# ICICI BANK LIMITED v. OFFICIAL LIQUIDATOR OF APS STAR INDUSTRIES LTD. AND ORS

- **Citation:** [2010] 12 S.C.R. 644
- **Court:** Supreme Court of India
- **Decided:** 2010-09-30
- **Case number:** Civil Appeal No. 8393 of 2010
- **Bench:** S.H. Kapadia, Swatanter Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/icici-bank-limited-v-official-liquidator-of-aps-star-industries-ltd-and-ors-26399
- **Pages:** 48

## Headnote

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 thatassignment 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.
D
Allowing the appeals, the Court
HELD:1. The Banking Regulation Act, 1949 provides
f

## Text

_Characters 0–39,773 of 90,816. This is a partial read: ask again with offset=39773 for what follows._

A
B
[2010] 12 S.C.R. 644
ICICI BANK LIMITED
V.
OFFICIAL LIQUIDATOR OF APS STAR INDUSTRIES LTD.
AND ORS.
(Civil Appeal No. 8393 of 2010)
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 thatassignment 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.
D
Allowing the appeals, the Court
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
H
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
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]
3. Section 6(1)(n) of the 1949 Act enables a banking
B
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] [684C-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
secured creditors, makes default in repayment of secured
debt or any installment thereof, the account of borrower
B
is classified as Non-Performing Asset (NPA). Such NPAs
cannot be used for any productive purpose. Continuous
growth in NPAs threatens the repayment ca
1pacity 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
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
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
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
E
F
G
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
0 Restructuring Mechanism falls within Section 21 r/w
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)
(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
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).
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
A
B
c
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
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
asset, namely, the debt as also the mortgagee's rights in
E
F
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; 689A]
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
E
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.
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
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
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]
Case Law Reference:
(1963) 3 S.C.R. 183
(1998) Q.B. 22 (CA)
relied on
referred to
Para 18
Para 19
E
F
G
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.
c
SLP (C) No. 29880 of 2009,
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
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
B
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
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
E
F
Ltd. as assignor was the absolute and beneficial owner of
Financial Instruments and receivables thereunder. An
aggregate of Rs. 52.45 crores being the principal amount
outstanding under the trade credit facilities was due and
payable by the borrowers to ICICI Bank Ltd. (assignee). The
assignor had agreed to sell and assign to the assignee, Kotak
Mahindra Bank Ltd., all debts together with interest on "as is
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:
c
D
E
F
G
"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
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
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
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
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
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
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
A
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
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.
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
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
E
F
G
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
0
Financial Assets and Enforcement of Security Interest Act, 2002
("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
0
learned counsel, there is no merit in the argument of the
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.