SC validates assignment of debt between banks

Readers will recollect the APS Star litigation that arose from a transfer, by way of assignment, of a pool of non-performing loans (NPAs) along with their underlying security, from ICICI Bank (the assignor) to Kotak Mahindra Bank (the assignee).

Putting the brakes on

The transfer was contested by one of ICICI Bank’s borrowers, APS Star Industries, which went into bankruptcy. During liquidation proceedings the company court refused to recognize the assignment and the rights of the assignee with respect to the loan. On appeal, a division bench of the Gujarat High Court held that the transfer was illegal, being speculative in nature and contrary to what a bank is permitted to undertake within the framework of the Banking Regulation Act (BR Act). As a consequence, the court observed that the assignment deed was illegal and that Kotak Mahindra was not entitled to substitute ICICI Bank.

Seeking a way out

This potentially prohibitive ruling had a far-reaching impact. It created uncertainty in the market and raised questions in relation to the legitimacy of transactions where any debt (i.e. both NPAs and standard assets) was transferred by a bank. The banks involved had appealed against this judgment to the Supreme Court and the Supreme Court, in its interim order on 16 February 2009, stayed the operation of the order of the Gujarat High Court pending final resolution of the dispute.

Ameya Khandge is a partner at Trilegal in Mumbai where Vardaan Ahluwalia is an associate. Trilegal is a full-service law firm that advises on corporate and commercial law in India. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 120 lawyers.