI Act. In this connection, learned counsel placed
reliance on Section 5 of that Act which inter alia states that
securitization company or reconstruction company may
"acquire" financial assets of a bank by entering into an
agreement for the transfer of the financial assets. Such
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 663
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
acquisition can only be if the originator assigns his debt to the A
securitization company. According to the learned counsel, the
Parliament has now prescribed the only legal way of transferring
financial assets under the SAR FAES I Act which would include
debts due to a bank (NPA or otherwise), by transfer to any
securitization company or reconstruction company. Therefore, B
according to the learned counsel, there is no other legal way
of transferring financial assets including dues due to bank
except under the SARFAESI Act, which has no application in
the present case as the said Act allows such transfers only in
favour of specified companies namely, securitization company c
or reconstruction company and not in favour of banks or any
other financial institutions. As regards NPA Norms of RBI,
learned senior counsel submitted that RBI has not issued
directives under Section 35A; that the relevant circular is by way
of guidelines and is entitled "RBI Prudential Norms on Income D
Recognition Asset Classification and Provisioning Pertaining
to Advances" dated 30th August, 2001. Lastly, learned counsel
submitted that assignment of debt by ICICI Bank is not a mode
of recovery. According to the learned counsel, assignment of
debt and recovery of debt are two different concepts. When
there is recovery, the debt is totally extinguished whereas in the E
case of assignment the debt is not extinguished, the debt
remains, the debtor remains, only the creditor changes. That,
the assignee Bank cannot be said to be recovering debt when
it in fact assigns the debt because both the debtor and the debt
continue to exist and they are not extinguished. In the written F
submissions submitted on behalf of the borrower, one
additional point is taken. According to the borrower, in the
present batch of cases all rights and liabilities have crystallized
on the date of the winding up order and, therefore, assignment
of debt by a bank cannot be permitted after the company is G
ordered to be wound up as that would amount to violating the
provisions of the Companies Act, 1956. For the afore-stated
reasons, the learned counsel submitted that no interference is
called for with the impugned judgment(s) and the appeals
preferred by the assignor deserve to be dismissed. H
664 SUPREME COURT REPORTS [2010] 12 S.C.R.
A 9. Issues:
(i) Whether the Gujarat High Court was right in holding
that assignment of debts by banks inter se is not
an activity permissible under the BR Act, 1949 and
consequently all executed contracts of assignment
B
of debts were illegal?
(ii) Whether the High Court was right in holding that the
assignee bank (s) was not entitled to substitution
in place of the original lendor (assignor) in
c proceedings relating to companies in liquidation
pending in the Company Court?
10. Reasons and Findings:
(i) On the issue concerning assignment of debts by
D bank inter se
Before dealing with Issue No. (i), we need to quote
hereinbelow relevant provisions of BR Act, 1949:
E "2 - Application of other laws not barred
The provisions of this Act shall be in addition to, and not,
save as hereinafter expressly provided, in derogation of
the Companies Act. 1956 ( 1 of 1956 ), and any other law
for the time being in force.
F
5 - Interpretation
In this Act, unless there is anything repugnant in the subject
or context, -
G (b) "banking" means the accepting, for the purpose of
lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdrawal
by cheque, draft, order or otherwise;
H (c) "banking company" means any company which
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 665
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
transacts the business of banking in India; A
Explanation.-Any company which is engaged in the
manufacture of goods or carries on any trade and which
accepts deposits of money from the public merely for the
purpose of financing its business as such manufacturer or
B
trader shall not be deemed to transact the business of
banking within the meaning of this clause;
(ca) "banking policy" means any policy which is specified
from time to time by the Reserve Bank in the interest of
the banking system or in the interest of monetary stability C
or sound economic growth, having due regard to the
interests of the depositors, the volume of deposits and
other resources of the bank and the need for equitable
allocation and the efficient use of these deposits and
resources; D
(d) "company" means any company as defined in section
3 of the Companies Act, 1956 (1 of 1956); and includes
a foreign company within the meaning of section 591 of
that Act;
E
(1) "Reserve Bank" means the Reserve Bank of India
constituted under section 3 of the Reserve Bank of India
Act, 1934 (2 of 1934);
6 - Forms of business in which banking companies may F
engage
(1) In addition to the business of banking, a banking
company may engage in any one or more of the following
forms of business, namely:-
G
(a) the borrowing, raising, or taking up of money; the
lending or advancing of money either upon or without
security; the drawing, maki:ig, accepting, discounting,
buying, selling, collecting and dealing in bills of exchange,
H
666 SUPREME COURT REPORTS [2010] 12 S.C.R.
A hoondees, promissory notes, coupons, drafts, bills of
lading, railway receipts, warrants, debentures, certificates,
scrips and other instruments and securities whether
transferable or negotiable or not; the granting and issuing
of letters of credit, traveller's cheques and circular notes;
B the buying, selling and dealing in bullion and specie; the
buying and selling of foreign exchange including foreign
bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares,
debentures, debenture stock, bonds, obligations, securities
c and investments of all kinds; the purchasing and selling of
bonds, scrips or other forms of securities on behalf of
constituents or others, the negotiating of loans and
advances; the receiving of all kinds of bonds, scrips or
valuables on deposit or for safe custody or otherwise; the
providing of safe deposit vaults; the collecting and
D
transmitting of money and securities;
(f) managing, selling and realising any property which may
come into the possession of the company in satisfaction
or part satisfaction of any of its claims;
E
(g) acquiring and holding and generally dealing with any
property or any right, title or interest in any such property
which may form the security or part of the security for any
loans or advances or which may be connected with any
F such security;
(I) selling, improving, managing, developing, exchanging,
leasing, mortgaging, disposing of or turning into account
or otherwise dealing with all or any part of the property and
rights of the company;
G
(n) doing all such other things as are incidental or conducive
to the promotion or advancement of the business of the
company;
(o) any other form of business which the Central
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 667
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
Government may, by notification in the Official Gazette, A
specify as a form of business in which it is lawful for a
banking company to engage.
