Rajasthan High Court Upholds SBI's Right to Assign Debts Despite NPA Classification Issues

Court dismisses writ petition challenging the validity of SBI's debt assignment to Alchemist Asset Reconstruction, emphasizing legal independence from NPA status.  

In a pivotal judgment delivered on September 23, 2025, the Rajasthan High Court, presided over by Justice Rekha Borana, dismissed a writ petition filed by Sh. Harendra Singh Rathore and others against the State Bank of India (SBI) and Alchemist Asset Reconstruction Company Limited (AARC). The petitioners had challenged the validity of SBI's assignment of a loan to AARC, arguing that the assignment was illegal due to the loan's incorrect classification as a Non-Performing Asset (NPA).

The case revolved around a substantial term loan provided by SBI to Hotel Gaudavan Pvt. Ltd. (HGPL), which was classified as an NPA in 2010. In March 2014, SBI assigned the loan to AARC, which subsequently initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. HGPL contested these actions, and the Debts Recovery Tribunal (DRT) declared the NPA classification illegal, a decision upheld by the Debts Recovery Appellate Tribunal (DRAT).

Despite the DRT's ruling, Justice Borana emphasized that the bank's authority to assign debts and transfer financial assets is independent of an account's NPA status. Citing the Supreme Court's judgment in the case of ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., Justice Borana reaffirmed that the assignment of debts is a separate legal transaction that remains valid irrespective of subsequent judicial declarations regarding NPA classification.

The court noted that the assignment of the loan was a legally distinct transaction from its NPA classification, underscoring that the bank's right to transfer debt does not hinge on the validity of its internal NPA designation. Furthermore, the court highlighted that proceedings under the Insolvency and Bankruptcy Code (IBC) continue unaffected by other court orders, including those related to NPA classifications.

Addressing other aspects of the petition, the court dismissed requests for a Special Investigation Team inquiry into the asset sale and rejected challenges to previous orders by the Debts Recovery Tribunal and notices issued under the SARFAESI Act. The court also noted ongoing criminal proceedings related to the matter, indicating that the petitioners had alternative legal remedies available.

Ultimately, the court concluded that the writ petition was without merit and constituted an abuse of the legal process, as the issues had been previously adjudicated by various courts and tribunals. The dismissal reinforces the legal principle that banks possess the inherent right to assign debts, independent of the classification of those debts as NPAs.

Bottom Line:

SARFAESI Act - Bank's power to assign debts and transfer financial assets does not depend on classification of loan as NPA. Even if the NPA classification is declared invalid, the assignment of debt remains valid as a separate legal transaction.

Statutory provision(s): SARFAESI Act, 2002 Sections 5, 13(2), 13(4); Insolvency and Bankruptcy Code, 2016; Criminal Procedure Code, 1973 Section 482

Sh. Harendra Singh Rathore v. State Bank of India (S.B.I.), (Rajasthan) : Law Finder Doc Id # 2790859