Full Judgment Text
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IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No.8393 OF 2010
(Arising out of S.L.P.(C) No. 2240 of 2009)
ICICI Bank Limited …
Appellant(s)
versus
Official Liquidator of
APS Star Industries Ltd. & Ors. …
Respondent(s)
with
Civil Appeal Nos.8394-8406 of 2010 (@ SLP(C) Nos. 2241-2253/09),
Civil Appeal Nos.8407-8425 of 2010 (@ SLP(C) Nos. 2254-2272/09),
Civil Appeal No.8426 of 2010 (@ SLP(C) No. 25151/09),
Civil Appeal No.8427 of 2010 (@ SLP(C) No. 20617/09).
J U D G M E N T
S. H. KAPADIA, CJI
Leave granted.
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
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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 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:
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 Ltd. as assignor was the absolute and beneficial
owner of Financial Instruments and receivables thereunder. An
aggregate of Rs. 52.45 crores being the principal amount
outstanding under the trade credit facilities was due and payable
by the borrowers to ICICI Bank Ltd. (assignee). The assignor had
agreed to sell and assign to the assignee, Kotak Mahindra Bank
Ltd., all debts together with interest on “as is where is” basis.
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Kotak Mahindra Bank Ltd., in turn, agreed to acquire the said
debts on “as is where is” basis. In consideration of Kotak
Mahindra Bank Ltd. paying the purchase price to ICICI Bank Ltd.
for purchase of the debts, the assignor agreed to assign
absolutely unto the assignee on “as is where is” basis, without
the assignee having any recourse to the assignor. Consequently,
Kotak Mahindra Bank Ltd., assignee, became the full and
absolute legal owner of the debts and as such the only person
legally entitled to receive the repayments of debts. 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 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:
2.2.1The 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;
2.2.2The Assignor shall not be subject to any duties
and/ or obligations in respect of the Financial
Instruments;
2.2.3The Assignee shall have all the rights and
obligations under the Financial Instruments as if
they were executed by the Clients in favour of the
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Assignee.”
4. One of the borrowers of ICICI Bank Ltd. at the relevant
time was M/s A.P.S. Star Ltd., a company which
Industries
subsequently went under liquidation. By way of Company
Application in the pending winding up proceedings before the
Company Court, Kotak Mahindra Bank Ltd. moved Company
Application for being substituted in place of original secured
creditor, ICICI Bank Ltd. This was pursuant to the Deed of
Assignment dated 31.3.2006. The Company Application for
substitution was moved at a stage of provisional/final winding up
proceedings. Before the Company Court, Kotak Mahindra 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
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
Ltd. Before the Company Court, the secured creditor, ICICI Bank
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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 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 the conclusion that the
impugned Deed was not presented in terms of Section 21 and
also that the impugned Deed did not meet the requirement of the
said section. However, the Company Court clarified that these
were its prima facie observations. On the acquisition of rights by
Kotak Mahindra Bank Ltd., the Company Court, however, held
that the claimed rights were not acquired by the assignee, Kotak
Mahindra Bank Ltd., through the process known in law and
therefore they cannot be permitted to be substituted in place of
ICICI Bank Ltd. as secured creditor of the company in
liquidation. Aggrieved by the said decision 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
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framed, e.g., whether the Company Court was justified in holding
that a separate documentation 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 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 substituted in
place of the secured creditor of the company in liquidation,
namely, ICICI Bank Ltd.
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 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:
6. Shri Harish N. Salve, learned senior counsel, appearing
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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 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 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 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 incorporated under the Companies
Act, 1956. 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,
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1882 (“TP Act” for short) whereas secured debts such as
mortgages were transferable by way of conveyance. Reliance in
this connection was placed on the definition of the words
“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, 1949 that 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 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
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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 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 (l) and clause (n). According to
the learned counsel, only prohibition under the BR Act, 1949 so
far as the business 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 (“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 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 and
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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 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 where financial
assets of banks are acquired. According to the learned counsel,
this concept of securitization is a totally new 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 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, 1949.
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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 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 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 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 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
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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
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 the assignor. In this connection, Shri
Andhyarujina relied upon Section 130 of the TP Act, 1882.
