9911796707🚨 Important Update for Our Users
We are transitioning to our new and improved portal - www.taxtmi.com - for a better experience.
Follow us:
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (7) TMI 141 - HC - Indian LawsAssignment of loan of the appellants to respondent No.7 - assignment has been effected without prior notice or intimation to the appellants - no notice of default of loan agreement/cash management agreement was given - appellants were not notified that their account was either NPA or a stressed asset - HELD THAT - The date of 27.12.2022 is the date of assignment of the loan to respondent No.7. Intimation in that regard to the appellants can be seen from pages No.636 to 638 of the paper book. The requirement of law can only be an intimation not a prior notice. The circular dated 21.03.2014 stipulated that the NBFC must take up with the borrower with a view to rectifying the deficiencies at the earliest that too only when the accounts are reported as SMA-1 or SMA-0 as the said circulars contemplate as soon as the account is reported as SMA-2 by one or more lending banks/notified NBFCs the same will trigger the mandatory formation of joint lenders forum and formulation of corrective action plan as envisaged in paragraph No.2.3 of the framework. But the same is not the position in the circulars issued between the years 2019 and 2023 which governs the assignment in this case. The said circulars as held by the learned single judge deals with four factors (i) declaration of an account to be an NPA (ii) what is a standard or stressed asset (iii) framework for resolution of standard or stressed asset (iv) transfer of asset to an ARC. As per the master circular dated 24.09.2021 as updated on 05.12.2022 it is clear that the lenders are permitted to transfer only stressed loan. The stressed loan is defined as loan exposures that are classified as NPAs or SMAs. It is the case of the respondents No.4 to 6 that the account of the appellant has been classified as SMA on 14.11.2022 which means the amount is wholly or partially overdue between 1-30 days. Therefore it classifies as default as per the definition because the whole or any part or installment of the amount of debt has become due and payable and was not paid by the appellants. So the classification of account as SMA is in view of operation of the circulars issued by the RBI. In other words by the operation of the circulars the account is classified as SMA and operation of the circulars in itself is a notice to the borrowers to pay the installment on time to avoid being classified in any of the SMA. Appeal dismissed.
The core legal questions considered by the Court include: (i) whether the assignment of the loan account from the original lenders (respondents No.4 to 6) to the asset reconstruction company (respondent No.7) was lawful and in compliance with the applicable statutory and regulatory framework, including the SARFAESI Act and Reserve Bank of India (RBI) Master Circulars; (ii) whether the appellants were entitled to prior notice or intimation regarding the classification of their loan account as a stressed asset or Non-Performing Asset (NPA) before such assignment; (iii) whether the loan account was indeed a stressed asset or NPA at the time of assignment, and the consequences thereof; (iv) the scope of judicial review over banking and financial institutions' decisions, including the recall of credit facilities and assignment of loans; and (v) whether the appellants had any enforceable right to credit under the Emergency Credit Line Guarantee Scheme (ECLGS) and whether refusal to extend such credit was arbitrary or violative of any statutory obligation.
