TaxTMI 
TaxTMI 
2010 (9) TMI 236
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.... E.R. Kumar, Ms. Shakun Sharma, Kumar Shashank, Kavin Gulati, R.N. Karanjawala, Ms. Manik Karanjawala, Ms. Nandini Gore, Murli Kaushik, Kamal Nijhawan, Jitendra Kumar, Sumit Gaur, Mohinder Jit Singh Rupal, Yash Anand, Shree Pal Singh, Senthil Jagadeesan, Ms. Maneesha Dhir, Ms. Purti Marwaha, R.S. Paliwal, Ms. Jayashree Shukla, Ms. Tripti Gupta, Gagan Gupta, Apoorve Karol and Mayank Grover for the Appearing Parties. JUDGMENT S.H. Kapadia, CJI. - Leave granted. 2. The short question which we are required to decide in this batch of cases is - Whether inter se transfer of Non-Performing Assets ("NPA" for short) by banks is illegal under Banking Regulation Act, 1949 ("BR Act, 1949" for short) as held by the Gujarat High Court in the impugned judgment? According to the impugned judgment(s), assignment of debts by banks inter se is not an activity which is permissible under the said BR Act, 1949 and consequently all executed contracts of assignment of debts were illegal. According to the impugned judgment(s), the assignee banks were not entitled to substitution in place of original lender (assignor) in proceedings relatable to companies in liquidation pending in the Company Court. Fac....
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....f the Financial Instruments; 2.2-3 The Assignee shall have all the rights and obligations under the Financial Instruments as if they were executed by the Clients in favour of the Assignee." 4. One of the borrowers of ICICI Bank Ltd., at the relevant time was M/s. A.P.S. Star Industries Ltd., a company which subsequently went under liquidation. By way of Company Application in the pending winding up proceedings before the Company Court, Kotak Mahindra Bank Ltd., moved Company Application for being substituted in place of original secured creditor, ICICI Bank Ltd. This was pursuant to the Deed of Assignment dated 31-3-2006. The Company Application for substitution was moved at a stage of provisional/final winding up proceedings. Before the Company Court, Kotak Mahindra Bank Ltd., submitted that, as per BR Act, 1949 read with the Guidelines of Reserve Bank of India dated 13-7-2005, sale and purchase of debts, including the rights in immovable properties being secured creditors, can be sold by loaners and purchased by banks/financial institutions as assignees. According to Kotak Mahindra Bank Ltd., since proceedings for winding up were pending before the Company Court at various stag....
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.... upheld the order of the Company Court only on the ground that assignment of debts by banks is not an activity which is permissible under the BR Act, 1949 and consequently, the impugned Deed(s) was illegal and the assignee bank(s) was not entitled to substitution in place of ICICI Bank Ltd., (assignor). The Division Bench has not examined the other questions referred to above. Submissions 6. Shri Harish N. Salve, learned senior counsel, appearing on behalf of the appellants submitted that the Division Bench of the High Court erred in holding that in assigning debts with underlying security the assignor banks were trading in debts which was not permissible under the BR Act, 1949 because the assignor bank had never purchased debts, it had advanced loans against security which was a part of its banking business. That, it was only when the account became NPA that the assignor bank decided to dispose of the debt(s) which was its asset along with the underlying security. Similarly, the assignee bank, Kotak Mahindra Bank Ltd., which acquired the debt along with the underlying security also did not sell the debt or the underlying security acquired as per RBI Guidelines. On the contrary, ....
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....of debt would fall within five of the clauses in section 6(1) of the BR Act, 1949, namely, clause (a), clause (c ), clause (g), clause (l) and clause ( n). According to the learned counsel, only prohibition under the BR Act, 1949 so far as the business of a bank is concerned is contained in sections 8 and 9 and neither of the said provisions limits or prohibits assignment of debts. According to the learned counsel, there is one more error in the impugned judgment. According to the High Court, Parliament had enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act" for short) because the BR Act, 1949 did not permit banks to assign debts; that the SARFAESI Act is an exclusive Act for assignment of debts and that the said SARFAESI Act permitted banks to assign debts not inter se but only to certain specified entities like Asset Management Companies ("AMC" for short)/Asset Reconstruction Companies. According to the learned counsel, the High Court had failed to appreciate the object of the SARFAESI Act. It has failed to appreciate the provisions of that Act. According to the learned counsel, the concept of securitization....
