Fairness in debt assignment: pending settlement, stamp defects and misrepresentation can invalidate a bank's transfer of secured debt.

A public sector bank's assignment of a borrower's debt and security during pending recovery proceedings and an ongoing settlement proposal is analysed as subject to writ scrutiny where public funds and fairness are implicated. The document notes that the transfer was questioned for lack of lawful basis under the SARFAESI framework, improper stamping, and misrepresentation in presenting the transaction as SARFAESI-based. It further states that a guarantor's liability could not be prejudiced by a unilateral transfer made while the settlement process was unresolved, and that a deposited one-time settlement amount was to be accepted and adjusted with release of the secured charge.

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Issues: (i) whether the writ petition was maintainable to challenge the deed of assignment executed by a public sector bank during pendency of recovery proceedings; (ii) whether the deed of assignment transferring the borrower's debt and security to another bank was valid in law, including the effect of the SARFAESI framework, the Transfer of Property Act and the finding of insufficient stamping and misrepresentation; and (iii) whether the petitioner-guarantor was entitled to relief, including discharge of liability and acceptance of the one time settlement amount already deposited.

Issue (i): whether the writ petition was maintainable to challenge the deed of assignment executed by a public sector bank during pendency of recovery proceedings

Analysis: The dispute was not treated as a mere private contractual matter. The bank was acting as a public financial institution dealing with public funds, and the assignment was executed while recovery proceedings and a pending one time settlement proposal existed. The record showed that the borrower had deposited a substantial amount under the settlement process and that the bank had not taken any decision on that proposal before transferring the debt. In these circumstances, the matter was held fit for scrutiny in writ jurisdiction.

Conclusion: The writ petition was maintainable and the challenge was entertained on merits.

Issue (ii): whether the deed of assignment transferring the borrower's debt and security to another bank was valid in law, including the effect of the SARFAESI framework, the Transfer of Property Act and the finding of insufficient stamping and misrepresentation

Analysis: The assignment was held to be unjustified because the transferee was not an asset reconstruction or securitisation company, while the transaction was projected before the stamp authorities as though it were a SARFAESI-based assignment. The deed was also found to have been impounded for insufficient stamp duty. The Court further found that the bank had acted arbitrarily in disposing of the debt for a comparatively small consideration despite a higher settlement offer being available and despite the borrower's deposit already lying with the bank. The challenge based on the Transfer of Property Act and the statutory scheme therefore succeeded on the facts found.

Conclusion: The deed of assignment was invalid and liable to be quashed so far as it related to the petitioner's company.

Issue (iii): whether the petitioner-guarantor was entitled to relief, including discharge of liability and acceptance of the one time settlement amount already deposited

Analysis: The guarantor's position was treated as co-extensive with that of the principal borrower subject to law, and the Court held that the bank's unilateral transfer of the debt during the subsistence of the settlement process could not prejudice the petitioner. Since the borrower had deposited the settlement amount directed by the Court, the settlement offer was treated as binding on the parties and the bank was directed to take the amount in discharge of the arrangement. The charge over the company's property was also required to be released.

Conclusion: Relief was granted in favour of the petitioner and the deposited settlement amount was ordered to be accepted and adjusted.

Final Conclusion: The assignment was set aside in relation to the petitioner's company, and the bank was directed to treat the deposited sum as full and final settlement for releasing the secured charge.

Ratio Decidendi: A public sector bank acting as a custodian of public funds must deal fairly and in good faith, and an assignment of a borrower's debt made during pending settlement and recovery proceedings may be quashed where it is found arbitrary, tainted by misrepresentation, and unsupported by lawful statutory authority or proper stamp compliance.

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