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TMI Blog2022 (5) TMI 994X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.A Nos. 2196, 2262-2263, 2264-2266, 2330-2331, 2332-2333 of 2020 IN Company Appeal (AT) No. 346 of 2018 - - - Dated:- 13-5-2022 - [ Justice Ashok Bhushan ] Chairperson, [ Dr. Alok Srivastava ] Member (Technical) And [ Shreesha Merla ] Member (Technical) For the Appellant : Mr. Ramji Srinivasan, Sr. Advocate with Mr. Kuber Dewan, Ms. Neeharika Aggarwal, Ms. Trisha Raychaudhuri, Ms. Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the prayers in the Applications above named, it is relevant to capture certain background facts which have necessitated filing up above applications: i. On October 1, 2018, Hon'ble National Company Law Tribunal, Mumbai Bench passed an order in Petition No. 3638 (M.B.) of 2018, filed by the Union of India ( UoI ) through Ministry of Corporate Affairs under Sections 241 and 242 of the Companies Act, 2013, whereby the existing board of directors of the IL FS was superseded and a new board of directors was appointed to take charge of the affairs. ii. Subsequently, vide its order dated October 12, 2018, the Hon ble National Company Law Tribunal, Mumbai Bench declined the UoI's prayer for grant interim relief in the nature of moratorium, akin to a moratorium under Section 14 of the IBC, in respect of the IL FS and its 348 group companies. Being aggrieved by this order, the present appeals were filed before this Hon'ble Tribunal. iii. Thereafter, the October 15, 2018 Order was passed by this Hon'ble Tribunal in respect of the present appeals, which, inter-alia, stayed: (i) the institution or continuation of suits or any other proceedings against the IL FS or its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Security Interest was also executed between the Borrower and Lender. 2. We shall hereinafter notice the relevant part of the Facility Agreement, Assignment Agreement and Power of Attorney while discussing the submissions of Learned Counsel for the parties: 3. Events after the Order dated 15th October, 2018 passed in the Appeal: i. After the Order dated 15th October, 2018, Borrower informed the Escrow Bank about the Interim Order dated 15th October, 2018 by an Email Dated 16.10.2018. On 19.10.2018, Lender instructed the Escrow Bank to transfer monthly instalment from Escrow Account to Lender s Account. On 23.10.2018, Borrower informed the Lender about the Interim Order dated 15.10.2018 stating that Interim Order restrained the Lender from appropriating the Borrower s Account with Escrow Bank. Borrower called upon the Lender by Letter dated 27.10.2018 to reverse the debit of Rs. 6.24 Crores and credit the amount back into the Account of the Borrower. The Lender responded to Borrower s Letter stating that receivable in respect of the secured property were assigned by the Borrower in favour of the Lender and therefore secured property ceased to be the asset of IL FS. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stating that receivables stood assigned in favour of the Lender and monies received were not the asset of the Borrower. Hon ble Justice (Retd.) D.K. Jain granted personal hearing to the parties. On 12th May, 2020, Hon ble Justice (Retd.) D.K. Jain recommended the Escrow Bank and Lender to maintain status quo in Escrow Account till a final view is taken on the Application filed by the Borrower. Escrow Bank stopped debiting any amount from the Escrow Account and informed the Borrower and Lender of the same. On 03rd July, 2020, final order was passed by the Hon ble Justice (Retd.) D.K. Jain holding that the acts of the Lender and Escrow Bank in debiting the amount from the Escrow Account are violation of the Orders passed by the NCLAT. Lender and Escrow Bank were accordingly directed to purge themselves within two weeks. 4. Now, we proceed to notice the prayers in different I.As filed by the Applicants as noted above. i. I.A. No. 2262-2263 of 2020 I.A. No. 2262-2263 of 2020 was filed by the Lender praying for following reliefs: In view of the facts and circumstances of the case, the Applicant most humbly prays that this Hon'ble Tribunal be pleased to: (i) q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estrain Respondent No. 1/Escrow Bank from making any debits from the Escrow Account of the Applicant/IL FS, other than for making any going concern payments in compliance with the orders passed by this Hon'ble Tribunal; d) Direct the Respondent No.1/Escrow Bank and the Respondent No.2/ Lender to comply with order dated May 29, 2019 of this Hon'ble Tribunal requiring the banks to release funds to ensure that the Applicant/IL FS is able to meet 'going concern payments; e) pass such other or further order(s) directions(s) as this Hon'ble Tribunal may deem just, necessary and expedient in the interest of justice and in the facts and circumstances of the case iv. I.A. No. 2330-2331 of 2020 and I.A. No. 2332-2333 of 2020 The above I.As have been filed by the HDFS Bank Limited. In I.A. No. 2330 of 2020, the HDFS Bank Limited prayed for following reliefs: In light of the facts and circumstances narrated above, it is most humbly prayed that this Hon ble Tribunal be pleased to:- a. Set aside the Order dated 3rd July, 2020 passed