TaxTMI 
TaxTMI 
2023 (10) TMI 962
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....ion Ltd (hereafter "HDFC" or "the lender") constituted an assignment and thus fell outside the scope of an asset and security freeze order made by the NCLAT. 2. IL&FS had approached the HDFC for financial assistance. By Sanction Letter dated 22.06.2018, the lender sanctioned a financial facility of Rs. 400 crores to the borrower. On 25.06.2018, a "Master Facility Agreement" ("MFA") was entered between IL&FS and HDFC for Rs. 400 crores. The MFA envisioned the creation of a separate escrow account with Housing Development Finance Corporation Bank Limited (hereinafter 'Escrow Bank') for opening of a separate escrow account with the Escrow Bank. Along with MFA, an "Assignment Agreement" (hereafter "AA") dated 25.06.2018 was also executed between the IL&FS and HDFC. Under this document (i.e., the AA) the parties 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 Agreement/s. It was also agreed that 'all the receivables derived/to be derived from the operati....
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....S in its favour and that the asset ceased to belong to IL&FS. 5. On 04.01.2019, IL&FS called upon HDFC to reverse the amount which was debited by the Escrow Bank in the escrow accounts. By the order dated 04.02.2019, NCLAT directed the UOI and IL&FS to approach Justice (Retd.) D.K. Jain ("former judge of this court") for consent and discuss the terms and conditions to supervise the operation of the resolution process. The UOI, through the Ministry of Corporate Affairs, in an affidavit stated that certain banks were still debiting amounts from IL&FS group entities classified as "Amber" and "Red" without authorization from the IL&FS board and those debits flouted the order dated 15.10.2018. Restraint orders were sought against banks and financial institutions enjoining them not to debit the accounts of the IL&FS and its group entities and/or appropriate the funds held in the said accounts without authorization of IL&FS and the relevant group entities; and further return/refund/release such amounts that have been debited. On 08.08.2019, NCLAT directed as follows: "...If any of the Bank/Financial Institution has debited any amount in violation of order of this Appellate Tri....
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....rt on July 3, 2020. 8. By the impugned order, NCLAT held that so far as part of 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. It was held, 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." IL&FS's argument that there was no assignment of the receivables, but only the creation of security interest in the receivables was rejected. It was also held that since there was an express assignment of lease rental- sufficient to meet the principal and interest payments-, the "assignment has to be accepted as assignment" in favour of HDFC and that 'pledge' in AA did not take away the nature of the transaction documents which was the assignment of receivables. NCLAT also held that the freeze order of 15.10.2018 did not negate the AA nor did it take away t....
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....y the lender, the borrower and the Escrow Bank, and after examining the principal (and the facility agreement) and all other agreements and attendant circumstances. Under that order, the lender and Escrow Bank were obliged to return the amount debited i.e. Rs.112,79,18,348/-. 11. Learned senior counsel argued that the lender's claim that the facilities extended are in the nature of lease rental discounting facility (LRD) as argued by HDFC, and not covered by the injunction is not borne out from the record. He argued that the facility is nothing but a type of term loan offered with security of rental income. The clear indicators that the Facility is secured by charge created over the property and the receivables (rent) can be gathered from the following: firstly, sanction letter for the term loan and the Facility specifically refers to this as a loan for a term of 96 months to be repaid by IL&FS from the lease rentals from commercial premises. Secondly, the terms relating to security and repayment also establish this. In fact, none of the documents contain any element or even a mention of the sale and purchase of the debt of IL&FS. The transaction is a loan transaction and not a ....