(2) No banking company shall engage in any form of
business other than those referred to in sub-section (1).
B
8 - Prohibition of trading
Notwithstanding anything contained in section 6 or in any
contract, no banking company shall directly or indirectly
deal in the buying or selling or bartering of goods, except c
in connection with the realisation of security given to or held
by it, or engage in any trade, or buy, sell or barter goods
for others otherwise than in connection with bills of
exchange received for collection or negotiation or with
such of its business as is referred to in clause (i) of sub- D
section (1) of section 6:
9 - Disposal of non-banking assets
Notwithstanding anything contained in section 6, no
banking company shall hold any immovable property E
howsoever acquired, except such as is required for its own
use, for any period exceeding seven years from the
acquisition thereof or from the commencement of this Act,
whichever is later or any extension of such period as in this
section provided, and such property shall be disposed of F
within such period or extended period, as the case may
be:
Provided that the. banking company may, within the period
of seven years as aforesaid deal or trade in any such
property for the purpose of facilitating the disposal. thereof: G
Provided further that the Reserve Bank may in any
particular case extend the aforesaid period of seven years
by such period not exceeding five years where it is
satisfied that such extension would be in the interests of H
668 SUPREME COURT REPORTS [2010] 12 S.C.R.
A the depositors of the banking company.
12. Regulation of paid-up capital, subscribed capital and
authorised capital and voting rights of shareholders
(1) No banking company shall carry on business in India,
B unless it satisfies the following conditions, namely:-
(i) that the subscribed capital of the company is not less
than one-half of the authorised capital, and the paid-up
capital is not less than one-half of the subscribed capital
c and that, if the capital is increased, it complies with the
conditions prescribed in this clause within such period not
exceeding two years as the Reserve Bank may allow;
(ii) that the capital of the company consists of ordinary
shares only or of ordinar; shares or equity shares and such
D preferential shares as may have been issued prior to the
1st day of July, 1944:
Provided that nothing contained in this sub-section shall
apply to any banking company incorporated before the
E 15th day of January, 1937.
(2) No person holding shares in a banking company shall,
in respect of any shares held by him, exercise voting rights
on poll in excess of ten per cent of the total voting rights
of all the s~1areholders of the banking company.
F
17. Reserve Fund
(1) Every banking company incorporated in India shall
create a reserve fund and shall, out of the balance of profit
G of each year as disclosed in the profit and loss account
prepared under section 29 and before any dividend is
declared, transfer to the reserve fund a sum equivalent to
not less than twenty per cent of such profit.
(1A) Notwithstanding anything contained in sub-section(1 ),
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 669
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
the Central Government may, on the recommendation of A
the Reserve Bank and having regard to the adequacy of
the paid-up capital and reserves of a banking company in
relation to its deposit liabilities, declare by order in writing
that the provisions of sub-section (1) shall not apply to the
banking company for such period as may be specified in B
the order:
Provided that no such order shall be made unless, at the
time it is made, the amount in the reserve fund under sub-
section (1 ), together with the amount in the share premium
account is not less than the paid-up capital of the banking c
company.
18. Cash reserve
(1) Every banking company, not being a scheduled bank, D
shail maintain in India by way of cash reserve with itself or
by way of balance in a current account with the Reserve
Bank, or by way of net balance in current accounts or in
one or more of the aforesaid ways, a sum equivalent to at
least three per cent of the total of its demand and time
E
liabilities in India as on the last Friday of the second
preceding fortnight and shall submit to the Reserve Bank
before the twentieth day of every month a return showing
the amount so held on alternate Fridays during a month
with particulars of its demand and time liabilities in India
on such Fridays or if any such Friday is a public holiday F
under the Negotiable Instruments Act, 1881 (26of1881),
at the close of business on the preceding working day.
Explanation.-ln this section, and in section 24,-
G
(a) "liabilities in India" shall not include-
(i) the paid-up capital or the reserves or any credit balance
in the profit and loss account of the banking company;
(ii) any advance taken from the Reserve Bank or from the H
670 SUPREME COURT REPORTS [2010] 12 S.C.R.
A Development Bank or from the Exim Bank or from the
Reconstruction Bank or from the National Housing Bank
or from the National Bank or from the Small Industries Bank
by the banking company;
(iii) in the case of a Regional Rural Bank, also any loan
B taken by such bank from its Sponsor Bank;
(b) "fortnight" shall mean the period from Saturday to the
second following Friday, both days inclusive;
c (c) "net balance in current accounts" shall, in relation to a
banking company, mean the excess, if any, of the
aggregate of the credit balances in current account
maintained by that banking company with State Bank of
India or a subsidiary bank or a corresponding new bank
over the aggregate of the credit balances in current
D
account held by the said banks with such banking
company;
(d) for the purposes of computation of liabilities, the
aggregate of the liabilities of a banking company to the
E State Bank of India, a subsidiary bank, a corresponding
new bank, a regional rural bank, another banking company,
a co-operative bank or any other financial institution
notified by the Central Government in this behalf, shall be
reduced by the aggregate of the liabilities of all such banks
F and institutions to the banking company;
(e) the expression "co-operative bank" shall have the
meaning assigned to it in clause (cci) of section 56.