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....ng reliance on their Guidelines. For the aforestated reasons, learned counsel submitted that the impugned judgment is erroneous and is liable to be set aside. 8. In reply, Shri T.R. Andhyarujina, learned senior counsel appearing for the borrower, inter alia submitted that the assignment of financial instruments in possession of ICICI Bank Ltd., to Kotak Mahindra Bank Ltd., transfers not only the right of recovering debt but also transfers the obligations under the financial instruments "as if the said financial instruments were executed by the clients of ICICI Bank in favour of the assignee". That, the assignment of a debt can never carry with it the assignment of the obligations of the assignor. Unless there is a novation of the contract by all parties, there cannot be a transfer of the obligations of the assignor. In this connection, Shri Andhyarujina relied upon section 130 of the TP Act, 1882. Therefore, according to the learned counsel, such an assignment cannot be legally sustained without novation of original contract executed by the assignor and the debtor. Consequently, such assignment cannot under any circumstances come within the permissible mode of business under secti....
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....-2001. Lastly, learned counsel submitted that assignment of debt by ICICI Bank is not a mode of recovery. According to the learned counsel, assignment of debt and recovery of debt are two different concepts. When there is recovery, the debt is totally extinguished whereas in the case of assignment the debt is not extinguished, the debt remains, the debtor remains, only the creditor changes. That, the assignee Bank cannot be said to be recovering debt when it in fact assigns the debt because both the debtor and the debt continue to exist and they are not extinguished. In the written submissions submitted on behalf of the borrower, one additional point is taken. According to the borrower, in the present batch of cases all rights and liabilities have crystallized on the date of the winding up order and, therefore, assignment of debt by a bank cannot be permitted after the company is ordered to be wound up as that would amount to violating the provisions of the Companies Act, 1956. For the aforestated reasons, the learned counsel submitted that no interference is called for with the impugned judgment(s) and the appeals preferred by the assignor deserve to be dismissed. 9. Issues :- (....
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.... to the business of banking, a banking company may engage in any one or more of the following forms of business, namely :- (a )the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, "discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or other....
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....e aforesaid period of seven years by such period not exceeding five years where it is satisfied that such extension would be in the interests of the depositors of the banking company. 12. Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders.-(1) No banking company shall carry on business in India, unless it satisfies the following conditions, namely :- (i)that the subscribed capital of the company is not less than one-half of the authorised capital, and the paid-up capital is not less than one-half of the subscribed capital and that, if the capital is increased, it complies with the conditions prescribed in this clause within such period not exceeding two years as the Reserve Bank may allow; (ii )that the capital of the company consists of ordinary shares only or of ordinary shares or equity shares and such preferential shares as may have been issued prior to the 1st day of July, 1944 : Provided that nothing contained in this sub-section shall apply to any banking company incorporated before the 15th day of January, 1937. (2) No person holding shares in a banking company shall, in respect of any shares held by him, exercise....
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....he banking company; (iii)in the case of a Regional Rural Bank, also any loan taken by such bank from its Sponsor Bank; (b)"fortnight" shall mean the period from Saturday to the second following Friday, both days inclusive; (c )"net balance in current accounts" shall, in relation to a banking company, mean the excess, if any, of the aggregate of the credit balances in current account maintained by that banking company with State Bank of India or a subsidiary bank or a corresponding new bank over the aggregate of the credit balances in current account held by the said banks with such banking company; (d )for the purposes of computation of liabilities, the aggregate of the liabilities of a banking company to the State Bank of India, a subsidiary bank, a corresponding new bank, a regional rural bank, another banking company, a co-operative bank or any other financial institution notified by the Central Government in this behalf, shall be reduced by the aggregate of the liabilities of all such banks and institutions to the banking company; (e )the expression "co-operative bank" shall have the meaning assigned to it in clause (cci) of section 56. (2) The Reserve Bank may, for the p....
