Banking Regulation Act limits NPA assignments, so an assignee bank cannot be substituted on an unlawful transfer.

A banking company cannot treat the purchase and sale of non-performing assets with underlying security as a permissible form of banking business under the Banking Regulation Act, 1949. Section 5(b) confines banking business to accepting deposits for lending or investment, while Section 6 provisions do not authorise trading in debts; Section 6(2) read with Section 8 was read as barring business outside the enumerated forms. The Court also held that general transfer law cannot override this special statutory scheme, and an assignment structured as a basket transaction was impermissible. Because the transfer was unlawful, the assignee bank could not be substituted for the assignor in winding-up proceedings.

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Issues: (i) Whether banking companies can assign and purchase non-performing assets with underlying security as a permissible form of banking business under the Banking Regulation Act, 1949; (ii) Whether the assignee bank was entitled to be substituted in place of the assignor bank in the winding up proceedings on the basis of the deed of assignment.

Issue (i): Whether banking companies can assign and purchase non-performing assets with underlying security as a permissible form of banking business under the Banking Regulation Act, 1949.

Analysis: The business of banking under Section 5(b) of the Banking Regulation Act, 1949 is confined to accepting deposits for lending or investment. The additional forms of business under Section 6(1) are enabling provisions, but they do not authorise a banking company to trade in debts. The Court held that clauses such as Section 6(1)(a), (f), (g), (l), (m), (n) and (o) do not cover purchase and sale of NPAs as a basket transaction, and that Section 6(2) read with Section 8 imposes an absolute prohibition on business outside the enumerated forms. The Court further held that general law under the Transfer of Property Act, 1882 cannot override this special statutory scheme, and that the assignment structure was speculative in nature and inconsistent with banking policy.

Conclusion: The deed of assignment was not a permissible banking activity and the transaction was invalid in law, against the appellants.

Issue (ii): Whether the assignee bank was entitled to be substituted in place of the assignor bank in the winding up proceedings on the basis of the deed of assignment.

Analysis: Since the assignment itself was held to be impermissible under the Banking Regulation Act, 1949, the assignee could not claim substitution as successor to the secured creditor. The Court also noted the special position of winding up proceedings and the pari passu scheme under Sections 529 and 529A of the Companies Act, 1956, and held that clubbing of different debts and charges could not justify substitution. The Court rejected the contention that substitution could be granted merely on a prima facie basis when the underlying transfer itself was unlawful.

Conclusion: The appellants were not entitled to substitution in place of the assignor bank, against the appellants.

Final Conclusion: The assignment of NPAs by one banking company to another was held to be outside the statutory powers of banking companies, and the refusal to substitute the assignee bank was upheld.

Ratio Decidendi: A banking company cannot, under the Banking Regulation Act, 1949, engage in trading of debts or NPAs as a form of banking business, and an assignee cannot seek substitution on the basis of a transfer that is itself impermissible in law.

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