(2) The Reserve Bank may, for the purposes of this section
G and section 24, specify from time to time, with reference
to any transaction or class of transactions, that such
transaction or transactions shall be regarded as liability in
India of a banking company and, if any question arises as
to whether any transaction or class of transactions shall be
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 671
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regarded for the purposes of this section and section 24 A
as liability in India of a banking company, the decision of
the Reserve Bank thereon shall be final.
20. Restrictions on loans and advances
(1) Notwithstanding anything to the contrary contained in B
section 77 of the Companies Act, 1956 (1 of 1956), no
banking company shall,-
(a) grant any loans or a.dvances on the security of its own
shares, or- C
(b) enter into any commitment for granting any loan or
advance to or on behalf of-
(i) any of its directors,
D
(ii) any firm in which any of its directors is interested as
partner, manager, employee or guarantor, or
(iii) any company [not being a subsidiary of the banking
company or a company registered under section 25 of the E
Companies Act, 1956 (1 of 1956), or a Government
company of which or the subsidiary or the holding
company of which any of the directors of the banking
company is a director, managing agent, manager,
employee or guarantor or in which he holds substantial
interest, or F
(iv) any individual in respect of whom any of its directors
is a partner or guarantor.
(2) Where any loan or advance granted by a banking G
company is such that a commitment for granting it could
not have been made if clause (b) of sub-section (1) had
been in force on the date on which the loan or advance
was made, or is granted by a banking company after the
commencement of section 5 of the Banking Laws
H
672 SUPREME COURT REPORTS [2010] 12 S.C.R.
A (Amendment) Act, 1968(58 of 1968), but in pursuance of
a commitment entered into before such commencement,
steps shall be taken to recover the amounts due to the
banking company on account of the loan, or advance
together with interest, if any, due thereon within the period
B stipulated at the time of the grant of the loan or advance,
or where no such period has been stipulated, before the
expiry of one year from the commencement of the said
section 5:
Provided that the Reserve Bank may, in any case, on an
c application in writing made to it by the banking company
in this behalf, extend the period for the recovery of the loan
or advance until such date, not being a date beyond the
period of three years from the commencement of the said
section 5, and subject to such terms and conditions, as the
D Reserve Bank may deem fit:
Provided further that this sub-section shall not apply if and
when the director concerned vacates the office of the
director of the banking company, whether by death,
E retirement, resignation or otherwise.
(3) No loan or advance, referred to in sub-section (2), or
any part thereof shall be remitted without the previous
approval of the Reserve Bank, and any remission without
such approval shall be void and of no effect.
F
(4) Where any loan or advance referred to in sub-section
(2), payable by any person, has not been repaid to the
banking company within the period specified in that sub-
section, then, such person shall, if he is a director of such
G banking company on the date of the expiry of the said
period, be deemed to have vacated his office as such on
the said date.
Explanation.-ln this section-
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 673
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(a) "loans or advance" shall not include any transaction A
which the Reserve Bank may, having regard to the nature
of the transaction, the period within which, and the manner
and circumstances in which, any amount due on account
of the transaction is likely to be realised, the interest of the
depositors and other relevant considerations, specify by B
general or special order as not being a loan or advance
for the purpose of this section;
(b) "director" include a member of any board or committee
in India constituted by a banking company for the purpose
of managing, or for the purpose of advising it in regard to
c
the management of, all or any of its affairs.
(5) If any question arises whether any transaction is a loan
or advance for the purposes of this section, it shall be
referred to the Reserve Bank, whose decision thereon shall D
be final.
21 - Power of Reserve Bank to control advances by
banking companies
(1) Where the Reserve Bank is satisfied that it is necessary E
or expedient in the public interest or in the interests of
depositors or banking policy so to do, it may determine
the policy in relation to advances to be followed by banking
companies generally or by any banking company in
particular, and when the policy has been so determined, F
all banking companies or the banking company concerned,
as the case may be, shall be bound to follow the policy as
so determined.
(2) Without prejudice to the generality of the power vested G
in the Reserve Bank under sub-section (1) the Reserve
Bank may give directions to banking companies, ·either
generally or to any banking company or group of banking
companies in particular, as to-
H
674 SUPREME COURT REPORTS [2010] 12 S.C.R.
A (a) the purposes for which advances may or may not be
made,
(b) the margins to be maintained in respect of secured
advances,
B (c) the maximum amount of advances or other financial
accommodation which, having regard to the paid-up
capital, reserves and deposits of a banking company and
other relevant considerations, may be made by that
banking company to any one company, firm, association
c of persons or individual,
(d) the maximum amount up to which, having regard to the
considerations referred to in clause (c),guarantees may be
given by a banking company on behalf of any one company,
D firm, association of persons or individual, and
(e) the rate of interest and other terms and conditions on
which advances or other financial accommodation may be
made or guarantees may be given.
E 3) Every banking company shall be bound to comply with
any directions given to it under this section.
22 - Licensing of banking companies
(1) Save as hereinafter provided, no company shall carry
F on banking business in India unless it holds a licence
issued in that behalf by the Reserve Bank and any such
licence may be issued subject of such conditions as the
Reserve Bank may think fit to impose.