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.... date beyond the period of three years from the commencement of the said section 5, and subject to such terms and conditions, as the Reserve Bank may deem fit : Provided further that this sub-section shall not apply if and when the director concerned vacates the office of the director of the banking company, whether by death, retirement, resignation or otherwise. (3) No loan or advance, referred to in sub-section (2), or any part thereof shall be remitted without the previous approval of the Reserve Bank, and any remission without such approval shall be void and of no effect. (4) Where any loan or advance referred to in sub-section (2), payable by any person, has not been repaid to the banking company within the period specified in that sub-section, then, such person shall, if he is a director of such banking company on the date of the expiry of the said period, be deemed to have vacated his office as such on the said date. Explanation.-In this section- (a )"loans or advance" shall not include any transaction which the Reserve Bank may, having regard to the nature of the transaction, the period within which, and the manner and circumstances in which, any amount due on account ....
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....arry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject of such conditions as the Reserve Bank may think fit to impose. 23. Restrictions on opening of new, and transfer of existing, places of business.- (1) Without obtaining the prior permission of the Reserve Bank- (a )no banking company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India; and (b )no banking company incorporated in India shall open a new place of business outside India or change, otherwise than within the same city, town or village in any country or area outside India, the location of an existing place of business situated in that country or area : 24. Maintenance of a percentage of assets.-(2A) A scheduled bank, in addition to the average daily balance which it is, or may be, required to maintain under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934) and every other banking company, in addition to the cash reserve which it is required to maintain under section 18, shall maintain in India, a....
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....and on such terms and conditions as may be specified therein- (i )require the banking company to call a meeting of its directors for the purpose of considering any matter relating to or arising out of the affairs of the banking company; or require an officer of the banking company to discuss any such matter with an officer of the Reserve Bank; (ii )depute one or more of its officers to which the proceedings at any meeting of the Board of directors of the banking company or of any committee or of any other body constituted by it; require the banking company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank; (iii)require the Board of directors of the banking company or any committee or any other body constituted by it to give in writing to any officer specified by the Reserve Bank in this behalf at his usual address all notices of, and other communications relating to, any meeting of the Board, committee or other body constituted by it; (iv)appoint one or more of its officers to observe the manner in which the affairs of the banking company or of its offices or bra....
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....nking company, then, the Reserve Bank may impose on such banking company- (a )where the contravention is of the nature referred to in sub-section (3) of section 46, a penalty not exceeding twice the amount of the deposits in respect of which such contravention was made; (b )where the contravention or default is of the nature referred to in sub-section (4) of section 46, a penalty not exceeding five lakh rupees or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where such the contravention or default is a continuing one, a further penalty which may extend to twenty-five thousand rupees for every day, after the first, during which the contravention of default continues. 51. Application of certain provisions to the State Bank of India and other notified banks.-(1) Without prejudice to the provisions of the State Bank of India Act, 1955 (23 of 1955) or any other enactment, the provisions of sections 10, 13 to 15, 17, 19 to 21A, 23 to 28, 29 excluding sub-section (3) sub-section (1B), (1C) and (2) of sections 30,31, 34, 35, 35A, 36 excluding clause (a) of sub-section (1), 45Y to 45ZF, 46 to 48, 50, 52 and 53 shall a....
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.... asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non-performing investment in the books of the selling bank. 3. The reference to 'bank' in the guidelines would include financial institutions and NBFCs." Brief analysis of the BR Act, 1949 12. The BR Act, 1949 provides for the comprehensive definition of "banking" so as to bring within its scope all institutions which receive deposits for lending or investment and to give RBI a control over banking companies. It is an Act to consolidate and amend the law relating to banking. Section 2 clarifies that the 1949 Act shall be in addition to and not in derogation of the Companies Act, 1956 and any other law for the time being in force save as therein expressly provided. Section 5(1)(a) is the interpretation section. It defines "banking" to mean "accepting deposits for lending". This is principal business of a bank. Section 5(1)(c) defines banking company as any company which transacts the business of banking. Thus, a banking company has to be a company in the first instance. Section 5(1)(ca) defines "banking policy" t....
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....rmine policy in relation to advances whereas section 21(2) empowers RBI to give directions to banking companies as to items mentioned there i.e., in section 21(2). Under section 21(3) every banking company is bound to comply with directions given by RBI at the peril of penalty being levied for non-compliance. Section 35A says that where RBI is satisfied that in the interest of Banking Policy it is necessary to issue directions to banking companies it may do so from time to time and the banking companies shall be bound to comply with such directions. Thus, in exercise of the powers conferred by sections 21 and 35A of the said Act, RBI can issue directions having statutory force of law. Section 36 deals with further powers and functions of RBI. Under section 39 it is the RBI who shall be the Official Liquidator in any proceedings concerning winding up of a banking company. 13. The above analysis of the various provisions of the 1949 Act shows that RBI is empowered to regulate the business of the banking companies. That, RBI is empowered to control management of banking companies in certain situations. It is empowered to lay down conditions on which the banking companies will operate....
