The Bombay High Court has clarified that an Asset Reconstruction Company (ARC) can be substituted as the complainant in a pending cheque dishonour case after acquiring the underlying loan and financial assets from a bank. The ruling reinforces the legal framework governing assignment of stressed financial assets and the continuation of proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act).
Justice N.R. Borkar, in Avarsekar & Sons Pvt. Ltd. v. Assets Care and Reconstruction Enterprises Ltd., dismissed the challenge raised by the borrowers against the substitution of Assets Care and Reconstruction Enterprises Ltd. (ACRE) in place of Axis Bank in a pending cheque bounce prosecution.
Background of the Dispute
The dispute originated from a ₹75 crore overdraft facility obtained by Avarsekar & Sons Pvt. Ltd. from Axis Bank under a Facility Agreement dated 30 December 2013.
As security for the facility, the borrowers issued three post-dated cheques, each for ₹25 crore. When the cheques were subsequently presented, they were dishonoured.
Axis Bank issued the statutory demand notice under the NI Act on 21 November 2016. After the borrowers failed to make the required payment, Axis Bank instituted a complaint under Section 138 of the Negotiable Instruments Act before the Metropolitan Magistrate, Mumbai, on 11 January 2017.
While the criminal complaint was pending, Axis Bank assigned the underlying loan, securities and associated rights—including the three cheques and the pending proceedings—to ACRE through a Deed of Assignment dated 27 March 2017.
ACRE thereafter approached the Trial Court seeking substitution as the complainant. The Trial Court allowed the application on 5 September 2018. The borrowers challenged the decision before the Sessions Court, but the revision petition was dismissed on 11 February 2021.
The matter eventually reached the Bombay High Court.
Borrowers’ Challenge Before the High Court
The borrowers argued that ACRE could not continue the cheque bounce prosecution because it was neither the original payee nor the holder in due course of the cheques.
They further contended that the provisions of the SARFAESI Act, 2002 could not be interpreted to permit substitution of an ARC in criminal proceedings under Section 138 of the NI Act.
ACRE opposed the challenge, arguing that the statutory mechanism under Section 5 of the SARFAESI Act transferred the rights and interests associated with the acquired financial asset to the ARC. Consequently, ACRE was entitled to continue proceedings connected with the acquired debt.
Bombay High Court’s Interpretation of SARFAESI Act
The principal issue before the Court was whether an ARC acquiring a financial asset from a bank could continue a pending Section 138 prosecution initiated by the original lender.
The High Court examined Sections 5(4) and 5(5) of the SARFAESI Act. According to the Court, these provisions are facilitative rather than restrictive.
Section 5(5) specifically enables an ARC to seek substitution in any pending suit, appeal or other proceeding relating to the acquired financial asset.
The Court held that the expression “any court or other authority” and the reference to “other proceeding” are sufficiently wide to encompass proceedings before a criminal court exercising jurisdiction under Chapter XVII of the NI Act.
Therefore, assignment of the underlying financial asset does not result in the automatic termination or abatement of an existing Section 138 proceeding.
ARC Can Become Holder in Due Course
The Court also considered the requirements under Section 142(1)(a) of the NI Act, which provides that cognizance of an offence under Section 138 can be taken only upon a complaint made by the payee or holder in due course of the cheque.
The borrowers relied on this provision to contend that ACRE, not being the original named payee, lacked the necessary standing to prosecute the complaint.
The High Court, however, rejected this argument.
It referred to Section 7 of the NI Act, which defines a payee, and also considered the concept of a “holder in due course” under Section 9.
The Court concluded that ACRE, having acquired the loan and the associated cheques for consideration, could qualify as a holder in due course. The statutory provisions of the SARFAESI Act also facilitated the transfer of rights relating to the financial asset.
Consequently, ACRE was legally entitled to prosecute the pending Section 138 proceedings.
Reliance on Earlier Bombay High Court Decisions
While reaching its conclusion, the High Court relied upon its earlier decisions in Hari Krishnan Selvakumar and Man Singh Tusaria.
These decisions recognized the broad scope of Section 5(4) of the SARFAESI Act and its application to proceedings arising from financial assets acquired by an ARC.
The Court therefore found no legal basis to prevent ACRE from continuing the cheque dishonour prosecution merely because the original bank had assigned the underlying financial asset during the pendency of the proceedings.
Key Takeaway for Banks, ARCs and Borrowers
The judgment provides important clarity on the interaction between the SARFAESI Act and Section 138 of the NI Act.
An assignment of a loan by a bank to an ARC does not necessarily bring pending cheque bounce proceedings to an end. Where the relevant financial asset and associated rights are transferred in accordance with law, the acquiring ARC can seek substitution and continue the proceedings.
The decision is particularly significant for ARCs dealing with portfolios of stressed loans, as it confirms that enforcement mechanisms connected with acquired financial assets can continue even after assignment.
For borrowers, the ruling also emphasizes that transfer of a loan account to an ARC does not, by itself, extinguish the legal consequences arising from dishonoured cheques issued in connection with the underlying financial facility.
Conclusion
In Avarsekar & Sons Pvt. Ltd. v. Assets Care and Reconstruction Enterprises Ltd., the Bombay High Court upheld the substitution of ACRE in a pending Section 138 prosecution originally filed by Axis Bank.
The Court’s interpretation of Sections 5(2), 5(3), 5(4) and 5(5) of the SARFAESI Act, read with Sections 7, 9 and 142 of the NI Act, confirms that an ARC acquiring a financial asset for consideration can acquire the necessary legal standing to pursue associated cheque dishonour proceedings.
The ruling strengthens the enforceability of assigned financial assets and provides useful guidance on the continuation of cheque bounce cases after assignment of debt to an Asset Reconstruction Company.
Case Title: Avarsekar & Sons Pvt. Ltd. v. Assets Care and Reconstruction Enterprises Ltd.
Case Number: Criminal Writ Petition No. 2776 of 2023
Court: Bombay High Court
Judge: Justice N.R. Borkar
Decision Date: 3 August