Assignment of Stressed Loans to Operational Creditors Held Unlawful; Compromise Under CPC Must Be Lawful, Rules Bombay High Court
- REEDLAW
- 17 hours ago
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REEDLAW Legal News Network reports: In a pivotal ruling, the Bombay High Court declared that the assignment of stressed loans to operational creditors is impermissible under law, as it contravenes the RBI’s Transfer of Loan Exposure Directions, 2021. The Court further clarified that a compromise recorded under Order XXIII Rule 3 of the CPC must be lawful and cannot encompass agreements that are expressly prohibited by law.
The Bombay High Court Single-Judge Bench of Justice Sandeep V. Marne, while adjudicating a series of writ petitions and applications, held that assigning stressed loans to an operational creditor violated the RBI Transfer of Loan Exposure Directions, 2021, rendering such transactions unlawful. The Court emphasised that compromises under Order XXIII Rule 3 CPC cannot validate agreements contrary to law, thereby reinforcing the principle that judicial recognition cannot be granted to arrangements that are legally impermissible.
The Applicant had filed an interim application seeking recall of the High Court’s order dated 21 October 2022, which was based on the Minutes of Order dated 20 October 2022. Along with this, review petitions were filed by the suspended director of the Corporate Debtor and the Corporate Debtor itself, challenging the same order. These applications essentially questioned the legality of the compromise recorded in a pending writ petition.
The Corporate Debtor had availed financial assistance from the Financial Creditor and mortgaged its property as security. Upon default, the loan account was classified as a non-performing asset, and recovery proceedings were initiated under Section 101 of the Maharashtra Co-operative Societies Act. During the pendency of these proceedings, an Operational Creditor operating the property under a conducting agreement approached the Court and deposited a substantial amount to protect its possession. Subsequently, when the State Government introduced a one-time settlement scheme, the Liquidator offered a settlement which the Operational Creditor accepted, subject to assignment of the Corporate Debtor’s loan account in its favour. Acting on this understanding, the Financial Creditor and the Operational Creditor executed Minutes of Order, under which the dues of the Corporate Debtor were acknowledged, and the Financial Creditor agreed to assign the loan and security to the Operational Creditor. On this basis, the writ petition was disposed of.
Later, the suspended director of the Corporate Debtor objected to this arrangement. The Financial Creditor cancelled the settlement and refunded the amount, which the Operational Creditor refused to accept. The Liquidator contended that the assignment violated the RBI’s Transfer of Loan Exposure Directions, 2021, and was outside the scope of the writ petition. It was argued that the Operational Creditor, being a private entity, was not an eligible transferee under the RBI norms and that the Minutes of Order were unlawful. Conversely, the Operational Creditor argued that the Liquidator lacked authority after the expiry of the liquidation period and that the assignment was a valid commercial decision.
The Court examined the legality of the compromise and held that under Order XXIII Rule 3 CPC, a compromise must be lawful. It noted that the RBI’s 2021 Directions, issued under Sections 21 and 35A of the Banking Regulation Act, strictly limited the transfer of stressed loans to permitted transferees such as banks, financial institutions, and NBFCs. Since the Corporate Debtor’s account was a stressed asset, its assignment to the Operational Creditor was expressly prohibited and, therefore, unlawful. The Court also found that the compromise adversely affected the rights of the Corporate Debtor, which was not a party to the agreement, as it enabled the Operational Creditor to recover the entire dues and initiate CIRP. It further observed that the mere presence of the Corporate Debtor’s advocate during the proceedings did not amount to consent for an illegal arrangement.
Relying on Supreme Court precedents, the Court reiterated that before recording Minutes of Order, the Court must ensure legality and inclusion of all necessary parties. It rejected the argument that the matter could be left to the jurisdiction of the NCLT, holding that the High Court’s seal on an unlawful compromise could not stand. It also clarified that technical objections on locus standi and limitation could not defeat the Court’s inherent power to recall an order obtained on an illegal compromise. Accordingly, the Court condoned the delay in filing the review petition.
In conclusion, the Court recalled its earlier order dated 21 October 2022, restored the writ petition for hearing, and allowed the interim application and review petitions. All pending applications were disposed of.
Mr. Navroz Seervai, Senior Advocate with Mr. Aseem Naphade and Mr. Shivaji Masal, Advocates, represented the Applicant in IA/13400/2024 in WP/11610/2022.
Mr. Vikram Nankani, Senior Advocate with Mr. Ameet Naik, Mr. Tushar Hathiramani, Mr. Abhishek Kale, Mr. Vivek Dwivedi, Mr. Nevil Chopra, Mr. Aditya Khare and Ms. Rebecca Singh i/b. M/s. Naik Naik and Co., Advocates, represented the Review Petitioner.
Dr. Virendra Tulzapurkar, Senior Advocate with Mr. Mandar Soman, Ms. Shruti Maniar, Ms. Shivani Bhandary and Ms. Kashmita Belwalkar i/b. M/s. Solomon and Co., Advocates, appeared for the Respondent No. 1.
Mr. Suresh Yadav, with Mr. Avinash Khondkar and Ms. Khushbu Bhansali, Advocates, appeared for the Respondent No. 4.
Mr. P.V. Nelson Rajan, AGP, appeared for the Respondent–State.
Ms. Savina R. Crasto, AGP, appeared for the Respondent-State in RPW/85/2024 and IA/10662/2024.
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