When does an Asset Reconstruction Company’s (ARC) recovery right stop, at acquisition cost or contractual debt? The Supreme Court didn’t say. Leaving key questions on NPA classification, debt assignment and SARFAESI compliance open, the Supreme Court fashioned an equitable, full-and-final settlement by directing payment of a further Rs. 125 crores beyond the Rs. 250 crores already paid. The payment will fully and finally settle the ARC’s claims against Atibir towards the assigned debt. In short, the Apex Court prioritises a practical resolution and allows closure of all recovery and insolvency proceedings upon payment of the settlement amount.
The Court expressly left open the validity of the NPA classification, the debt assignment and compliance with Section 5 of the SARFAESI Act. The Court also fixed the additional amount without deciding whether compensation should be calculated on the debt value or acquisition value, or characterised as a return on investment. It considered the 15% rate discussed in Justice Anil R. Dave’s report, the elapsed period, and the ARC’s costs and expenses.
The Court considered the interests of a running business and its employees, the undenied allegation of competitor-linked acquisition funding, and the ARC’s failure to provide financial statements and borrowing-rate details. The Court expressly described the relief as equitable and aimed at balancing the parties’ interests.
Briefly, the appellant company, Atibir Industries Co. Ltd., had availed various credit facilities from a consortium of banks led by State Bank of India (SBI). During the COVID-19 period, the company defaulted in servicing its debts and sought relief under RBI moratorium circulars. SBI subsequently classified the account as a Non-Performing Asset (NPA) with effect from Oct 16, 2020, and later initiated recovery proceedings before the DRT, insolvency proceedings before the NCLT, and SARFAESI proceedings.
While settlement discussions and One-Time Settlement (OTS) proposals were ongoing, SBI assigned the debt to CFM ARC for ₹250 crore. The borrower challenged both the NPA classification and the assignment before the Calcutta High Court. The Single Judge ruled in favour of the borrower, but the Division Bench reversed that decision, leading to the appeal before the Supreme Court.
A Three-Judge Bench comprising Chief Justice of India, Justice Suryakant, Justice Joymalya Bagchi and Justice V. Mohana noted that the validity of the NPA classification itself was under serious dispute because the account had been classified as NPA retrospectively despite the RBI’s COVID-19 moratorium framework and the revised repayment schedule granted by SBI. The Court observed that substantial questions existed regarding whether the account could legally have been treated as NPA from Oct 16, 2020.
The Court further observed that SBI pursued multiple recovery mechanisms simultaneously by approaching the DRT, NCLT and invoking SARFAESI remedies, while also engaging in OTS negotiations with the borrower. The sudden decision to auction and assign the debt while settlement discussions were underway was a significant feature of the dispute.
The Court also took note of the borrower’s allegation that the ARC had acquired the debt with funds allegedly sourced through entities connected to a business competitor of the borrower. The Court recorded that these allegations were not specifically denied and that the ARC had not produced its financial statements despite a request made by Justice Anil R. Dave during the reference proceedings. However, the Court refrained from giving a final finding on these allegations.
The Apex Court emphasized that several contentious legal questions remained unresolved, including the validity of the NPA classification, the legality of the assignment, and compliance with Section 5 of the SARFAESI Act. Since the Court intended to provide an equitable and practical resolution, it consciously left those questions open without adjudicating them.
The Court highlighted that the appellant was a running industrial concern and that the livelihood of numerous employees depended on its continued operation. Therefore, while balancing the interests of both the borrower and the ARC, the Court considered it appropriate to craft an equitable solution rather than enter into prolonged adjudication of disputed legal issues.
