Transfer of NPAs is bona fide banking business

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Does the Banking Regulation Act, 1949, allow transfer of non-performing assets (NPAs) by banks? Ruling in ICICI Bank Limited v Official Liquidator of APS Star Industries Ltd & Ors, the Supreme Court held that a bank can deal in NPAs as part of its credit appraisal process and for the purpose of cleaning up its balance sheets. The court said that banks in doing so are following guidelines issued by the Reserve Bank of India that have been issued in accordance with section 21 read with section 35A of the Banking Regulation Act, 1949.

This case began when ICICI Bank assigned a basket of its NPAs to Mahindra Bank in March 2006. Subsequently APS Star – one of ICICI Bank’s borrowers when Kotak Mahindra acquired the basket of NPAs – went into liquidation. During proceedings to wind up APS Star, it rejected requests for Kotak Mahindra to be substituted in place of its original secured creditor, ICICI Bank, on the grounds that the deed of assignment was not valid. The Company Court that was involved in the winding up agreed with APS Star.

An appeal to Gujarat High Court followed. The court upheld the order of the Company Court on the ground that assignment of debts by banks is not an activity which is permissible under the Banking Regulation Act, 1949. As such the deed of assignment was illegal and Kotak Mahindra could not take ICICI Bank’s place.

This prompted major banks, including ICICI Bank, Kotak Mahindra Bank, Standard Chartered bank and the Indian Banks Association, to challenge this decision before Supreme Court.

(For more details of this judgment see pages 52 and 59.)

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.