Bank loan assignment valid with intimation after transfer, no prior notice required under law

Karnataka HC dismissed the appeal regarding loan assignment to respondent No.7. The court held that intimation of assignment on 27.12.2022 was sufficient as law requires intimation, not prior notice. The appellant's account was classified as SMA on 14.11.2022 due to overdue amounts between 1-30 days, constituting default under RBI circulars. The court ruled that RBI circular operation itself serves as notice to borrowers regarding timely payment requirements. The assignment was valid as lenders are permitted to transfer stressed loans, including SMA-classified accounts.

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The core legal questions considered by the Court include: (i) whether the assignment of the loan account from the original lenders (respondents No.4 to 6) to the asset reconstruction company (respondent No.7) was lawful and in compliance with the applicable statutory and regulatory framework, including the SARFAESI Act and Reserve Bank of India (RBI) Master Circulars; (ii) whether the appellants were entitled to prior notice or intimation regarding the classification of their loan account as a stressed asset or Non-Performing Asset (NPA) before such assignment; (iii) whether the loan account was indeed a stressed asset or NPA at the time of assignment, and the consequences thereof; (iv) the scope of judicial review over banking and financial institutions' decisions, including the recall of credit facilities and assignment of loans; and (v) whether the appellants had any enforceable right to credit under the Emergency Credit Line Guarantee Scheme (ECLGS) and whether refusal to extend such credit was arbitrary or violative of any statutory obligation.

Regarding the legality of the loan assignment, the Court analyzed the provisions of the SARFAESI Act, 2002, and RBI Master Circulars issued between 2019 and 2023, which regulate the classification of loan accounts and the permissible transfer of stressed assets to asset reconstruction companies (ARCs). The Court relied on authoritative precedents, notably the Supreme Court's decisions in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., which affirm that the debt owed by a borrower is an asset of the lender and that such asset can be transferred or assigned without the borrower's consent. The assignment does not affect the borrower's contractual rights or obligations but merely transfers the lender's rights to recover the debt. The Court emphasized that intimation, rather than prior consent or notice, to the borrower suffices to satisfy principles of natural justice in this context.

On the issue of whether the appellants' loan account was a stressed asset or NPA, the Court examined the RBI's classification framework for Special Mention Accounts (SMA) and NPAs. The RBI Master Circular dated 07.06.2019 categorizes SMA into SMA-0 (overdue 1-30 days), SMA-1 (31-60 days), and SMA-2 (61-90 days), with the recognition of incipient stress occurring immediately upon default. The Court found that the appellants' account was classified as SMA-1 on 14.11.2022, indicating that principal or interest payments were overdue between 31 and 60 days, thereby constituting default under the Insolvency and Bankruptcy Code (IBC) definition. The Court noted that the appellants admitted the existence of default, undermining their contention that the account was not stressed. The Court further observed that the Master Circulars and RBI guidelines permit the assignment of any stressed loan, including those classified as SMA, to ARCs, without the necessity of the account being declared an NPA.

Addressing the appellants' argument that they were not notified of the SMA classification or default status, the Court held that the RBI's regulatory framework and the reporting mechanism to the Central Repository of Information on Large Credits (CRILC) fulfill the requirement of notice. The appellants were notified by way of the assignment intimation dated 27.12.2022, and the CRILC report dated 30.11.2022 reflected the SMA status of their account. The Court rejected the claim that the absence of explicit notice of SMA classification or default violated principles of natural justice, relying on the Supreme Court's rulings that the lender's right to transfer assets does not require borrower consent and that intimation suffices.

Regarding the appellants' reliance on earlier RBI circulars, particularly the Master Circular dated 21.03.2014, which mandated close monitoring and borrower engagement upon SMA-0 or SMA-1 classification, the Court observed that these circulars were superseded by later guidelines issued between 2019 and 2023. The current regulatory framework governs the classification and assignment of stressed assets, and the assignment in the present case complied with these updated norms. The Court also noted that the appellants did not raise these circulars before the Single Judge, and their belated reliance did not merit interference.

