2010 (9) TMI 236 - SC - Companies Law

Bank-to-bank NPA assignments vs 'trading' ban under BR Act: transfers upheld, not illegal trading

Whether inter se transfer/assignment of NPAs by banks is impermissible 'trading' under the BR Act, 1949 was the dominant issue. The SC held the BR Act is ... Assignment of debts by banks inter se - definition of 'banking' - trading in NPAs - Guidelines on purchase/sale of Non-Performing Financial Assets - Whether inter se transfer of Non-Performing Assets ('NPA') by banks is illegal under Banking Regulation Act, 1949 ('BR Act, 1949') as held by the Gujarat High Court in the impugned judgment? HELD THAT:- 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. On reading the provisions of the BR Act, 1949 with the RBI Guidelines, 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. In the case of Khardah Co. Ltd. v. Raymon & Co. (India) (P.) Ltd. [1963] 3 SCR 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 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. 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-a-vis the assignor bank. It is these obligations which are referred to in the impugned Deed of Assignment. That, an Account Receivable becomes an NPA only because of the default committed by 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. 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. Thus, we set aside the impugned judgment(s) on the question of assignment of debts as an activity permissible under the Banking Regulation Act, 1949. Issues: (i) Whether inter se assignment/transfer of Non-Performing Assets (NPAs) by banks is permissible under the Banking Regulation Act, 1949 and related RBI guidelines.Analysis: The Banking Regulation Act, 1949 provides an open-ended framework for banking business: section 2 preserves other laws except where the BR Act expressly provides otherwise; section 5 defines banking and banking company; section 6(1) lists forms of business a banking company may engage in including activities incidental or conducive to banking business (clauses (a), (g), (l), (n)); sections 8 and 9 impose limited prohibitions relating to trading and non-banking assets. Sections 21 and 35A empower the Reserve Bank to determine policy in relation to advances and to issue directions binding on banks. RBI's Guidelines dated 13-7-2005 on purchase/sale of Non-Performing Financial Assets were issued under these statutory powers and authorize banks, financial institutions and NBFCs to purchase/sell NPAs inter se (excluding securitisation/reconstruction companies). The correct test is whether dealing in NPAs has the characteristics of bona fide banking business and falls within powers conferred by the BR Act and RBI's delegated policy-making. Assignment of account receivables (NPAs) transfers the bank's proprietary asset (the debt) and related security rights; it does not, without novation, transfer the assignor's contractual obligations to the borrower. The SARFAESI Act supplies a mechanism for securitisation/reconstruction but does not exclude banks from transferring their own financial assets inter se when such transfers fall within RBI policy and the BR Act framework.Conclusion: Assignment/transfer of NPAs inter se between banks is permissible under the Banking Regulation Act, 1949 read with RBI's guidelines (including the Guidelines dated 13-7-2005); the High Court's conclusion that such inter se assignments are impermissible is set aside.