2022 (5) TMI 994 - AT - Companies Law

Tribunal: Receivables Assignment = Ownership Transfer, Not Violation of Interim Order

The Tribunal concluded that the assignment of receivables was a transfer of ownership, not just a security interest. The actions of the Escrow Bank and ... Breach of interim order or not - IL&FS default case - Whether IL&FS has any claim whatsoever on the receivables which are the subject matter of an Assignment Agreement in favour of the Lender deposited in the Escrow Account? - Whether by debiting the money so assigned from the Escrow Account even after 15.10.2018, can Lender and Escrow Bank be said to have violated the order dated 15.10.2018? - HELD THAT:- A perusal of the relevant conditions of transaction documents, makes it clear that a facility of Rs.400 Crores was advanced by the lender to the borrower payable in 96 months with tentative repayment schedule. The amount of interest component and principal component payable on each month has been provided in Schedule 2 of the Agreement. The immovable property of the borrower i.e. ‘IL&FS Financial Centre, Plot-No. 22, G Block, Bandra Kurla Complex, Bandra East, Mumbai was mortgaged as security to the facility. All the right, title and interest of the borrower in the receivables in respect of the TIFC Property was assigned to the lender. All receivables were to be deposited by the tenants of the IL&FS in the Escrow Account which Escrow Account was to be operated by the Escrow Bank on the irrevocable instructions issued by the borrower to the lender. The Escrow Account, as per the Escrow Account Agreement, is to be operated by Escrow Bank under the instructions of lender. The borrower is specifically prohibited to issue any cheque or draft on the Escrow Account. Escrow Bank under the Escrow Agreement is obliged to follow the instructions given by the lender. Further, Clause 3 of the Assignment and Administration Agreement, clearly contemplates that sufficient portion of receivables to pay the principal and interest is assigned and set aside for that purpose, the transaction documents thus, clearly indicate that insofar as the amount receivables deposited in the Escrow Account which are sufficient to pay the principal and interest are concerned, they are assigned to the lender and cannot be dealt with the borrower in any manner. The present is not a case where lender has enforced any security interest created in their favour nor is a case where they have exercised any right given to them consequent to an event of default. Assigned receivables are as per transaction documents, noted above, are lender’s property which on instructions given by the lender to the Escrow Bank is transferred to the account of lender. It is however, clear that only part of receivables which is sufficient to pay the principal and interest is assigned. Any amount deposited in the Escrow Account out of receivables which is in excess of principal and interest is not part of assignment and can be transferred back to the borrower and that part of the amount which is in excess of principal and interest can be said to be part of security which can also be enforced by lender in an eventuality. Insofar as that part of the receivables deposited in the Escrow Account which is sufficient to meet the principal and interest which has been assigned by the borrower to lender, no proprietary interest continues with the borrower nor borrower can exercise any right over that part of the Escrow Account which is assigned. The borrower may have right and interest on the residual of deposits which is an excess of principal and interest for which security interest is created in favour of the lender which Escrow Bank is permitted to transfer to the borrower - There being express assignment of lease rental which is sufficient to meet the principal and interest, the assignment has to be accepted as assignment in favour of the lender. Use of word ‘pledge’ in Assignment Agreement does not take away the nature of the transaction documents which is assignment of receivables. Having come to the conclusion that the lender has right to instruct the Escrow Bank to debit the amount sufficient to cover interest and principal deposited in the Escrow Account out of the receivables, no direction can be issued to reverse the said amount to the borrower. However, in case the amount debited are in excess of amount sufficient to cover principal and interest and also after adjusting any shortfall the said amount needs to be reversed by the borrower since that amount cannot be said to be part of the amount assigned to the lender. The prayer of Applicant IL&FS seeking direction to lender to reverse the amount of Rs. 112,79,18,348/- from the accounts of the IL&FS towards debt service payments, is refused - part of receivables in excess of payment of interest and principal payable which was assigned to the lender after adjusting any shortfall in the amount payable need to be reversed to the borrower - Escrow Bank shall re-visit all its debits after 15.10.2018 to find out as to whether any amount in excess to the amount payable to cover principal and interest subject to adjustment any shortfall in earlier payment have been debited; and in event, any excess amount has been debited, the same shall be reversed to borrower which exercise shall be completed within the period of one month from today with due intimation in writing to the IL&FS. Application disposed off. Issues Involved:1. Validity of the assignment of receivables.2. Compliance with the interim order dated 15.10.2018.3. Whether the actions of the Escrow Bank and the Lender constituted contempt of court.4. Reversal of debited amounts from the Escrow Account.Detailed Analysis:1. Validity of the Assignment of Receivables:The Tribunal examined the nature of the transaction documents, including the Facility Agreement, Assignment Agreement, and Escrow Agreement. The Facility Agreement dated 25th June 2018, between the Borrower and Lender, involved a loan of Rs. 400 Crores, secured by assigning receivables from the Borrower's contracts. The Assignment Agreement and Power of Attorney executed on the same date indicated that the receivables were assigned to the Lender for repayment of the loan. The Tribunal concluded that the assignment of receivables was a transfer of ownership and not merely a security interest, as the receivables were the exclusive property of the Lender for repayment purposes.2. Compliance with the Interim Order Dated 15.10.2018:The interim order dated 15.10.2018 imposed a moratorium on actions to foreclose, recover, or enforce any security interest over the assets of IL&FS and its group companies. The Tribunal analyzed whether the debiting of the Escrow Account by the Lender violated this order. It was determined that the assigned receivables, being the property of the Lender, did not fall under the assets of IL&FS. Therefore, the Lender's actions did not constitute a violation of the interim order. The Tribunal emphasized that only the residual receivables, which were not assigned, could be considered assets of IL&FS.3. Whether the Actions of the Escrow Bank and the Lender Constituted Contempt of Court:The Tribunal considered whether the Escrow Bank and the Lender's actions in debiting the Escrow Account constituted contempt of the interim order. It was concluded that the Escrow Bank merely followed the instructions of the Lender as per the Escrow Agreement and did not act in contempt. The Tribunal also found no willful disobedience by the Lender, as the actions were based on the transaction documents and the interpretation of the agreements. Therefore, there was no occasion for purging the contempt by either the Escrow Bank or the Lender.4. Reversal of Debited Amounts from the Escrow Account:The Tribunal directed that if any amount in excess of the principal and interest payable had been debited from the Escrow Account, it should be reversed to the Borrower. The Escrow Bank was instructed to revisit all debits made after 15.10.2018 to determine if any excess amounts had been debited and to reverse such amounts to the Borrower within one month, with due intimation to IL&FS.Conclusion:The Tribunal refused the prayer of IL&FS to direct the Lender to reverse the amount of Rs. 112,79,18,348/- but allowed for the reversal of any excess amounts debited beyond the principal and interest payable. All applications were disposed of accordingly, with specific directions to the Escrow Bank to review and reverse any excess debits.