G 23. Restrictions on opening of new, and transfer of
existing, places of business
(1) Without obtaining the prior permission of the Reserve
Bank-
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 675
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
(a) no banking company shall open a new place of business A
in India or change otherwise than within the same city, town
or village, the location of an existing place of business
situated in India; and
(b) no banking company incorporated in India shall open B
a new place of business outside India or change, otherwise
than within the same city, town or village in any country or
area outside India, the location of an existing place of
business situated in that country or area:
24 - Maintenance of a percentage of assets c
(2A) A scheduled bank, in addition to the average daily
balance which it is, or may be, required to maintain under
section 42 of the Reserve Bank of India Act, 1934 (2 of
1934) and every other banking company, in addition to the o
cash reserve which it is required to maintain under section
18, shall maintain in India, assets, the value of which shall
not be less than such percentage not exceeding forty per
cent, of the total of its demand and time liabilities in India
as on the last Friday of the second preceding fortnight as E
the Reserve Bank may, by notification in the Official
Gazette, specify from time to time and such assets shall
be maintained, in such form and manner, as may be
specified in such notification.
35A. Power of the Reserve Bank to give directions F
(1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or G
(b) to prevent the affairs of any banking company being
conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of the
banking company; or H
676 SUPREME COURT REPORTS [2010] 12 S.C.R.
A (c) to secure the proper management of any banking
company generally, it is necessary to issue directions to
banking companies generally or to any banking company
in particular, it may, from time to time, issue such
directions as it deems fit, and the banking companies or
B the banking company, as the case may be, shall be bound
to comply with such directions.
(2) The Reserve Bank may, on representation made to it
or on its own motion, modify or cancel any direction issued
under sub-section (1 ), and in so modifying or cancelling
c any direction may impose such conditions as it thinks fit,
subject to which the modification or cancellation shall have
effect.
36 - Further powers and functions of Reserve Bank
D
(1) The Reserve Bank may-
(a) caution or prohibit banking companies or any banking
company in particular against entering into any particular
transaction or class of transactions, and generally give
E advice to any banking company;
(b) on a request by the companies concerned and subject
to the provision of section 44A, assist, as intermediary or
otherwise, in proposals for the amalgamation of such
F banking companies;
(c) give assistance to any banking company by means of
the grant of a loan or advance to it under clause(3) of sub-
section (1) of section 18 of the Reserve Bank of India Act,
1934 (2of 1934);
G
(d) at any time, if it is satisfied that in the public interest or
in the intf3rest of banking policy or for preventing the affairs
of the banking company being conducted in a manner
detrimental to the interests of the banking company or its
H depositors it is necessary so to do, by order in writing and
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 677
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
on such terms and conditions as may be specified therein- A
(i) require the banking company to call a meeting of its
directors for the purpose of considering any matter relating
to or arising out of the affairs of the banking company; or
require an officer of the banking company to discuss any B
such matter with an officer of the Reserve Bank;
(ii) depute one or more of its officers to which the
proceedings at any meeting of the Board of directors of
the banking company or of any committee or of any other .
body constituted by it; require the banking company to give C
an opportunity to the officers so deputed to be heard at
such meetings and also require such officers to send a
report of such proceedings to the Reserve Bank;
(iii) require the Board of directors of the banking company D
or any committee or any other body constituted by it to give
in writing to any officer specified by the Reserve Bank in
this behalf at his usual address all notices of, and other
communications relating to, any meeting of the Board,
committee or other body constituted by it; E
(iv) appoint one or more of its officers to observe the
manner in which the affairs of the banking company or of
its offices or branches are being conducted and make a
report thereon;
F
(v) require the banking company to make, within such time
as may be specified in the order, such changes in the
management as the Reserve Bank may consider
necessary.
G
39. Reserve Bank to be official liquidator.-
(1) Notwithstanding anything contained in section 38A of
this Act or in section 448 or section 449 of the Companies
Act, 1956(1 of 1956), where in any proceeding for the
winding up by the High Court of a banking company, an H
678 SUPREME COURT REPORTS (2010] 12 S.C.R.
A application is made by the Reserve Bank in this behalf,
the Reserve Bank, the State Bank of India or any other
bank notified by the Central Government in this behalf or
any individual, as stated in such application shall be
appointed as the official liquidator of the banking company
B in such proceeding and the liquidator, if any, functioning
in such proceeding shall vacate office upon such
appointment.
(2) Subject to such directions as may be made by the High
Court, the remuneration of the official liquidator appointed
c under this section, the cost and expenses of this
establishment and the cost and expenses of the winding
up shall be met out of the assets of the banking company
which is being wound up, and notwithstanding anything to
the contrary contained in any other law for the time being
D in force, no fees shall be payable to the Central
Government, out of the assets of the banking company.
46 - Penalties
(4) If any other provision of this Act is contravened or if any
E
default is made in-
(i) complying with any requirement of this Act or of any
order, rule or direction made or condition imposed
thereunder, or
F
(ii) carrying out the terms of, or the obligations under, a
scheme sanctioned under sub-section (7) of section 45,
by any person, such person shall be punishable with fine
which may extend to fifty thousand rupees or twice the
G amount involved in such contravention or default where
such amount is quantifiable, whichever is more, and where
a contravention or default is a continuing one, with a further
fine which may extend to two thousand and five hundred
rupees for every day, during which the contravention or
default continues.
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 679
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
47A. Power of Reserve Bank to impose penalty A
( 1) Notwithstanding anything contained in section 46, if a
contravention or default of the nature referred to in sub-
section (3) or sub-section (4) of section 46, as the case
may be, is made by a banking company, then, the Reserve
B
Bank may impose on such banking company-
(a) where the contravention is of the nature referred to in
sub-section (3) of section 46, a penalty not exceeding
twice the amount of the deposits in respect of which such
contravention was made; c
(b) where the contravention or default is of the nature
referred to in sub-section (4) of section 46, a penalty not
exceeding five lakh rupees or twice the amount involved
in such contravention or default where such amount is D
quantifiable, whichever is more, and where such the
contravention or default is a continuing one, a further
penalty which may extend to twenty-five thousand rupees
for every day, after the first, during which the contravention
of default continues.