On the scope of judicial review over banking decisions, the Court reiterated the restrictive nature of such review, citing a coordinate Bench's judgment which held that courts do not act as appellate authorities over commercial decisions of banks unless there is statutory violation or malafide conduct. The Court emphasized that prudential decisions, such as recalling credit facilities or assigning loans, are within the exclusive domain of lenders and are not subject to re-evaluation by courts on merits or commercial prudence. The appellants' challenge to the recall of credit facilities and refusal to extend ECLGS credit was thus held to be untenable, as the scheme imposes no absolute obligation on lenders to disburse credit and leaves the discretion to assess financial risk with the lending institution.

The Court also addressed the appellants' contention that the assignment was contrary to the SARFAESI Act and RBI Master Circulars. It found no statutory or regulatory violation in the assignment process, noting that the account was stressed and that the assignment followed the prescribed framework. The Court further observed that disputes regarding the debt and default were already before the National Company Law Tribunal (NCLT) under the IBC, and that the writ jurisdiction was not the appropriate forum to adjudicate such private contractual disputes between lenders and borrowers.

In its conclusions, the Court upheld the principle that debts are assets of the lender and may be assigned or transferred without borrower consent, provided intimation is given. The classification of the appellants' account as SMA-1 constituted default, justifying the assignment under the RBI guidelines. The Court rejected the appellants' claims of lack of notice or violation of natural justice, and declined to interfere with the lender's commercial decisions or the assignment process. It affirmed the limited scope of judicial review in banking matters and emphasized that disputes over debt and default are to be resolved through the statutory insolvency process before the NCLT.

Significant holdings include the following verbatim excerpts of crucial legal reasoning:

"The Apex Court holds that what the assignor Bank has done is transferring its right under a contract and its own asset to another Bank without in any manner affecting the right of the borrower. Therefore, that matter should not have been a subject matter of judicial review before the High Court."

"The lender has a right to transfer/ assign its assets to another person without seeking consent of the borrower. Such transfer/assignment is recognised and that this Court in APS Star Industries has recognised and upheld such an assignment."

"The scope of judicial review of 'Bankers Decisions' is too restrictive... Courts exercising constitutional jurisdiction under Article 226 do not sit as Appellate Authorities over the acts & deeds of the Bank... unless the action of the Bank is apparently malafide, even a wrong decision taken by it cannot be interfered."

"When the lender Banks in given facts & circumstances of the case take a decision as dictated by the prudence, for abruptly recalling the credit facilities, it is not for the courts to sit in appeal over their wisdom."

Core principles established include:

• Debt owed by a borrower is an asset of the lender and can be assigned or transferred without borrower consent, subject only to intimation.
• Classification of loan accounts as SMA or NPA is governed by RBI Master Circulars, and assignment of stressed assets includes those classified as SMA-0, SMA-1, and SMA-2.
• Judicial review of banking decisions, including assignment of loans and recall of credit, is limited to cases of statutory violation or malafide conduct; courts do not re-assess commercial prudence.
• Disputes relating to default and debt recovery are to be adjudicated under the Insolvency and Bankruptcy Code before the NCLT, not through writ petitions.
• Discretionary credit relief schemes like ECLGS do not confer a vested right on borrowers to demand credit; lenders may refuse credit based on financial risk assessment.

Final determinations on each issue are:

• The assignment of the appellants' loan account to the asset reconstruction company was lawful and complied with the SARFAESI Act and RBI guidelines.
• The appellants were duly intimated of the assignment and the SMA classification of their account; no prior consent or notice of default was legally required.
• The appellants' loan account was a stressed asset classified as SMA-1, constituting default under applicable norms.
• The writ petition challenging the assignment and seeking relief under the ECLGS was dismissed as lacking merit and outside the scope of judicial review.
• Disputes concerning debt and default are to be resolved by the NCLT under the IBC framework.

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