2025 (5) TMI 166 - AT - IBC

Assignment agreement partially void under Tamil Nadu Registration Act Section 28(b) but valid for financial assets

Saurabh Jhunjhunwala (Suspended Board of Director of Fairdeal Supplies Limited.) Versus Pegasus Assets Reconstruction Company Private Limited & Anr.

NCLAT Principal Bench upheld admission of Section 7 application filed by assignee financial creditor. Assignment agreement from bank to creditor was held ... Admission of section 7 application - Validity of assignment agreement executed by Allahabad Bank in favour of Pegasus - application filed by Pegasus under Section 7 was barred by limitation or not - discharge of debt of financial creditor stands fulfilled by depositing the principal amount as mentioned in Part IV of Section 7 application by the appellant in the order of this Tribunal or not. Whether assignment agreement dated 27.09.2023, executed by Allahabad Bank in favour of Pegasus is void on the strength of Section 28 of the Registration Act, 1908 as substituted by state of Tamil Nadu by Act No.19/1997? - HELD THAT:- A suit has been filed by the appellant challenging the assignment in the year 2017, which is said to be pending. Challenge to assignment agreement could not have been directly raised in Section 7 application. However, in the present case, it is required to consider the effect and consequence of Section 28(b) as applicable in the state of Tamil Nadu. Section 28 deals with the registering document relating to land, sub-Clause (a) mentions that every document affecting immovable property and sub-Clause (b) provides that any document registered outside the state of Tamil Nadu in contravention of provisions of Clause (a) shall be deemed to be null and void. The document thus has to be treated null on void in respect to the property situated in the state of Tamil Nadu, which document was required to be registered in state of Tamil Nadu. Thus, assignment agreement qua the immovable property which is covered by the assignment, which property is situated in the state of Tamil Nadu is null and void and no right can be claimed by financial creditor with respect to the said land. The assignment agreement indicates that apart from creating mortgage in the assets situated in Tamil Nadu, there large number of other accounts and other financial assets which are dealt in the assignment agreement. Assignment deed dated 27.09.2013 can be held to be void insofar as the mortgage of land situated in Coimbatore and no rights in the said land by virtue of assignment can be claimed by financial creditor, but that itself is not sufficient to hold the entire assignment void so as to make application Section 7 as not maintainable - the submission of the appellant on the strength of Section 28 (a) & (b) of the Registration Act as applicable in the state of Tamil Nadu, can be accepted to the extent that on the basis of assignment, no rights can be claimed by financial creditor qua the assets situated in Coimbatore since the assignment agreement insofar as creating any mortgage or any other interest in the immovable assets is void. However, the entire assignment cannot be declared as null and void on the said ground. The judgment in Mattapalli Chelamayya Vs. Mattapalli Venkataratnam [1972 (1) TMI 118 - SUPREME COURT] fully support the submission of the respondent that assignment qua immovable property situated in state of Tamil Nadu which is hit by Section 28(b) is severable from the entire assignment agreement and assignment agreement has to be held to be void to that extent only. Whether the application filed by Pegasus under Section 7 on 18.08.2022 was barred by limitation? - HELD THAT:- The acknowledgement contained in the balance sheet is acknowledgement of debt. The debt is continuously acknowledged in the balance sheets of the corporate debtor. It is acknowledgement of the corporate debtor, it is relevant for extension of limitation. The mere fact that Allahabad Bank has assigned the debt to the Pegasus and non-mention of Pegasus in the balance sheet shall not deny the benefit of Section 18 of the Limitation Act in facts of the present case - the application filed by the financial creditor was not barred by time. Whether by depositing the principal amount as mentioned in Part IV of Section 7 application by the appellant in the order of this Tribunal dated 28.05.2024, it can be said that debt of financial creditor stand discharged? - HELD THAT:- The deposit which was offered to be made by the appellant was amount of ₹220,02,051,721/- which was mentioned as amount due on 15.07.2013 in the assignment agreement. The relevant amount is the amount due at the time of filing of Section 7 application as claimed in Part IV. The amount mentioned in the assignment, agreement has no relevance to find debt and default of the corporate debtor - the amount deposited in no manner liquidate