The Supreme Court upholds the Bombay High Court ruling allowing Asset Reconstruction Companies (ARCs) to replace banks as complainants in pending cheque bounce cases under Section 138 of the Negotiable Instruments Act.
Introduction
In an important development concerning debt recovery and cheque dishonour proceedings, the Supreme Court of India has declined to interfere with the Bombay High Court’s ruling permitting an Asset Reconstruction Company (ARC) to substitute a bank as the complainant in a pending prosecution under Section 138 of the Negotiable Instruments Act, 1881.
The decision recognises the legal consequences of transferring financial assets, securities and associated legal proceedings from banks to Asset Reconstruction Companies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The ruling is significant for banks, financial institutions, Asset Reconstruction Companies and borrowers, particularly in cases where cheque bounce proceedings remain pending after assignment of the underlying debt.
Background of the Case
The dispute arose from an overdraft facility of ₹75 crore obtained by Avarsekar & Sons Pvt. Ltd. from Axis Bank in December 2013. In connection with the facility, the borrower issued three post-dated cheques of ₹25 crore each as security.
When the cheques were presented for encashment, they were dishonoured due to insufficient funds. Consequently, Axis Bank initiated criminal proceedings under Section 138 of the Negotiable Instruments Act in January 2017.
While the cheque dishonour complaints were pending, Axis Bank assigned the loan facilities, securities, three cheques and pending legal proceedings to Assets Care and Reconstruction Enterprises Ltd. (ACRE) through an Assignment Agreement dated March 27, 2017.
Following the assignment, ACRE approached the Magistrate seeking substitution of its name in place of Axis Bank as the complainant in the pending cheque bounce proceedings.
The Magistrate allowed the substitution application on September 5, 2018. Subsequently, the Sessions Court dismissed the borrowers’ revision petition challenging the substitution order on February 11, 2021.
The borrowers thereafter approached the Bombay High Court, which upheld the substitution of the ARC as complainant.
Legal Issue Before the Supreme Court
The principal question was whether an Asset Reconstruction Company acquiring a bank’s financial assets, together with the associated securities and pending legal proceedings, could replace the original bank as complainant in an ongoing criminal prosecution under Section 138 of the Negotiable Instruments Act.
The borrowers questioned whether the transfer of a financial asset by operation of law could automatically authorise an ARC to take over the position of the complainant in criminal proceedings.
Their contention was that criminal prosecution involves considerations different from ordinary civil litigation and that substitution of a complainant in such proceedings required separate legal scrutiny.
Supreme Court’s Observations
A Bench comprising Justice Dipankar Datta and Justice Sheel Nagu considered the challenge to the Bombay High Court’s decision.
During the hearing, the petitioners’ counsel, Senior Advocate Siddharth Dave, argued that Sections 5(4) and 5(5) of the SARFAESI Act should not be interpreted as automatically permitting substitution in criminal proceedings.
He also referred to Section 302 of the Code of Criminal Procedure, which deals with permission to conduct prosecution, to support the argument that criminal proceedings cannot be treated identically to civil suits and appeals.
However, the Supreme Court examined the broad language employed in Section 5(4) of the SARFAESI Act, particularly the expression “other proceedings of whatever nature”.
The Bench questioned why the provision should not receive a wide interpretation, considering that Parliament had deliberately used expansive language to facilitate the continuation of proceedings relating to acquired financial assets.
The Court also referred to Section 5(5) of the SARFAESI Act, which provides a procedural mechanism enabling an ARC to apply before the concerned court or authority for substitution of its name in pending proceedings.
After considering the submissions, the Supreme Court declined to interfere with the Bombay High Court’s order and dismissed the Special Leave Petition.
Importance of Sections 5(4) and 5(5) of the SARFAESI Act
The provisions governing acquisition of financial assets by Asset Reconstruction Companies are central to this dispute.
Section 5(4) enables an ARC, upon acquisition of a financial asset, to pursue legal proceedings connected with that asset. Its wide wording covers proceedings of different kinds relating to the acquired financial asset.
Section 5(5) provides the mechanism for substitution of the ARC in place of the transferor institution in pending proceedings before the relevant court or authority.
These provisions facilitate continuity in debt recovery proceedings even when the ownership of the underlying financial asset changes.
Consequently, the assignment of a loan account to an ARC need not bring existing legal proceedings to an end merely because the original lending bank is no longer the holder of the financial asset.
Significance of the Ruling
The decision has considerable practical importance for the banking and financial recovery sector.
First, it strengthens the ability of Asset Reconstruction Companies to pursue pending recovery-related litigation after acquiring stressed financial assets from banks.
Second, it avoids unnecessary procedural complications arising from changes in the ownership of financial assets during the pendency of cheque dishonour cases.
Third, it provides greater continuity to legal proceedings associated with assigned loan accounts and their underlying securities.
For borrowers, the ruling also highlights that the transfer of a loan account to an ARC does not, by itself, extinguish pending cheque dishonour proceedings.
Conclusion
The Supreme Court’s refusal to interfere with the Bombay High Court’s decision reinforces the interpretation that Sections 5(4) and 5(5) of the SARFAESI Act facilitate the continuation of proceedings by an Asset Reconstruction Company after acquisition of a financial asset.
The ruling is particularly relevant to cases involving assignment of bank loans, transfer of securities and pending prosecutions under Section 138 of the Negotiable Instruments Act.
It underscores the importance of examining the assignment agreement and the statutory framework when determining the legal entitlement of an ARC to continue proceedings initiated by the original lending institution.
Case Details
- Case Title: Kishore Avarsekar v. Assets Care and Reconstruction Enterprises Ltd.
- Court: Supreme Court of India
- Case Number: Diary No. 66688/2026
- Judges: Justice Dipankar Datta and Justice Sheel Nagu
- Relevant Provisions: Sections 5(4) and 5(5), SARFAESI Act, 2002; Section 138, Negotiable Instruments Act, 1881.
Disclaimer: This article is intended for general legal information and academic discussion and should not be treated as legal advice.