Therefore, according to the learned counsel, such an 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 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 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
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business” only to accepting for the purpose of lending or
investment of deposits of money. In other words, according to the
learned counsel, the 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 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 acquisition can only
be if the originator assigns his debt to the securitization
company. According to the learned counsel, the Parliament has
now prescribed the only legal way of transferring financial assets
under the SARFAESI Act which would include debts due to a
bank (NPA or otherwise), by transfer to any securitization
company or reconstruction company. Therefore, 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 or reconstruction
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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 Recognition Asset
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Classification and Provisioning Pertaining to Advances” dated 30
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 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 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 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
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counsel submitted that no interference is called for with the
impugned judgment(s) and the appeals preferred by the assignor
deserve to be dismissed.
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 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 proceedings relating to companies in
liquidation pending in the Company Court?
10. Reasons and Findings:
(i) On the issue concerning assignment of debts by bank
inter se
Before dealing with Issue No. (i), we need to quote
hereinbelow relevant provisions of BR Act, 1949:
“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.
5 - Interpretation
In this Act, unless there is anything repugnant in the
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subject or context, -
(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;
(c) "banking company" means any company which
transacts the business of banking in India;
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 man-
ufacturer or 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 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) "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;
(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 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:-
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(a) the borrowing, raising, or taking up of money; the
lending or advancing of money either upon or without
security; the drawing, making, accepting, discounting,
buying, selling, collecting and dealing in bills of
exchange, 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; 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 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 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;
(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 such security;
(l) 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;
(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
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Government may, by notification in the Official Gazette,
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).
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 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-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
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 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:
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 the depositors of the banking company.
12. Regulation of paid-up capital, subscribed capital
and authorised capital and voting rights of
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shareholders
(1) No banking company shall carry on business in
India, 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 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 ordinary shares or equity shares and
such 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
th
before the 15 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 shareholders of the banking
company.
17. Reserve Fund
(1) Every banking company incorporated in India shall
create a reserve fund and shall, out of the balance of
profit 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), the Central Government may, on the
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recommendation of 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 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 company.
18. Cash reserve
(1) Every banking company, not being a scheduled
bank, shall 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 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
under the Negotiable Instruments Act, 1881 (26 of
1881), at the close of business on the preceding
working day.
Explanation.--In this section, and in section 24,-
(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
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the 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
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) "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 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
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 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 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 regarded for the purposes of
this section and section 24 as liability in India of a
banking company, the decision of the Reserve Bank
22
thereon shall be final.
20. Restrictions on loans and advances
(1) Notwithstanding anything to the contrary contained
in section 77 of the Companies Act, 1956 (1 of 1956),
no banking company shall,-
(a) grant any loans or advances on the security of its
own shares, or-
(b) enter into any commitment for granting any loan or
advance to or on behalf of-
(i) any of its directors,
(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 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
(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
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 (Amendment) Act, 1968(58 of 1968), but in
pursuance of a commitment entered into before such
commencement, steps shall be taken to recover the
23
amounts due to the banking company on account of
the loan, or advance together with interest, if any, due
thereon within the period 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
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 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,
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.
(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 subsection, then, such person shall, if he is a
director of such 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.--In this section-
(a) "loans or advance" shall not include any transaction
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
24
relevant considerations, specify by 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 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 be final.
21 - Power of Reserve Bank to control advances by
banking companies
(1) Where the Reserve Bank is satisfied that it is
necessary 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, 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 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-
(a) the purposes for which advances may or may not be
made,
(b) the margins to be maintained in respect of secured
advances,
(c) the maximum amount of advances or other financial
accommodation which, having regard to the paid-up
25
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 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, 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.
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 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.
23. Restrictions on opening of new, and transfer of
existing, places of business
(1) Without obtaining the prior permission of the
Reserve Bank-
(a) no banking company shall open a new place of
business 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 a new place of business outside India or change,
26
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
(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 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 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
(1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(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
(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 the banking company, as the case may
be, shall be bound to comply with such directions.
27
(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 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
(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 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 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);
(d) at any time, if it is satisfied that in the public
interest or in the interest 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 depositors it is necessary
so to do, by order in writing and on such terms and
conditions as may be specified therein-
(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 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
28
the banking company or of any committee or of any
other body constituted by it; require the banking
company to give 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 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;
(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;
(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.