E
51. Application of certain provisions to the State Bank of
India and other notified banks
(1) Without prejudice to the provisions of the State Bank
of India Act, 1955 (23 of 1955) or any other enactment, F
the provisions of sections 10, 13 to 15, 17, 19 to 21A, 23
to 28, 29 excluding sub-section (3) sub-section (1 B), (1 C)
and (2) of sections 30,31, 34, 35, 35A, 36 excluding
clause(a) of sub-section(1), 45Y to 45ZF, 46 to48 50, 52
and 53 shall also apply; so far as may be, to and in relation G
to the State Bank of India or any corresponding new bank
or a Regional Rural Bank or any subsidiary bank as they
apply to and in relation to banking companies:
Provided that-
H
680 SUPREME COURT REPORTS (2010] 12 S.C.R.
A (a) nothing contained in clause (c) of sub-section (1) of
section 10 shall apply to the chairman of the State Bank
of India or to a managing director of any subsidiary bank
insofar as the said clause precludes him from being a
director of, or holding an office in, any institution approved
B by the Reserve Bank;
(b) nothing contained in sub-clause (iii) of clause (b) of sub-
section (1) of section 20 shall apply to any bank referred
to in sub-section (1), insofar as the said sub-clause (iii) of
clause (b) pre~cludes that bank from entering into any
c commitment for granting any loan or advance to or on
behalf of a company (not being a Government company)
in which not less than forty per cent of the paid-up capital
is held (whether singly or taken together) by the Central
Government or the Reserve Bank or a corporation owned
D by that bank; and
(c) nothing contained in section 46 or in section 47A shall
apply to, -
(i) an officer of the Central Government or the Reserve
E
Bank, nominated or appointed as director of the State
Bank of India or any corresponding new bank or a Regional
Rural Bank or any subsidiary bank or a banking company;
or
F (ii) an officer of the State Bank of India or a corresponding
new bank or a Regional Rural Bank or a subsidiary bank
nominated or appointed as director of any of the said
banks (not being the bank of which he is an officer) or of
a banking company.;
G
(2) References to a banking company in any rule or
direction relating to any provision of this Act referred to in
sub-section (1) shall, except where such rule or direction
provides otherwise, be construed as referring also to the
State Bank of India, a corresponding new bank, a Regional
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 681
APS STAR INDUSTRIES LTD. (S.H. KAPADIA, CJI.]
Rural Bank and a subsidiary bank." A
11. For the purpose of deciding Issue No. (i), we are also
required to quote relevant portion of RBI Guidelines dated 13th
July, 2005, which reads as under:
"Guidelines on purchase! sale of Non Performing B
Financial Assets
Scope
1. These guidelines would be applicable to banks, Fis and C
NBFCs purchasing/ selling non performing financial
assets, from/ to other banks/Fls/NBFCs (excluding
securitisation companies/ reconstruction companies).
2. A financial asset, including assets under multiple/
consortium banking arrangements, would be eligible for D
purchase/sale in terms of these guidelines if it is a non-
performing asseUnon performing investment in the books
of the selling bank.
3. The reference to 'bank' in the guidelines would include E
financial institutions and NBFCs."
Brief analysis of the BR Act, 1949
12. The BR Act, 1949 provides for the comprehensive
definition of "banking" so as to bring within its scope all F
institutions which receive deposits for lending or investment and
to give RBI a control over banking companies. It is an Act to
consolidate and amend the law relating to banking. Section 2
clarifies that the 1949 Act shall be in addition to and not in
derogation of the Companies Act, 1956 and any other law for G
the time being in force save as therein expressly provided.
Section 5(1 )(a) is the interpretation section. It defines "banking"
to mean "accepting deposits for lending". This is principal
business of a bank. Section 5(1)(c) defines banking company
as any company which transacts the business of banking. Thus, H
682 SUPREME COURT REPORTS (2010] 12 S.C.R.
A a banking company has to be a company in the first instance.
Section 5(1 )(ca) defines "banking policy" to mean any policy
which is specified from time to time by RBI in the interest of
banking system or in the interest of monetary stability or
economic growth having due regard to the interest of the
B depositors and efficient use of these deposits. Part II deals with
"business of banking companies" Section 6( 1) in Part II says
that in addition to the business of banking, a banking company
may engage in any one or more of the forms of business
enumerated in clauses (a) to (o). It covers borrowing, lending,
c advancing of money; acquiring and holding and dealing with
property (security) or right, title and interest thereiil; selling,
improving leasing or turning into account or otherwise dealing
with such security; doing all such other things as are incidental
or conducive to the promotion or advancement of the
business of the company and any other form of business which
0
the Central Government may notify. Thus, Section 6(1) has a
general provision and the provision which enumerates topics/
fields in which the banks can carry on their business. Section
8 begins with non-obstante clause. It says that no banking
company shall deal in the buying or selling of goods except in
E connection with the realization of security. Section 9 also begins
with a non-obstante clause. It deals with restrictions on disposal
of non-banking assets. Both Sections 8 and 9 are prohibitions
and restrictions under the Act which are covered by the
expression "save as except provided" in Section 2 of the Act.
