LI Network
Published on: October 26, 2023 at 17:04 IST
The Supreme Court of India clarified the legal stance on the assignment of rents receivable by a debtor to a creditor as an “actionable claim” under the Transfer of Property Act, 1882 (TPA). This decision came as a result of a dispute between Infrastructure Leasing and Financial Services Ltd. (IL&FS) and HDFC Bank Ltd.
The Supreme Court bench, comprising Justices S Ravindra Bhat and Dipankar Datta, examined the provisions of the TPA, specifically Section 3, which defines actionable claims.
According to Section 3 of TPA, actionable claim encompasses claims to unsecured debts that are not secured by mortgage of immovable property, hypothecation, or pledge, as well as beneficial interest in movable property.
Section 130 of TPA provides the procedures for transferring actionable claims.
The Court’s ruling emphasized that the TPA and related legal authorities support the notion that debts, which are classified as actionable claims, can indeed be transferred. In the specific case, the rents owed by IL&FS tenants, lessees, and licensees were considered as debts, and these debts were successfully transferred to HDFC Bank, the creditor.
The dispute in this case revolved around whether the documents executed by IL&FS, which unconditionally assigned rents payable to HDFC Bank, were subject to an asset freeze order issued by the National Company Law Appellate Tribunal (NCLAT) regarding IL&FS’s assets and securities. The Supreme Court determined that the rents payable by IL&FS tenants, lessees, and licensees qualified as debts and were rightfully transferred to HDFC Bank, and thus, the NCLAT’s asset freeze order did not apply.
In the background of the case, HDFC Bank had provided credit facilities to IL&FS, and a Master Facility Agreement (MFA) was signed in 2018. This MFA involved the creation of an escrow account with Housing Development Finance Corporation Bank Ltd. (Escrow Bank). Additionally, an “Assignment Agreement” was established between IL&FS and HDFC, explicitly designating the rents payable to IL&FS in favor of HDFC.
When the NCLAT issued an asset freeze order, HDFC and Escrow Bank debited amounts from the Escrow Account. IL&FS argued that there was no assignment of receivables, but rather the creation of a security interest in the receivables, which meant that HDFC and Escrow Bank could not make the debit.
The NCLAT later ruled that the asset freeze order did not nullify the Assignment Agreement or HDFC’s property rights in the lease rental receivables. Consequently, the receivables in the Escrow Account, which were adequate to cover the principal and interest payable by IL&FS to HDFC, no longer held any proprietary interest for IL&FS.
IL&FS challenged the NCLAT’s decision in the Supreme Court, which led to the recent verdict.
The Supreme Court’s verdict centered on the question of whether the documents executed by IL&FS, which transferred rents to HDFC, constituted an assignment and consequently fell outside the scope of the NCLAT’s asset and security freeze order.
The Court determined that, in essence, these documents represented a Lease Rental Discounting (LRD) Agreement, even though they did not explicitly use the term ‘LRD.’ The LRD arrangement essentially allows a commercial property owner access to credit by assigning a significant portion or all of the rent or receivables to the creditor bank, ensuring automatic debt discharge from the property’s proceeds.
The Supreme Court ultimately concluded that the rents payable by IL&FS tenants, lessees, and licensees were, indeed, debts that had been transferred to HDFC Bank. The NCLAT’s decision was upheld, and the appeal was dismissed.