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 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 in such
proceeding and the liquidator, if any, functioning in
such proceeding shall vacate office upon such
appointment.
29
(2) Subject to such directions as may be made by the
High Court, the remuneration of the official liquidator
appointed 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 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 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
(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 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.
47A. Power of Reserve Bank to impose penalty
(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 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;
30
(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 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.
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, the provisions of sections 10, 13 to 15, 17,
19 to 21A, 23 to 28, 29 excluding sub-section (3) sub-
section (1B), (1C) 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 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-
(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 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) precludes that bank from
entering into any 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
31
Reserve Bank or a corporation owned 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
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
(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.;
(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 Rural Bank and a subsidiary bank.”
11. For the purpose of deciding Issue No. (i), we are also
th
required to quote relevant portion of RBI Guidelines dated 13
July, 2005, which reads as under:
“ Guidelines on purchase/ sale of Non Performing
Financial Assets
Scope
1. These guidelines would be applicable to banks, FIs
and NBFCs purchasing/ selling non performing
financial assets, from/ to other banks/FIs/NBFCs
(excluding securitisation companies/ reconstruction
companies).
2. A financial asset, including assets under
32
multiple/consortium banking arrangements, would be
eligible for purchase/sale in terms of these guidelines
if it is a non-performing asset/non performing
investment in the books of the selling bank.
3. The reference to ‘bank’ in the guidelines would
include 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
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 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, 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 depositors and efficient
33
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, advancing of money; acquiring and
holding and dealing with property (security) or right, title and
interest therein; 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 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 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. 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
34
other laws save and except to the extent of any activity which is
prohibited or restricted (See: Section 2). Section 12 says that 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 companies. Section
21 empowers RBI to frame policies in relation to advances to be
followed by banking companies. It 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 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 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
35
functions of RBI. Under 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
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 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, RBI’s
permission is required to be obtained if a banking company seeks
to deal in “derivatives”. It is a business 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 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.
36
RBI. In other words, the 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. 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 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 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 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,
37
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 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 the BR Act,
1949. Thus, accepting deposits and lending by itself is not
enough to constitute the “business of banking”. The dependence
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 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
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
38
statutory force of law. They have allowed banks to engage in
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 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 the delegatee
(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 empowering RBI to determine the Policy in relation to
Advances is to enable banking companies to expand their
business of banking and 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 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
39
(NPA). Such NPAs cannot be used for any productive purpose.
Continuous growth in NPAs threatens the repayment 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 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 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 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
more aspect needs to be kept in mind. In this batch of cases we
40
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 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 enactment of BR Act,
1949. Thus, the said Guidelines fall under Section 21 of the
1949 Act. These Guidelines are a part of 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/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 also the growth and the new
concepts that have emerged in the course of time. (see: Principles
th
of Statutory Interpretation by G.P. Singh, 11 edition at page
41
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 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 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
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
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 favour 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 of the
assignor unless there is a novation of the contract by all parties.
42
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 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
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 of the bank
becomes Non Performing Asset when the client fails to repay. 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 underlying
43
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 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 Assignment transfers any
obligations of the assignor towards 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 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 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
44
agreement between the parties. A benefit under the contract can
always be assigned. That, 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.
19. In the case of Camdex International Ltd. v. Bank of
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 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 transaction at the end of the day. If there
was no prospect of a profit, Hobhouse LJ observed,
commercial entities would never purchase debts.”
20. Similarly, the following proposition in Chitty on Contracts,
th
27 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
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 Receivables
in the books of ICICI Bank Ltd. has been transferred to Kotak
45
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, 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 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
bank can enforce such obligations vis-à-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 the borrower(s) who fails to
repay. Lastly, it may be mentioned that 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.
22. Before concluding, we may state that NPAs are created on
46
account of the breaches committed by the borrower. 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:
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. 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.
24. In the circumstances, we set aside the impugned
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 to costs.
…..……………………….CJI
(S. H. Kapadia)
47
……………………………..J.
(Swatanter Kumar)
New Delhi;
September 30, 2010.