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....he lender, only for securing the obligations of the appellant IL&FS under the Facility agreement and facilitation of repayment and it did not amount to a transfer of the legal title over such receivables which continues to vest with IL&FS. It is submitted that in these circumstances, the holistic reading of all documents as resorted to by former judge of this court was the correct approach. Lastly, it is pointed out that the receivables or the rent paid into the account was to be held in trust by the escrow agent which had to secure compliance with the tribunal's order dated 15.08.2018 and the judgement dated 12.03 2020. 15. Mr. Mukul Rohatgi, learned Sr. Advocate appeared for HDFC Ltd. and refuted the submissions of the learned senior counsel for IL&FS. It was argued that a plain analysis of the transaction documents makes it clear that the facility extended to the borrower is a Lease Rental Discounting (LRD) loan transaction, which is materially different from a traditional loan transaction. An LRD loan transaction involves the assignment/sale of the rent receivables by the landlord to the financing entity at a discounted value in terms of the transaction documents. A cert....
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....t was not the entire rent receivables but only a portion of the same sufficient to cover the principal and interest, was assigned. The balance portion was not assigned; it continues to be owned by IL&FS. The borrower hence continues to have title and interest in the residual receivables which too was secured. Analysis and Conclusions 18. For appreciation of the transaction (to determine whether the assignment or arrangement was a transfer, or security interest), it would be convenient to peruse portions of the impugned order, which reproduced the relevant conditions in the various documents. 19. The parties entered into a Master Facility Agreement (MFA) on 25.06.2018. The definition clause in the MFA, inter alia, defined [Cl. 2 (1)] "due date"; Clause 2 (aa) defined "repayment" and clause 2 (cc) defined "security". Per Clause 2 (cc), "Security" had to have the same "meaning as described in Clause-8 of this Agreement and also described in the Schedule-III". Likewise, secured property inter alia, included immovable property described in Schedule III. The MFA envisioned that the borrower (IL&FS) enters into an escrow agreement "on such terms as agreed by the lender. The power....
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....-1." 21. Clause 4 of Schedule-1 of the MFA deals with 'Borrower's Contracts Specific Covenants'. Clauses 4(c) and Clause 5 (a), (b) and (c) provide as follows: "4. [..] (c) The Borrower shall not alter, change or modify the terms of the Borrower's Contracts in so far as it relates to such terms which would have an adverse effect or impact on the Receivables and/or which shall otherwise detrimentally effect the Lender's interest in the Secured Property and income thereof." "5. SECURITY AND REPAYMENT SPECIFIC COVENANTS a) The Borrower agrees that the Facility shall be secured by exclusive security interest on the Receivables in such mode and manner as deemed fit and desired by the Lender. b) The Borrower shall, on execution of this Facility Agreement, assign the Receivables in favour of the Lender on such terms as would be entered into between the Borrower and the Lender and pursuant thereto shall execute a Power of Attorney and Assignment and Management Agreement in line with the draft enclosed herewith in Appendix-3 to the Special Conditions. c) The Borrower agrees that the Receivables shall be exclusive property of the Lender....
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.... (c) The Escrow Bank agreed that during the currency of the term of this Agreement as may be amended from time to time, the Escrow Bank shall ensure that the Escrow Account is operated and maintained as per the terms set out herein and shall not permit any deviation, without the written consent of the Lender. (d) The Escrow Bank agrees that all money(ies) received by it under this Agreement shall, until transferred in accordance with this Agreement, be held in trust for the purposes for which they were received, and shall be segregated from other accounts of the constituents of the Escrow Bank and from the funds and Property of the Escrow Bank, in accordance with the banking law and practice. (e) The Bank shall transfer such amounts to the account of the Borrower which are in excess of the minimum balance required to be maintained in the Escrow Account in accordance with the terms stated herein." 23. Clause 4(b) of the Escrow Account Agreement deals with 'Operation and Maintenance'. Clause 4(a), (c) and (e) provides as follows: "4. OPERATION AND MAINTENANCE (a) The Borrower agrees that, the payments to be collected/received by....
