In A setback to a deal between ICICI and Kotak Mahindra banks pertaining to sale and purchase of debts on payment of a nominal sum,the Gujarat High Court has ruled that the banks cannot engage in trading of debts.
In a recent ruling,the court observed that they are not allowed to transfer debts from one bank to another under provisions of the Banking Regulation Act of 1949.
The landmark judgment came in a case between Kotak Mahindra Bank (KMB) and Aps Star India Limited (ASIL) and 19 others,who are borrowers/customers of the ICICI Bank. KMB had moved a division bench after it lost the case before the company court and a single judge bench of the high court.
According to case details,ICICI Bank (assignor) had executed a ‘deed of assignment’ to KMB (assignee),under which 56 debts amounting to Rs 52.45 crore with underlying security interest were assigned or sold out for a sum of Rs 12 crore. According to petitioners,Rs 52.45 crore is only the principal amount whereas the debts run
into hundreds of crores. ICICI Bank had contended that it had transferred the debts to KMB as a mode of recovery of its outstanding loans.
The two-judge bench comprising justices D A Mehta and H N Devani,however,observed that the transaction did not amount to recovery,but a trading activity,which is not allowed for a banking company under the BR Act.
Pointing out that the “concept of trading in debts is,by its very nature,abhorrent to the concept of banking in any form”,the bench said the present transaction “is bad in law” because of its “not being permissible in law”.
Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002,the two banks in question should have formed their own securitisation and reconstruction of financial assets company for transaction of debts. But the court observed the bank itself acted as a securitisation company,which is not allowed under the existing law.
The judgement made it clear that the “present transaction in essence is transfer of NPAs (non-performing assets) and hence the payment received for transfer of assets cannot be termed to be towards recovery of outstanding loan”.
The order stated that the recovery of a loan can be done only from the borrower while the transaction in question essentially amounts to trading debts,an illegal activity.
The whole act,according to the order,amounted to “doing injustice to the basic fabric of the trust reposed by the customer in the bank”. The court also held the ICICI Bank guilty of not giving enough opportunity to customers whose securities were transferred to another bank.