F As stated earlier, BR Act, 1949 is in addition to the Companies
Act, 1956 or any other law for the time being in force and its
provisions shall not be treated to be in derogation of any other
laws save and except to the extent of any activity which is
prohibited or restricted (See: Section 2). Section 12 says that
G no banking company shall carry on business unless it satisfies
certain conditions. Section 17 refers to creation of Reserve
Fund. Section 18 refers to creation of Cash Reserve. Section
20 refers to restrictions on loans and advances. Section 21
deals with the power of RBI to control advances by banking
H companies. Section 21 empowers RBI to frame policies in
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 683
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
relation to advances to be followed by banking companies. It A
further says that once such policy is made all banking
companies shall be bound to follow them. Section 21 (1) is once
again a general provision empowering RBI to determine policy
in relation to advances whereas Section 21(2) empowers RBI
to give directions to banking companies as to items mentioned B
there i.e. in Section 21(2). Under Section 21(3) every banking
company is bound to comply with directions given by RBI at the
peril of penalty being levied for non-compliance. Section 35A
says that where RBI is satisfied that in the interest of Banking
Policy it is necessary to issue directions to banking companies c
it may do so from time to time and the banking companies shall
be bound to comply with such directions. Thus, in exercise of
the powers conferred by Sections 21 and 35A of the said Act,
RBI can issue directions having statutory force of law. Section
36 deals with further powers and functions of RBI. Under
0
Section 39 it is the RBI who shall be the Official Liquidator in
any proceedings concerning winding up of a banking company.
13. The above analysis of the various provisions of the
1949 Act shows that RBI is empowered to regulate the business
of the banking companies. That, RBI is empowered to control E
management of banking companies in certain situations. It is
empowered to lay down conditions on which the banking
companies will operate. It is empowered to regulate paid-up
capital, reserve fund, cash fund and above all to lay down
policies in the matter of advances to be made by the: banking F
companies, allocation of resources etc. While laying down such
policies under the said Act, RBI can lay down parameters
enabling banking companies to expand its business. For
example, RBl's permission is required to be obtained if a
banking company seeks to deal in "derivatives". It is a business G
which will not fall in clauses (a) to (o) of Section 6(1)(a) and
yet RBI can lay down guidelines and directions enabling
banking companies to deal in derivatives like futures and
options. The point we are trying to make is that apart from the
principal business of accepting deposits and lending the said H
684 SUPREME COURT REPORTS [2010] 12 S.C.R.
A 1949 Act leaves ample scope for the banking companies to
venture into new businesses subject to such businesses being
subject to the control of the Regulator, viz. RBI. In other words,
the 1949 Act allows banking companies to undertake activities
and businesses as long as they do not attract prohibitions and
B restrictions like those contained in Sections 8 and 9. In this
connection we need to emphasize that Section 6(1 )(n) enables
a banking company to do all things as are incidental or
conducive to promotion or advancement of the business of the
company. Section 6(1) enables banking companies to carry on
C different types of businesses. Under Section 6( 1), these
different types of businesses are in addition to business of
banking, viz., core banking. The importance of the words "in
addition to" in Section 6(1) is that even if different businesses
under clauses (a) to (o) are shut down, the company would still
be a banking company as long as it is in the core banking of
0
accepting deposits and lending so that its main income is from
the spread or what is called as "interest income". Thus, we may
broadly categorise the functions of the banking company into
two parts, viz., core banking of accepting deposits and lending
and miscellaneous functions and services. Section 6 of the BR
E Act, 1949 provides for the form of business in which banking
companies may engage. Thus, RBI is empowered to enact a
policy which would enable banking companies to engage in
activities in addition to core banking and in the process it
defines as to what constitutes "banking business". The BR Act,
F 1949 basically seeks to regulate banking business. In the cases
in hand we are not concerned with the definition of banking but
with what constitutes "banking business". Thus, the said BR Act,
1949 is an open-ended Act. It empowers RBI (regulator and
policy framer in matter of advances and capital adequacy
G norms) to develop a healthy secondary market, by allowing
banks inter se to deal in NPAs in order to clean the balance
sheets of the banks which guideline/policy falls under Section
6(1 )(a) r/w Section 6(1 )(n). Therefore, it cannot be said that
assignment of debts/NPAs is not an activity permissible under
H
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 685
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
'he BR Act, 1949. Thus, accepting deposits and lending by itself A
's not enough to constitute the "business of banking". The
.:lependence of commerce on banking is so great that in
modern money economy the cessation even for a day of the
banking activities would completely paralyse the economic life
of the nation. Thus, the BR Act, 1949 mandates a statutory B
comprehensive and formal structure of banking regulation and
supervision in India.
14. The test to be applied is - whether trading in NPAs
has the characteristics of a bona fide banking business. That
test is satisfied in this case. The guidelines issued by RBI dated C
13.7.2005 itself authorizes banks to deal inter se in NPAs.
These guidelines have been issued by the Regulator in exercise
of the powers conferred by Sections 21 and 35A of the Act.
They have a statutory force of law. They have allowed banks to
engage in trading in NPAs with the purpose of cleaning the D
balance sheets so that they could raise the capital adequacy
ratio. All this comes within the ambit of Section 21 which
enables RBI to frame the policy in relation to Advances to be
followed by the banking companies and which empowers RBI
to give directions to banking companies under Section 21 (2). E
These guidelines and directions following them have a statutory
force. When a delegate is empowered by the Parliament to
enact a Policy and to issue directions which have a statutory
force and when the delegatee (RBI) issues such guidelines
(Policy) having statutory force, such guidelines have got to be F
read as supplement to the provisions of the BR Act, 1949. The
"banking policy" is enunciated by RBI. Such policy cannot be
said to be ultra vires the Act. The idea behind empowering RBI
to deterlJ)ine the Policy in relation to Advances is to enable
banking companies to expand their business of banking and G
in that sense such guidelines also define - as to what
constitutes banking business.
