Rents receivable by a borrower can be assigned to a lender as an "actionable claim" as per the Transfer of Property Act,1882(TPA), held the Supreme Court while deciding a dispute between the Infrastructure Leasing and Financial Services Ltd and the HDFC Bank Ltd.

The bench comprising Justices S Ravindra Bhat and Dipankar Datta observed that under Section 3 of TPA, actionable claim means (a) claim to an unsecured debt, other than a debt secured by mortgage of immovable property, hypothecation or pledge; and (b) beneficial interest in a movable property. Both these are recognised as enforceable. Section 130 of TPA provides the manner in which Actionable claims can be transferred.

"The provisions of the TPA and the discussion of the various authorities support the conclusion that there can be a transfer of debts, which are defined as actionable claims. In the present case, the rents payable by IL&FS tenants, lessees and licensees are debts, which stood transferred to the creditor, i.e. HDFC Bank," the Court said.

The issue in the present case was whether the documents executed by IL&FS whereby rents payable to IL&FS stood unconditionally assigned to HDFC Bank Ltd., constituted an assignment and would come under purview of asset freeze order passed by the National Company Law Appellate Tribunal (“NCLAT”) in respect of IL&FS’s assets and securities. It was held that the rents payable by IL&FS tenants, lessees and licensees are debts, stood transferred to the creditor, i.e. HDFC Bank.

HDFC Bank Ltd. (“Respondent/HDFC”) provided credit facility to Infrastructure Leasing and Financial Services Ltd. (“Appellant/IL&FS”). In 2018, a Master Facility Agreement (“MFA”) was executed between the Parties. The MFA envisioned opening of a separate escrow account with Housing Development Finance Corporation Bank Ltd. (“Escrow Bank”). 

Alongside, an “Assignment Agreement” was also executed between IL&FS and HDFC, whereby it was agreed that the authorised indebtedness of IL&FS in terms of the MFA, by way of the facility together with the interest thereon was payable from the gross income and revenue to be derived from the operation of the Business Centre Services Agreements/Lease/Leave and License Agreements. The Assignment Agreement categorically set aside the rents payable to IL&FS, in favour of the assignee, i.e. HDFC.

On 15.10.2018, the National Company Law Appellate Tribunal (“NCLAT”) passed an asset freeze order in respect of assets and securities of IL&FS.

In the meanwhile, the HDFC and Escrow Bank debited amounts from the Escrow Account. IL&FS contended that there was no assignment of the receivables, but only the creation of security interest in the receivables. Hence debit could not have been made by HDFC and Escrow Bank. 

On 13.05.2022, the NCLAT passed an order and held that the freeze order of 15.10.2018 did not negate the Assignment Agreement nor did it take away the property right of HDFC in the lease rental receivables. Further, the receivables deposited in the Escrow Account which were sufficient to meet the principal and interest (payable by IL&FS) assigned by the said borrower to HDFC, no proprietary interest continued with IL&FS nor could it exercise any right over that part of the Escrow Account which was assigned. 

IL&FS filed an appeal before the Supreme Court against the NCLAT order dated 13.05.2022.

SUPREME COURT VERDICT

The issue before the Court was whether the documents executed by IL&FS by which rents were made over to HDFC, constituted an assignment and thus fell outside the scope of an asset and security freeze order made by the NCLAT?

The Bench opined that as per the MFA, the receivables or rents that which IL&FS is entitled to, form the security for the advance extended to it by the lender. Further, the Assignment Agreement clearly indicates that rents payable to IL&FS stood unconditionally assigned to HDFC.

The Court explained the nature of a Lease Rental Discounting (LRD) Agreement as under:

“The Lease Rental Discounting (LRD) arrangement - a new kind of financial agreement by which a banker allows credit facilities to a commercial property owner, has the flexibility of ensuring that the asset owner is given access to credit. The dominant condition is that a substantial portion or the entire rent or receivables which the owner would be entitled to are made- sold or assigned, absolutely to the creditor bank. This is with the intention that the borrower’s liabilities are discharged automatically from the proceeds payable in respect of the property. Such amounts virtually are by way of unsecured debts.”

It was observed that though the documents executed by IL&FS do not use the term ‘LRD’ in them but in effect they were LRD Agreement. “An application of the rule that all the contemporaneous documents are to be read together, to discern the true purport of the contract, it is evident that what the parties intended was the assignment of the debt, i.e., the rents payable.it is the nature and substance of the transaction which is determinative”,

The Court held that the rents payable by IL&FS tenants, lessees and licensees are debts, stood transferred to the creditor, i.e. HDFC Bank. The NCLAT order has been upheld.

“The earlier discussion in this judgment, about the true nature of the transaction in this case led this court to hold that it is an assignment and not a pledge. The reference to pledge, in some places in the documents, did not undermine the fact that the rents payable to and receivable by the lender (IL&FS) stood absolutely assigned to HDFC. The provisions of the TPA and the discussion of the various authorities support the conclusion that there can be a transfer of debts, which are defined as actionable claims. In the present case, the rents payable by IL&FS tenants, lessees and licensees are debts, which stood transferred to the creditor, i.e. HDFC Bank. Therefore, the NCLAT’s conclusions are unexceptionable; the challenge to its correctness, therefore fails.”

The appeal has been dismissed.
Source