Case: Icici Bank Limited Vs. Officl.Liquir.Of Aps Star Indus.Ld

According to the impugned judgment(s), assignment of debts by banks inter se is not an activity which is permissible under the said BR Act, 1949 and consequently all executed contracts of assignment of debts were illegal. According to the impugned 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. 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 theOn 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.One of the borrowers of ICICI Bank Ltd. at the relevant time was M/s A.P.S. Star Industries Ltd., a company which subsequently went under liquidation. By way of Company Application in the pending winding up proceedings before the Company Court, Kotak Mahindra Bank Ltd. moved Company Application for being substituted in place of original secured creditor, ICICI Bank Ltd. This was pursuant to the Deed of Assignment dated 31.3.2006. The Company 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 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 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.

Court's reasoning:
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, RBIs 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. 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, 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 intest 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 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 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 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.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 nofind 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 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 mortgagees 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 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 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 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.