Trading in NPA - a misnomer
15. At the outset one needs to know what is NPA? When H
686 SUPREME COURT REPORTS [2010] 12 S.C.R.
A a borrower who is under liability to pay to secured creditors.
makes default in repayment of secured debt or any installment
thereof. the account of borrower is classified as Non-Performing
Asset (NPA). Such NPAs cannot be used for any productive
purpose. Continuous growth in NPAs threatens the repayment
B capacity of the banks. They have an adverse impact on the
financial strength of the banks which in the present era of
globalization are required to conform to International Standards.
Thus, NPA means an asset or account receivable of a
borrower. which has been classified by banks or financial
C institutions in terms of RBI Guidelines as sub-standard. doubtful
etc. These guidelines are issued to improve quality of assets
of the banks. The 2005 guidelines of RBI are not to eliminate
NPAs but to restructure. The BR Act, 1949 vide Section 21
empowers RBI in the interest of the Banking Policy to lay down
guidelines in relation to advances to be followed by banking
0
companies. The 2005 guidelines have been issued as "a
restructuring measure" in order to avoid setbacks in the
banking system. NPAs do not generate interest. 85% of the
Indian Banks' income comes from interest. Thus, NPAs
adversely impact profits of the banks and hence. as a matter
E of Banking Policy, RBI as Regulator seeks through its
guidelines under Section 21 r/w Section 35A to manage these
NPAs and not to eliminate. The said guidelines deal with
restructuring of the banking system which is one of the objects
behind giving authority to RBI to frame "banking policy". One
F more aspect needs to be kept in mind. In this batch of cases
we are dealing with assets in the hands of banks. NPAs are
"Account Receivables". The impugned guidelines show that RBI
considers inter se NPA assignment between banks to be a tool
for resolving the issue of NPAs and in the interest of banking
G policy under Section 21 of the BR Act, 1949. The object is to
minimize the problem of credit risk. The corporate debt
restructuring is one of the methods for reducing NPAs. Thus,
such restructuring as a matter of banking policy cannot be
treated as "trading". One has to keep in mind the object behind
H enactment of BR Act. 1949. Thus, the said Guidelines fall under
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 687
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
Section 21 of the 1949 Act. These Gu.idelines are a part of A
Credit Appraisal Mechanism. Thus, in our view the impugned
Guidelines are not ultra vires the BR Act, 1949. Dealing in
NPAs as part of the Credit Appraisal Mechanism and as a part
of Restructuring Mechanism falls within Section 21 r/w Section
35A of the Act. Hence, it cannot be said that "transfer of debts/ B
NPAs" inter se between banks is an activity which is
impermissible under the 1949 Act. The BR Act, 1949 is an Act
enacted to consolidate and amend the law relating to banking.
Thus, while interpreting the Act one needs to keep in mind not
only the framework of the banking law as it stood in 1949 but c
also the growth and the new concepts that have emerged in
the course of time. (see: Principles of Statutory Interpretation
by G.P. Singh, 11th edition at page 328.)
16. Thus, in our view on reading the provisions of the BR
Act, 1949 with the Guidelines of RBI issued from time to time D
in relation to Advances and Re-structuring/Management of
NPAs we are of the view that the BR Act, 1949 is a complete
Code on banking and that dealing in NPAs inter se by the
banks needs to be looked in the larger framework of "Re-
structuring of banking System". Thus, we need not go into the E
provisions of the said TP Act. In fact, it is the case of the
borrower(s) that provisions of the said TP Act has no
application. (See Written Submissions filed on 31.8.2010).
Invocation of Section 130 of TP Act, 1882 F
17. In the alternative, since the borrower(s) has relied on
Section 130 of the said TP Act, one needs to analyse the
contentions raised in that regard. According to the borrower(s)
assignment of Financial Instruments in possession of ICICI Bank
Ltd. to Kotak Mahindra Bank Ltd. transfers not merely the right G
to recover the debt but also transfers the obligations under the
Financial Instruments "as if they were executed by the clients
of ICICI Bank in favo•Jr of the assignee", i.e., Kotak Mahindra
Bank Ltd. According to the borrower(s), an assignment of ·a
debt can never carry with it the assignment of the obligations H
688 SUPREME COURT REPORTS [2010] 12 S.C.R.
A of the assignor unless there is a novation of the contract by all
parties. Therefore, according to the borrower(s). the impugned
Deed of Assignment is legally unsustainable without novation
of original contract between ICICI Bank Ltd. (assignor) and the
borrower(s) (assignee). We find no merit in the above
B arguments.
18. As stated above, an outstanding in the account of a
borrower(s) (customer) is a debt due and payable by the
borrower(s) to the bank. Secondly, the bank is the owner of such
debt. Such debt is an asset in the hands of the bank as a
c secured creditor or mortgagee or hypothecatee. The bank can
always transfer its asset. Such transfer in no mannE" affects any
right or interest of the borrower{s) (customer). Further, there is
no prohibition in the BR Act, 1949 in the bank transferring its
assets inter se. Even in the matter of assigning debts, it cannot
D be said that the banks are trading in debts, as held by the High
Court(s). The assignor bank has never purchased the debt(s).
It has advanced loans against security as part of its banking
business. The account of a client in the books of the bank
becomes Non Performing Asset when the client fails to repay.
