NCLAT upheld the validity of the assignment of debt by co-operative banks to asset reconstruction companies under the SARFAESI Act.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra and Mr. Arun Baroka (Technical Members) reviewed an appeal and observed that co-operative banks, including multi-state co-operative banks, are classified as "banks" under the SARFAESI Act, 2002, thereby validating their ability to assign debts to asset reconstruction companies, which was affirmed by both statutory provisions and judicial precedent. The Appellate Tribunal further concluded that the Section 7 application was timely and supported by adequate acknowledgement of debt, rendering the assignment valid.
In the appeal, a suspended director contested the NCLT's decision to admit a Section 7 application filed by an Asset Reconstruction Company (ARC). The corporate debtor had defaulted on financial assistance received from Business Co-operative Bank Ltd., leading to the classification of its account as a Non-Performing Asset (NPA) in April 2003. Following the declaration of the debtor as a sick company in 2007, the bank assigned its debt to Omkara in December 2020. The subsequent application claimed a substantial debt of ₹6,42,56,279.
The appellant argued that the application was time-barred, based on the initial default date, and contended that the assignment was invalid, asserting that the bank was prohibited from transferring its debt prior to September 2021. In contrast, the respondent maintained that the application was timely, supported by acknowledgements of debt and payments made by the corporate debtor, which effectively extended the limitation period.
Upon review, the NCLAT determined that the application had been filed within the appropriate timeframe, bolstered by evidence including the corporate debtor's balance sheets and communications acknowledging the debt. The tribunal further addressed the appellant's claims regarding the validity of the assignment under the SARFAESI Act, 2002. It clarified that multi- State co-operative banks were included within the Act's definition of "bank," as established by a Ministry of Finance notification and reinforced by the Supreme Court's ruling in Panduranga Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited, REEDLAW 2020 SC 05201. The Supreme Court affirmed that co-operative banks could assign their debts to asset reconstruction companies.
The NCLAT also noted an RBI circular from March 15, 2019, which advised a co-operative bank to utilize SARFAESI provisions for debt recovery, supporting the argument that these banks were entitled to assign their debts. The tribunal dismissed the appellant's reliance on a later RBI circular from September 2021 as irrelevant to the existing legal framework.
Ultimately, the NCLAT upheld the NCLT's order, confirming the validity of the assignment to the ARC and concluding that the appeal lacked merit. The decision reinforced the regulatory framework allowing co-operative banks to engage in debt assignments, clarifying the application of the SARFAESI Act in such contexts.
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