Transfer of non-performing assets between banks is a permissible banking activity, and assignee banks may step into recovery proceedings.

Inter se transfer of non-performing assets between banks is treated as a permissible incident of banking business under the Banking Regulation Act, 1949, because the Act allows banking companies to deal with property, rights and interests connected with securities and does not impose a general bar on assignment of debts. RBI directions permitting purchase and sale of NPAs reinforce that framework, so assignment deeds are not illegal on that basis. An assignee bank that acquires the receivables and secured creditor's rights may step into the assignor's shoes in recovery proceedings, including matters concerning companies in liquidation, because the borrower's underlying liability is not novated by the transfer.

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Issues: (i) Whether inter se transfer of non-performing assets by banks is an activity permissible under the Banking Regulation Act, 1949 and whether executed assignment contracts are illegal; (ii) Whether the assignee bank is entitled to substitution in place of the original lender in proceedings relating to companies in liquidation.

Issue (i): Whether inter se transfer of non-performing assets by banks is an activity permissible under the Banking Regulation Act, 1949 and whether executed assignment contracts are illegal.

Analysis: Section 2 of the Banking Regulation Act, 1949 makes the Act supplemental to the Companies Act, 1956 and other laws, while Sections 5 and 6 show that banking companies may, in addition to core banking, engage in other forms of business including dealing with property, rights and interests connected with security and doing acts incidental or conducive to banking business. Sections 8 and 9 are prohibitory provisions and do not create a general bar against assignment of debts. The Reserve Bank of India, acting under Sections 21 and 35A, had issued guidelines permitting purchase and sale of non-performing financial assets between banks and financial institutions as a restructuring measure and as part of banking policy. On that framework, inter se transfer of NPAs is not trading in debts in the prohibited sense but a permissible banking activity within the statutory scheme.

Conclusion: The transfer of debts and NPAs between banks is permissible under the Banking Regulation Act, 1949, and the assignment deeds are not illegal on that ground.

Issue (ii): Whether the assignee bank is entitled to substitution in place of the original lender in proceedings relating to companies in liquidation.

Analysis: The assignment transferred the receivables and the secured creditor's rights in the debt, while the borrowers' underlying liability remained unaffected. Since the assignee became the holder of the debt and the secured interest, it was entitled to step into the shoes of the assignor for recovery purposes. The objection that the obligations of the assignor were assigned was rejected, as the document was treated as a transfer of the assignor's own asset and rights rather than a novation of the borrower contract.

Conclusion: The assignee bank was entitled to substitution in place of the original lender in the company proceedings.

Final Conclusion: The impugned judgment was set aside on the question of permissibility of inter se assignment of bank debts, and the matters were remitted to the High Court for consideration of remaining issues.

Ratio Decidendi: A banking company may, under the Banking Regulation Act, 1949 and binding RBI directions, transfer its receivables and secured interests in NPAs to another bank as a permissible incident of banking business and banking policy regulation.

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