2010 (9) TMI 236 - SC - Companies Law

Form of business in which banking companies may engage 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?

Summary

Issues Involved:

1. Whether the Gujarat High Court was right in holding that assignment of debts by banks inter se is not an activity permissible under the Banking Regulation Act, 1949 and consequently all executed contracts of assignment of debts were illegal?
2. Whether the High Court was right in holding that the assignee bank(s) was not entitled to substitution in place of the original lender (assignor) in proceedings relating to companies-in-liquidation pending in the Company Court?

Issue-Wise Detailed Analysis:

1. Assignment of Debts by Banks Inter Se:

The primary issue before the Supreme Court was whether the inter se transfer of Non-Performing Assets (NPAs) by banks is illegal under the Banking Regulation Act, 1949 (BR Act, 1949) as held by the Gujarat High Court. The Court examined the relevant provisions of the BR Act, 1949, including Sections 2, 5, 6, 8, 9, 12, 17, 18, 20, 21, 22, 23, 24, 35A, 36, and 39, to understand the scope of banking activities permissible under the Act.

The Court found that the BR Act, 1949 is a comprehensive code on banking, which empowers the Reserve Bank of India (RBI) to regulate the business of banking companies. Section 6(1) of the Act allows banking companies to engage in various forms of business in addition to core banking, including the acquisition, holding, and dealing with property (security) or any right, title, or interest therein, and doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company.

The Court noted that the RBI, in exercise of its powers under Sections 21 and 35A of the BR Act, 1949, had issued guidelines dated 13-7-2005, which authorized banks to deal inter se in NPAs. These guidelines have the statutory force of law and are aimed at cleaning the balance sheets of banks to improve their financial health. The Court emphasized that the assignment of debts/NPAs is part of the credit appraisal and restructuring mechanism, which falls within the ambit of Section 21 read with Section 35A of the Act.

The Court rejected the argument that the assignment of debts constitutes trading in debts, which is prohibited under Sections 8 and 9 of the BR Act, 1949. The Court clarified that the assignment of debts by banks is a transfer of assets and not trading. The assignor bank transfers its asset (debt) to the assignee bank for a consideration, and the borrower becomes liable to the assignee bank. The Court further held that the assignment of debts does not affect the rights of the borrower and does not require novation of the contract.

The Court concluded that the assignment of debts by banks inter se is an activity permissible under the BR Act, 1949, and the impugned judgment of the Gujarat High Court holding otherwise was erroneous.

2. Substitution of Assignee Bank in Proceedings Relating to Companies-in-Liquidation:

The second issue was whether the assignee bank is entitled to substitution in place of the original lender (assignor) in proceedings relating to companies-in-liquidation pending in the Company Court. The Court noted that the Division Bench of the Gujarat High Court had not examined this issue and had upheld the order of the Company Court only on the ground that the assignment of debts by banks is not permissible under the BR Act, 1949.

The Court observed that the Company Court had held that the assignee bank could not be substituted in place of the original secured creditor because the claimed rights were not acquired through a process known in law. The Company Court had also made prima facie observations regarding the presentation and registration of the Deed of Assignment under Section 21 of the Registration Act, 1908.

The Supreme Court set aside the impugned judgment of the Gujarat High Court on the question of assignment of debts being permissible under the BR Act, 1949. However, the Court remitted the matters to the Division Bench of the High Court for consideration of other issues raised, including the applicability of the provisions of the Registration Act, 1908, and the substitution of the assignee bank in the proceedings relating to companies-in-liquidation.

Conclusion:

The Supreme Court held that the assignment of debts by banks inter se is an activity permissible under the Banking Regulation Act, 1949, and set aside the impugned judgment of the Gujarat High Court. The Court remitted the matters to the Division Bench of the High Court for consideration of other issues raised in the cases. The civil appeals were allowed with no order as to costs.