E In assigning the debts with underlying security, the bank is only
transferring its asset and is not acquiring any rights of its
client(s). The bank transfers its asset for a particular agreed
price and is no longer entitled to recover anything from the
borrower(s). The moment ICICI Bank Ltd. transfers the debt with
F underlying security, the borrower(s) ceases to be the
borrower(s) of the ICICI Bank Ltd. and becomes the borrower(s)
of Kotak Mahindra Bank Ltd. (assignee). At this stage, we wish
to once again emphasize that debts are assets of the assignor
bank. The High Court{s) has erred in not appreciating that the
G assignor bank is only transferring its rights under a contract and
its own asset, namely, the debt as also the mortgagee's rights
in the mortgaged properties without in any manner affecting the
rights Of the borrower(s)/mortgagor(s) in the contract or in the
assets. None of the clauses of the impugned Deed of
H
ICICI BANK LIMITED Ii. OFFICIAL LIQUIDATOR OF 689
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
Assignment transfers any obligations of the assignor towards A
the assignee. In the case of"Khardah Company Ltd. v. Raymon
& Co. (India) Private Ltd. reported in (1963) 3 S.C.R. 183 the
Supreme Court has held that the law on the subject of
assignment of a contract is well settled. An assignment of a
contract might result by transfer either of the rights or by transfer B
of obligations thereunder. There is a well recognized distinction
between the two classes of assignments. As a rule, obligations
under a contract cannot be assigned except with the consent
of the promisee, and when such consent is given. it is really a
novation resulting in substitution of liabilities. That. rights underc
a contract are always assignable unless the contract is personal
in its nature or unless the rights are incapable of assignment,·
either under the law or under an agreement between the
parties. A benefit under the contract can always be assigned.
That, there is, in law, a clear distinction between assignment D
of rights under a contract by a party who has performed his
obligation thereunder and an assignment of a claim for
compensation which one party has against the other for breach
of contract.
19. In the case of Camdex International Ltd. v. Bank of E
Zambia reported in (1998) Q.B. 22 (CA) the following
observation which is relevant to the present case needs to be
quoted:
'The assignment of a debt will not be contrary to public F
policy solely on the grounds that the assignee has
purchased the debt for a considerably discounted price or
because that price is only payable after a period of credit.
Nor will the assignment be contrary to public policy simply
because the assignee may make a profit on the G
transaction at the end of the day. If there was no prospect
of a profit, 1-iobhouse LJ observed, commercial entities
would never purchase debts."
20. Similarly, the following proposition in Chitty on
H
690 SUPREME COURT REPORTS [2010] 12 S.C.R.
A Contracts, 27th edn. (1994) at para 19.027 is relevant to be
noted.
"It is also well established that a claim to a simple debt is
assignable even if the debtor has refused to pay. The
practice of assigning or 'selling' debts to debt collecting
B
agencies and credit factors could hardly be carried on if
the law were otherwise. "
21. In view of the above exposition of law, we find that under
the impugned Deed of Assignment only the Account-
C Receivables in the books of ICICI Bank Ltd. has been
transferred to Kotak Mahindra Bank Ltd. The obligations of ICICI
Bank Ltd. towards its borrower(s) (customer) under the loan
agreement secured by deed of hypothecation/mortgage have
not been assigned by ICICI Bank Ltd. to the assignee bank,
D namely, Kotak Mahindra Bank Ltd. Hence, it cannot be said
that the impugned Deed of Assignment is unsustainable in law.
The obligations referred to in the impugned Deed of
Assignment are the obligations, if any, of ICICI Bank Ltd.
towards Kotak Mahindra Bank Ltd. (assignee) in the matter of
E transfer of NPAs. For example, when an Account Receivable
is treated as NPA and assigned to the assignee bank, the
parties have to follow certain Guidelines issued by RBI. If there
is a breach of the Guidelines or statutory directions issued by
RBI by Assignor in regard to transfer of NPA then the assignee
F bank can enforce such obligations vis-a-vis the assignor bank.
It is these obligations which are referred to in the impugned
Deed of Assignment. That, an Account Receivable becomes
an NPA only because of the default committed by th~
borrower(s) who fails to repay. Lastly, it may be mentioned that
G the said SARFAESI Act, 2002 was enacted enabling specified
SPVs to buy the NPAs from banks. However, from that it does
not follow that banks inter se cannot transfer their own assets.
Hence the said SARFAESI Act, 2002 has no relevance in this
case.
H 22. Before concluding, we may state that NPAs are
ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF 691
APS STAR INDUSTRIES LTD. [S.H. KAPADIA, CJI.]
created on account of the breaches committed by the borrower. A
He violates his obligation to repay the debts. One fails to
appreciate the opportunity he seeks to participate in the
'Transfer of Account Receivable" from one bank to the other.
Conclusion:
B
23. As stated above, by the impugned judgment, the
Division Bench of the Gujarat High Court upheld the order of
the Company Court only on one ground, namely, assignment
of debts by the banks inter se is an activity which is
impermissible under the Banking Regulation Act, 1949. C
However, the Division Bench did not go into other issues which
ar9se for determination before the Company Court, including
applicability of the provisions of the Registration Act, 1908.
24. In the circumstances, we set aside the impugned D
judgment(s) on the question of assignment of debts as an
activity permissible under the Banking Regulation Act, 1949.
However, we remit these matters to the Division Bench of the
High Court(s) for consideration of other issues raised in this
batch of cases. Subject to above, the impugned judgment(s)
is set aside and the civil appeals are allowed with no order as E
to costs.
B.B.B. Appeal allowed.
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