Regarding the legality of the loan assignment, the Court analyzed the provisions of the SARFAESI Act, 2002, and RBI Master Circulars issued between 2019 and 2023, which regulate the classification of loan accounts and the permissible transfer of stressed assets to asset reconstruction companies (ARCs). The Court relied on authoritative precedents, notably the Supreme Court's decisions in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., which affirm that the debt owed by a borrower is an asset of the lender and that such asset can be transferred or assigned without the borrower's consent. The assignment does not affect the borrower's contractual rights or obligations but merely transfers the lender's rights to recover the debt. The Court emphasized that intimation, rather than prior consent or notice, to the borrower suffices to satisfy principles of natural justice in this context. On the issue of whether the appellants' loan account was a stressed asset or NPA, the Court examined the RBI's classification framework for Special Mention Accounts (SMA) and NPAs. The RBI Master Circular dated 07.06.2019 categorizes SMA into SMA-0 (overdue 1-30 days), SMA-1 (31-60 days), and SMA-2 (61-90 days), with the recognition of incipient stress occurring immediately upon default. The Court found that the appellants' account was classified as SMA-1 on 14.11.2022, indicating that principal or interest payments were overdue between 31 and 60 days, thereby constituting default under the Insolvency and Bankruptcy Code (IBC) definition. The Court noted that the appellants admitted the existence of default, undermining their contention that the account was not stressed. The Court further observed that the Master Circulars and RBI guidelines permit the assignment of any stressed loan, including those classified as SMA, to ARCs, without the necessity of the account being declared an NPA. Addressing the appellants' argument that they were not notified of the SMA classification or default status, the Court held that the RBI's regulatory framework and the reporting mechanism to the Central Repository of Information on Large Credits (CRILC) fulfill the requirement of notice. The appellants were notified by way of the assignment intimation dated 27.12.2022, and the CRILC report dated 30.11.2022 reflected the SMA status of their account. The Court rejected the claim that the absence of explicit notice of SMA classification or default violated principles of natural justice, relying on the Supreme Court's rulings that the lender's right to transfer assets does not require borrower consent and that intimation suffices. Regarding the appellants' reliance on earlier RBI circulars, particularly the Master Circular dated 21.03.2014, which mandated close monitoring and borrower engagement upon SMA-0 or SMA-1 classification, the Court observed that these circulars were superseded by later guidelines issued between 2019 and 2023. The current regulatory framework governs the classification and assignment of stressed assets, and the assignment in the present case complied with these updated norms. The Court also noted that the appellants did not raise these circulars before the Single Judge, and their belated reliance did not merit interference. On the scope of judicial review over banking decisions, the Court reiterated the restrictive nature of such review, citing a coordinate Bench's judgment which held that courts do not act as appellate authorities over commercial decisions of banks unless there is statutory violation or malafide conduct. The Court emphasized that prudential decisions, such as recalling credit facilities or assigning loans, are within the exclusive domain of lenders and are not subject to re-evaluation by courts on merits or commercial prudence. The appellants' challenge to the recall of credit facilities and refusal to extend ECLGS credit was thus held to be untenable, as the scheme imposes no absolute obligation on lenders to disburse credit and leaves the discretion to assess financial risk with the lending institution. The Court also addressed the appellants' contention that the assignment was contrary to the SARFAESI Act and RBI Master Circulars. It found no statutory or regulatory violation in the assignment process, noting that the account was stressed and that the assignment followed the prescribed framework. The Court further observed that disputes regarding the debt and default were already before the National Company Law Tribunal (NCLT) under the IBC, and that the writ jurisdiction was not the appropriate forum to adjudicate such private contractual disputes between lenders and borrowers. In its conclusions, the Court upheld the principle that debts are assets of the lender and may be assigned or transferred without borrower consent, provided intimation is given. The classification of the appellants' account as SMA-1 constituted default, justifying the assignment under the RBI guidelines. The Court rejected the appellants' claims of lack of notice or violation of natural justice, and declined to interfere with the lender's commercial decisions or the assignment process. It affirmed the limited scope of judicial review in banking matters and emphasized that disputes over debt and default are to be resolved through the statutory insolvency process before the NCLT. Significant holdings include the following verbatim excerpts of crucial legal reasoning: "The Apex Court holds that what the assignor Bank has done is transferring its right under a contract and its own asset to another Bank without in any manner affecting the right of the borrower. Therefore, that matter should not have been a subject matter of judicial review before the High Court." "The lender has a right to transfer/ assign its assets to another person without seeking consent of the borrower. Such transfer/assignment is recognised and that this Court in APS Star Industries has recognised and upheld such an assignment." "The scope of judicial review of 'Bankers Decisions' is too restrictive... Courts exercising constitutional jurisdiction under Article 226 do not sit as Appellate Authorities over the acts & deeds of the Bank... unless the action of the Bank is apparently malafide, even a wrong decision taken by it cannot be interfered." "When the lender Banks in given facts & circumstances of the case take a decision as dictated by the prudence, for abruptly recalling the credit facilities, it is not for the courts to sit in appeal over their wisdom." Core principles established include:
Final determinations on each issue are:
|
