2023 (10) TMI 962 - SC - Companies Law

Scope of an asset and security freeze order - assignment or not - documents executed by IL FS by which rents were made over to the respondent, Housing Development Finance Corporation Ltd (HDFC or the lender) - HELD THAT - 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. In other words, future rent payable is actually an unsecured debt that the owner/borrower would have been otherwise entitled to claim, but for the assignment or transfer, to the lender/creditor. The borrower is correct in arguing that the expression LRD is nowhere used in any of the documents executed at the time - 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. 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. This court holds that there is no merit in the appeal - Appeal dismissed.

Summary

Issues Involved:
1. Whether the documents executed by IL&FS constituted an assignment and thus fell outside the scope of an asset and security freeze order made by the NCLAT.
2. Whether the receivables (rents) in respect of the secured property were assigned by IL&FS to HDFC and thus ceased to belong to IL&FS.
3. Whether the actions of HDFC and the Escrow Bank in debiting the amount from the Escrow Account violated the orders passed by NCLAT.

Summary:

Issue 1: Whether the documents executed by IL&FS constituted an assignment and thus fell outside the scope of an asset and security freeze order made by the NCLAT.
The Supreme Court analyzed the Master Facility Agreement (MFA), Assignment Agreement (AA), and other related documents executed between IL&FS and HDFC. The court determined that the rents payable to IL&FS were unconditionally assigned to HDFC, and the use of the term "pledge" did not alter the nature of the transaction. The court emphasized that the substance of the transaction indicated an assignment, making the receivables the exclusive property of HDFC. Thus, the freeze order did not negate the AA or take away HDFC's property rights in the lease rental receivables.

Issue 2: Whether the receivables (rents) in respect of the secured property were assigned by IL&FS to HDFC and thus ceased to belong to IL&FS.
The court held that the receivables were indeed assigned to HDFC, making them the lender's exclusive property. The Assignment and Administration Agreement and other documents clearly set aside the rents payable to IL&FS in favor of HDFC. The court noted that the transaction was a Lease Rental Discounting (LRD) arrangement, where future rents were assigned to the creditor bank to ensure the discharge of the borrower's liabilities. This assignment was considered a transfer of actionable claims under the Transfer of Property Act, 1882.

Issue 3: Whether the actions of HDFC and the Escrow Bank in debiting the amount from the Escrow Account violated the orders passed by NCLAT.
The court found that the actions of HDFC and the Escrow Bank in debiting the amounts from the Escrow Account did not violate the NCLAT's orders. The NCLAT had correctly concluded that the assigned receivables were not the assets of IL&FS and thus fell outside the scope of the freeze order. The court upheld the NCLAT's decision that the borrower retained rights over the residual amounts in the Escrow Account, which were in excess of the principal and interest assigned to HDFC.

Conclusion:
The Supreme Court dismissed the appeal, affirming the NCLAT's decision that the receivables were assigned to HDFC and thus fell outside the scope of the asset and security freeze order. The court held that the actions of HDFC and the Escrow Bank did not violate the NCLAT's orders, and the assigned receivables were the exclusive property of HDFC. The appeal was dismissed with no order on costs.