the debt of financial creditor. Conclusion - i) The assignment agreement dated 27.09.2013 is held void in so far as it creates equitable mortgage of 253.89 acres of land and building situate at Coimbatore, State of Tamil Nadu. The assignment deed qua the immovable property situated in Tamil Nadu is void, but the rest of the assignment relating to financial assets is valid. ii) The application filed under Section 7 on 18.08.2022 is not barred by limitation. iii) The amount mentioned in the assignment, agreement has no relevance to find debt and default of the corporate debtor, thus, the amount deposited in no manner liquidate the debt of financial creditor. There are no error in the order of the adjudicating authority in admitting Section 7 application - appeal disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered the following core legal questions:(i) Whether the assignment agreement dated 27.09.2013 executed by Allahabad Bank in favour of the financial creditor is void under Section 28 of the Registration Act, 1908, as amended by the Tamil Nadu Amendment Act No. 19/1997, on the ground that it was registered outside Tamil Nadu despite relating to immovable property situated in Tamil Nadu;(ii) Whether the Section 7 application filed by the financial creditor on 18.08.2022 is barred by limitation, considering the date of default and subsequent acknowledgments;(iii) Whether the deposit of the principal amount as per Part IV of the Section 7 application by the appellant discharges the debt of the financial creditor and affects the continuation of the insolvency proceedings.2. ISSUE-WISE DETAILED ANALYSISIssue I: Validity of Assignment Agreement under Section 28 of the Registration Act as amended by Tamil NaduLegal framework and precedents: Section 28 of the Indian Registration Act, 1908 mandates that every document affecting immovable property must be registered in the sub-registrar office within whose jurisdiction the property is situated. The Tamil Nadu Amendment Act No. 19/1997 substituted Section 28 to specifically require registration of such documents within Tamil Nadu for immovable properties situated therein, declaring any document registered outside Tamil Nadu in contravention null and void. The Tribunal also relied on a Division Bench judgment of the Madras High Court which held that assignment deeds relating to immovable property situated in Tamil Nadu but registered outside the state are null and void.Court's interpretation and reasoning: The Tribunal examined the assignment deed dated 27.09.2013, which was registered in Kolkata (West Bengal) but related to financial assets, including equitable mortgage of land and building situated at Coimbatore, Tamil Nadu. The Tribunal noted that Section 28(b) of the Tamil Nadu Amendment Act renders such out-of-state registration null and void only in respect of the immovable property situated in Tamil Nadu.Key evidence and findings: The assignment agreement covered multiple financial assets and loans, including those secured by immovable property in Tamil Nadu. The deed was registered outside Tamil Nadu, violating Section 28(b) as applicable in Tamil Nadu. However, the assignment also covered other financial assets and loans not connected to immovable property in Tamil Nadu.Application of law to facts: The Tribunal held that the assignment deed is void only insofar as it relates to the equitable mortgage of immovable property situated in Tamil Nadu. The rest of the assignment, including financial debts and assets not connected to immovable property in Tamil Nadu, remains valid and enforceable. The Tribunal applied the principle of severability, relying on the Supreme Court's decision in 'Mattapalli Chelamayya' which recognized that a document evidencing two transactions - one personal liability and one charge on immovable property - can be severed, with the charge being invalid if not properly registered but the personal liability remaining valid.Treatment of competing arguments: The appellant argued for the entire assignment to be declared void due to defective registration. The financial creditor contended that only the part relating to immovable property was affected and the rest of the assignment was valid. The Tribunal accepted the latter, distinguishing between the immovable property-related portion and the rest.Conclusion: The assignment agreement is held void only to the extent it creates equitable mortgage or interest in immovable property situated in Tamil Nadu. The remainder of the assignment, including the debt assignment, is valid and supports the Section 7 application.Issue II: Limitation Bar on Section 7 ApplicationLegal framework and precedents: The Limitation Act, 1963, particularly Section 18, provides for extension of limitation period where there is acknowledgment of debt. The date of default was declared as 30.09.2011, and the limitation period for filing Section 7 applications is three years from the date of default or from the last acknowledgment of the debt.Court's interpretation and reasoning: The Tribunal noted that although the assignment to the financial creditor Pegasus occurred on 27.09.2013, the corporate debtor's balance sheets from financial year 2013-14 through 2019-20 acknowledged the debt owed to Allahabad Bank. The appellant contended that these acknowledgments cannot be attributed to Pegasus since the balance sheets did not mention the assignee.Key evidence and findings: The financial statements consistently reflected the debt owed to Allahabad Bank, the original creditor. The Tribunal relied on a prior decision of the Tribunal which held that acknowledgment of debt to the original creditor is sufficient to extend limitation against the assignee who steps into the shoes of the assignor. The appellant's knowledge of assignment was evidenced by their OTS (One Time Settlement) proposal addressed to Pegasus, indicating awareness of the assignment.Application of law to facts: The Tribunal applied the principle that acknowledgment of debt by the corporate debtor to the assignor (Allahabad Bank) is relevant for limitation purposes even after assignment. The non-mention of Pegasus in the balance sheets does not negate the acknowledgment or the extension of limitation period. The debt was continuous and default persisted.Treatment of competing arguments: The appellant argued the application was barred by limitation due to the lapse of time since default and lack of acknowledgment to Pegasus. The financial creditor argued continuous acknowledgment and assignment made it timely. The Tribunal accepted the financial creditor's submissions.Conclusion: The Section 7 application filed on 18.08.2022 is not barred by limitation.Issue III: Effect of Deposit of Principal Amount on Debt DischargeLegal framework and precedents: The amount claimed as debt and default is the outstanding as on the date of filing Section 7 application, not the principal amount due at the time of assignment. Deposit of an earlier principal amount does not discharge the entire debt liability.Court's interpretation and reasoning: The appellant deposited Rs. 220.25 crores (principal amount as per assignment dated 15.07.2013) during the appeal proceedings. The Tribunal observed that the outstanding amount claimed in the Section 7 application as on 04.08.2022 was Rs. 145.74 crores, which included interest and other charges, significantly higher than the deposited principal amount.Key evidence and findings: The amount claimed in default was not liquidated by the deposit of the principal amount alone. The deposit did not cover accrued interest or other dues. The Tribunal noted that the amount deposited cannot be treated as discharge of the debt.Application of law to facts: The Tribunal applied the principle that debt discharge requires payment of the entire amount due, including interest and other charges. Partial payment or deposit of principal amount alone does not extinguish the debt or preclude continuation of insolvency proceedings.Treatment of competing arguments: The appellant contended that deposit of principal amount should discharge the debt and halt CIRP. The financial creditor and IRP contended that deposit was insufficient to liquidate debt and proceedings should continue. The Tribunal accepted the latter.Conclusion: The deposit of principal amount does not discharge the financial creditor's debt and does not affect continuation of the insolvency process.3. SIGNIFICANT HOLDINGS(i) 'The assignment agreement dated 27.09.2013 is held void in so far as it creates equitable mortgage of 253.89 acres of land and building situate at Coimbatore, State of Tamil Nadu.'(ii) 'The entire assignment cannot be declared as null and void on the said ground [of defective registration under Section 28 of the Registration Act]. The assignment deed qua the immovable property situated in Tamil Nadu is void, but the rest of the assignment relating to financial assets is valid.'(iii) 'The balance sheets of the corporate debtor acknowledging debt to Allahabad Bank from 2013-14 to 2019-20 constitute sufficient acknowledgment for the purpose of extending limitation under Section 18 of the Limitation Act, even though the assignee's name is not mentioned.'(iv) 'The application filed under Section 7 on 18.08.2022 is not barred by limitation.'(v) 'The deposit of principal amount as per assignment deed does not liquidate the total debt claimed as on date of Section 7 application and therefore does not discharge the financial creditor's debt.'(vi) 'The appeal against the order admitting the Section 7 application is dismissed; the interim orders are vacated; the period from 08.04.2024 till date is excluded from CIRP; and the amount deposited is to be returned to the appellant with accrued interest.'