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....ceivables"). Xxxx Further Clause 1 of the Assignment and Administration Agreement reads as: 1. Assignment and Pledge of Receivables All the Receivables derived/to be derived from the operation of the Borrower's Contracts, sufficient portion of which, to pay the principal and interest as and when the same shall become due in terms of the said Facility Agreement, is hereby assigned and pledged and shall be set aside for that purpose and this Assignment and Pledge shall extend to and include any assessments that may be levied pursuant to Clause 4(a) hereof." 25. A Power of Attorney document too was executed by IL& FS on 25.06.2018. By the Power of Attorney, the borrower irrevocably nominated, constituted and appointed HDFC as its true and lawful attorney on behalf of the borrower. By recital clause 2 of the said Power of Attorney document, HDFC could "appropriate the proceeds received towards the discharge of the Facility"; recital clause 5 enabled the lender to put to use, the secured property and give the business centre, etc, on leave, license or lease basis in the event the borrower's existing arrangements were terminated or ended. Recital clause 7 enab....
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....together and they have the same legal effect for all purposes as if they are one document. In Manks v. Whiteley, [1912] 1 Ch. 735 Moulton, L.J. stated : "Where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole." 28. Undoubtedly as argued on behalf of IL&FS, there are certain conditions in the MFA - [clauses 2 (cc) and 2 (dd)] which define "security" and "security interest". Read along with clause 8.1 and Schedule III, these would lead one to infer those receivables or rents that which IL&FS is entitled to, form the security for the advance extended to it by the lender. Nevertheless, as discussed earlier, these conditions cannot be read in isolation because the MFA itself adverts to other documents - all of which were executed by the parties contemporaneously. The condition in the Assignment a....
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....ermits the bank to appropriate amounts towards adjustment arising out of the Facility liability. In the same line, the General Power of Attorney (GPA) document (especially clauses 2 and 5) categorically entitles the lender/HDFC to appropriate the proceeds deposited towards the discharge of the borrower's liability under the Facility. Clause 5 similarly entitles access to the lease rent. Furthermore, the bank/lender virtually steps into the shoes of the borrower and by the terms of the GPA is also authorized to let out the premises in case due to an unforeseen situation an existing lessee or tenant vacates it or is unable to pay. 31. The borrower is correct in arguing that the expression LRD is nowhere used in any of the documents executed at the time. Yet, as discussed earlier in the judgment, it is the nature and substance of the transaction which is determinative. 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. 32. It would at this stage, be necessary to consider whether such amounts pay....
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....valid as against such transfer. (2) The transferee of an actionable claim may, upon the execution of such instrument of transfer as aforesaid, sue or institute proceedings for the same in his own name without obtaining the transferor's consent to such suit or proceeding and without making him a party thereto. Exception -Nothing in this section applies to the transfer of a marine or fire policy of insurance or affects the provisions of section 38 of the Insurance Act, 1938 (4 of 1938). Illustrations (i) A owes money to B, who transfers the debt to C. B then demands the debt from A, who, not having received notice of the transfer, as prescribed in section 131, pays B. The payment is valid, and C cannot sue A for the debt. (ii) A effects a policy on his own life with an Insurance Company and assigns it to a Bank for securing the payment of an existing or future debt. If A dies, the Bank is entitled to receive the amount of the policy and to sue on it without the concurrence of A's executor, subject to the proviso in subsection (1) of section 130 and to provisions of section 132. Section 131. Notice to be in writing signed- Every notice of t....
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...., 910). A right to the credit in a provident fund account has also been held to an actionable claim (Official Trustee, Bengal v L. Chippendale AIR 1944 (Cal.) 335; Bhupathi Mohan Das v Phanindra Chandra Chakravarthy & Anr. AIR 1935 (Cal.) 756)." The issue involved in that case was whether the sale of lottery tickets, amounted to the sale of goods, attracting a sales tax levy. The court held that the sale did not involve goods, but the sale of actionable claim: "The question is, what is this right which the ticket represents? There can be no doubt that on purchasing a lottery ticket, the purchaser would have a claim to a conditional interest in the prize money which is not in the purchaser's possession. The right would fall squarely within the definition of an actionable claim and would therefore be excluded from the definition of 'goods' under the Sale of Goods Act and the sales tax statute [..]" The court characterised the rights contained in a lottery ticket, and that they represented a right in futuro, the sale of which amounted to the sale of an actionable claim: "The right to participate being an inseparable part of the chance to win is ther....