Auction Purchaser Cannot Claim Reclassification of NPA if it affects Financial Creditor's Rights: NCLAT rules in favour of IDBI Bank [Read Order]

While disposing of an appeal filed by IDBI Bank Ltd., the National Company Law Appellate Tribunal (Principal Bench, New Delhi) has set aside an order of the Adjudicating Authority that permitted the reclassification of a loan account, holding that an auction purchaser cannot seek concessions that impinge upon a financial creditor's rights against personal guarantors.

The appeal was filed by IDBI Bank Ltd., the Financial Creditor, challenging an order passed by the Adjudicating Authority in an application filed by the successful auction purchaser, Silver Stallion Ltd. The bank had advanced loans of about Rs. 428 Crores to the Corporate Debtor, which went into liquidation. The assets were sold as a going concern to the respondent, with IDBI Bank receiving only around Rs. 7 Crores against its claim.

IDBI Bank contended that while it had discharged its charge over the secured assets sold to the respondent and issued a No Objection Certificate, the order to de-classify the account from a Non-Performing Asset (NPA) to 'standard' would adversely affect its independent right to proceed against the personal guarantors of the loan. They argued that the respondent's concern should be limited to securing an encumbrance-free title to the asset purchased, and not to interfering with the bank's separate remedies.

The respondent, Silver Stallion Ltd., had approached the Adjudicating Authority seeking a list of 21 concessions. The critical concession, which was granted by the lower authority, was that all accounts of the Corporate Debtor be regularized and their asset classification be changed to 'standard'.

A bench of the NCLAT, comprising Justice N. Seshasayee (Member, Judicial) and Indevar Pandey (Member, Technical), found merit in the bank's submissions. The Tribunal held that the rights of a successful auction purchaser are confined to securing a clear title to the asset acquired. It observed that any re-classification of the loan in the bank's books could not extend to a point where it interferes with the bank's statutory and contractual right to proceed against personal guarantors, a right that is distinct from the bank's claim over the auctioned asset.

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Given the appellant's unequivocal stand that it would not proceed against the asset sold to the respondent, the Tribunal concluded that the respondent had no legitimate interest in the standardization of the loan account.

Accordingly, the NCLAT allowed the appeal. The order of the Adjudicating Authority granting the concession for the reclassification of the loan account was set aside, affirming the financial creditor's rights against the personal guarantors as distinct from the rights of the auction purchaser over the acquired assets.