Supreme Court allows banks to assign debts

In ICICI Bank Ltd v Official Liquidator of APS Star Industries Ltd & Ors the Supreme Court considered whether the transfer of non-performing assets (NPA) by banks was permissible under the Banking Regulation Act, 1949 (BR Act).

ICICI Bank and Kotak Mahindra Bank entered into a deed of assignment by which ICICI Bank assigned to Kotak certain debts that were credit facilities granted to various borrowers. The debt was assigned on an “as is where is” basis, for which Kotak paid approximately Rs520 million (US$11.7 million). Accordingly the assignee, Kotak, became the secured creditor for the debt.

Subsequently one of ICICI Bank’s borrowers, APS Star Industries, went into liquidation and Kotak requested (by way of a company application) to be substituted as the secured creditor. Kotak’s position was that debt can be sold by creditors and purchased by banks and financial institutions. Although ICICI Bank supported Kotak in this application, the borrower – APS Star – contended the deed of assignment had not lawfully given Kotak the right to replace ICICI Bank. Agreeing with APS Star, the Company Court held that the rights had not been conveyed legally.

Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners.