Borrower-wise NPA classification and valid transfer of stressed exposure to an asset reconstruction company upheld.

Asset classification must be assessed borrower-wise rather than facility-wise when determining whether an account has become a non-performing asset. On the facts discussed, the borrower's cash credit account remained irregular and overdrawn, the term loan remained unpaid under the revised schedule, and the borrower did not rebut the material showing default; the account was therefore treated as non-performing. The transfer of the stressed exposure to an asset reconstruction company was also held valid under the SARFAESI framework, since the asset remained stressed or non-performing on the date of sale and no breach of binding regulatory directions was shown. The writ challenge to the sale process accordingly failed.

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Issues: (i) Whether the borrower's account was non-performing asset as on the date of classification; (ii) whether the transfer of the financial asset by the secured creditor to the asset reconstruction company was valid; (iii) what relief, if any, the parties were entitled to.

Issue (i): Whether the borrower's account was non-performing asset as on the date of classification.

Analysis: The account had to be assessed borrower-wise and not facility-wise. The cash credit account remained irregular and overdrawn beyond the sanctioned limit for the relevant period, and the borrower had itself submitted a restructuring plan acknowledging the outstanding position. The term loan account had also been rescheduled and remained unpaid in accordance with the revised schedule. The borrower did not rebut the material showing default and did not discharge the burden of showing that none of the credit facilities had become stressed or non-performing by the relevant date.

Conclusion: The account was correctly treated as non-performing asset, and the finding is against the borrower.

Issue (ii): Whether the transfer of the financial asset by the secured creditor to the asset reconstruction company was valid.

Analysis: Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 permits acquisition of financial assets by an asset reconstruction company, and the governing RBI framework permits transfer where the exposure is stressed or non-performing. On the relevant date of sale, the borrower's exposure remained stressed and non-performing. The transfer was not vitiated merely because the borrower had not responded to the notice under Section 13(2), and the assignment did not amount to a measure under Section 13(4). No violation of the binding regulatory directions was established.

Conclusion: The transfer and assignment were valid, and the finding is in favour of the secured creditor and the asset reconstruction company.

Issue (iii): What relief, if any, the parties were entitled to.

Analysis: Since the classification and transfer were upheld, the writ relief granted by the Single Judge could not stand. The challenge to the sale process did not succeed, and no ground was made out to interdict the assignment.

Conclusion: The appeals were allowed and the writ petition was dismissed.

Final Conclusion: The impugned judgment was set aside, the bank's assignment of the loan exposure was upheld, and the borrower's challenge to the sale process failed.

Ratio Decidendi: For a lawful transfer of a loan exposure under Section 5 of the Act of 2002, the account must be stressed or non-performing on the date of sale, and asset classification is to be examined borrower-wise rather than facility-wise.

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