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....business. In the cases in hand we are not concerned with the definition of banking but with what constitutes "banking business". Thus, the said BR Act, 1949 is an open-ended Act. It empowers RBI (regulator and policy framer in matter of advances and capital adequacy norms) "to develop a healthy secondary market, by allowing banks inter se to deal in NPAs in order to clean the balance sheets of the banks which guideline/policy falls under section 6(1)(a) read with section 6(1)(n). Therefore, it cannot be said that assignment of debts/NPAs is not an activity permissible under the BR Act, 1949. Thus, accepting deposits and lending by itself is not enough to constitute the "business of banking". The dependence of commerce on banking is so great that in modern money economy the cessation even for a day of the banking activities would completely paralyse the economic life of the nation. Thus, the BR Act, 1949 mandates a statutory comprehensive and formal structure of banking regulation and supervision in India. 14. The test to be applied is - whether trading in NPAs has the characteristics of a bona fide banking business. That test is satisfied in this case. The guidelines issued by RBI....
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....n issued as "a restructuring measure" in order to avoid setbacks in the banking system. NPAs do not generate interest .85 per cent of the Indian Banks' income comes from interest. Thus, NPAs adversely impact profits of the banks and hence, as a matter of Banking Policy, RBI as Regulator seeks through its guidelines under section 21 read with section 35A to manage these NPAs and not to eliminate. The said guidelines deal with restructuring of the banking system which is one of the objects behind giving authority to RBI to frame "banking policy". One more aspect needs to be kept in mind. In this batch of cases we are dealing with assets in the hands of banks. NPAs are "Account Receivables". The impugned guidelines show that RBI considers inter se NPA assignment between banks to be a tool for resolving the issue of NPAs and in the interest of banking policy under section 21 of the BR Act, 1949. The object is to minimize the problem of credit risk. The corporate debt restructuring is one of the methods for reducing NPAs. Thus, such restructuring as a matter of banking policy cannot be treated as "trading". One has to keep in find the object behind enactment of BR Act, 1949. Thus, the s....
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....We find no merit in the above arguments. 18. As stated above, an outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the bank. Secondly, the bank is the owner of such debt. Such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypothecatee. The bank can always transfer its asset. Such transfer in no manner affects any right or interest of the borrower(s) (customer). Further, there is no prohibition in the BR Act, 1949 in the bank transferring its assets inter se. Even in the matter of assigning debts, it cannot be said that the banks are trading in debts, as held by the High Court(s). The assignor bank has never purchased the debt(s). It has advanced loans against security as part of its banking business. The account of a client in the books of the bank becomes Non-Performing Asset when the client fails to repay. In assigning the debts with underlying security, the bank is only transferring its asset and is not acquiring any rights of its client(s). The bank transfers its asset for a particular agreed price and is no longer entitled to recover anything from the borrower(s). The moment ICICI Bank Ltd.....
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.... LJ observed, commercial entities would never purchase debts." 20. Similarly, the following proposition in Chitty on Contracts, 27th edn. (1994) at para 19.027 is relevant to be noted. "It is also well established that a claim to a simple debt is assignable even if the debtor has refused to pay. The practice of assigning or 'selling' debts to debt collecting agencies and credit factors could hardly be carried on if the law were otherwise." 21. In view of the above exposition of law, we find that under the impugned Deed of Assignment only the Account Receivables in the books of ICICI Bank Ltd., has been transferred to Kotak Mahindra Bank Ltd. The obligations of ICICI Bank Ltd., towards its borrower(s) (customer) under the loan agreement secured by deed of hypothecation/mortgage have not been assigned by ICICI Bank Ltd., to the assignee bank, namely, Kotak Mahindra Bank Ltd. Hence, it cannot be said that the impugned Deed of Assignment is unsustainable in law. The obligations referred to in the impugned Deed of Assignment are the obligations, if any, of ICICI Bank Ltd., towards Kotak Mahindra Bank Ltd., (assignee) in the matter of transfer of NPAs. For example, when an Account Rec....