by Hon ble Mr. Justice (Retd.) D.K. Jain; and b. Hold and declare that the Applicant is not in contempt or viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of principal and interest payable per month. The Facility Agreement and all the Agreements clearly depicted relationship of the Borrower and the Lender, the Assignment Agreement, cannot be read in violation. The Escrow Bank is holding amount in the Account as a trustee and Power of Attorney Agreement executed on 25th June, 2018 was by way of Security Interest. Repayment was secured by receivables and additional to other security. Assignment of receivables is only security and not transfer. It is submitted that detailed written submissions were filed before Hon ble Mr. Justice (Retd.) D.K. Jain by the parties and after considering each and every submission, the Order dated 03rd July, 2020 was passed by Hon ble Mr. Justice (Retd.) D.K. Jain. The Order dated 3rd July, 2020 was passed by Hon ble Mr. Justice (Red.) D.K. Jain after considering all the submissions raised by the Lender, borrower and Escrow Bank and after examining the principal and facility agreement and all other Agreements and attendant circumstances. Under the Order dated 3rd July, 2020, the Lender and Escrow Bank are obliged to return the amount debited i.e. Rs. 112,79,18,348/- crores. 8. Mr. Arun Kathpalia, Sr. Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount shall be irrevocable as per the Escrow Agreement. Neither Borrower nor Lender have any access to Escrow Fund. Mr. Arun Kathpalia elaborating the submissions stated that there is a complete and absolute transfer of ownership of certain portion of the rent receivables by Respondent No. 1 in favour of the Lender which was sufficient to pay the principal and interest as and when became due in terms of the Facility Agreement. What was assigned is not the entire rent receivables but only a portion of the same sufficient to cover the principal and interest, rest of the portion has not been assigned and which is continuing to be owned by Respondent No. 1 (IL FS). The Borrower thus continued to have right/title and interest in the residual receivables which was also secured. 10. Mr. Nakul Dewan, Sr. Advocate appearing for the HDFS Bank Limited (Escrow Bank) submitted that action and act of debiting of the Escrow Account was not in breach of Order dated 15.10.2018. As an Escrow Agent, the Bank is merely providing the services to the parties to the Escrow Agreement. He submits that recovery/enforcement of security interest is an issue entirely between Borrower and Lender. The Escrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents throwing light on the issues which have arisen for consideration in these Applications. The Housing Development Finance Corporation Limited (Lender) by Sanction Letter dated 22.06.2018 sanctioned an amount of Rs.400 Crores for a term of 96 months repayable by IL FS from the cash flows to be assigned to the HDFC from the commercial premises being let out on leave and license rental payments. Clauses 6 and 7 of the letter provides as follows:- 6. Repayment Financial Facility will be repaid by you from the cash flows to be assigned to HDFC from the commercial premises being let out by you on leave and license/ rental basis to tenant of the said commercial premises. Indicative repayment scheduled attached as Annexure-1. 7 Security 1. Mortgage of The IL FS Financial Centre situated at Plot No.22, G Block, Bandra Kurla Complex, Bandra East, Mumbai- 400051 admeasuring 372.537 sq. ft. 2. Assignment of receivables from the IL FS 16. After the aforesaid sanction, lender and borrower entered into a Master Facility Agreement on 25.06.2018. Clause 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. ASSIGNMENT/ TRANSFER 13.1. The Borrower shall not assign or transfer all or any of its rights, benefits or obligations under the Facility Agreement and the Transaction Documents without the approval of Lender. Lender may, at any time, assign or transfer all or any of its rights, benefits and obligations under the Facility Agreement and the Transaction Documents. Notwithstanding any such assignment or transfer, the Borrower shall, unless otherwise notified by Lender, continue to make all payments under the Facility Agreement to Lender and all such payments when made to Lender shall constitute a discharge to the Borrower from its liabilities only to the extent of such payments. 19. Clause 15 covered Event of Default . Clause 15.2 deals with Consequence of Default and remedies . Schedule-1 of the Agreement provides for Special Conditions for Rental Discounting. Receivables is defined in Clause 1 in following words:- Receivables shall mean and include gross income and revenue derived from the operation of Client s Contracts and shall include Deferred Receivables as stated in Appendix-1. 20. Clause 4 of Schedule-1 of the Agreement deals with Borrower s Cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the amounts credited in the said Escrow Account, and permit the transfer in the Designated account of the Borrower opened with the Escrow Bank, the amount as mentioned in Item No.7 of Schedule A out of the remaining balance in the said Escrow Account after such adjustment as agreed hereunder. 23. Clause-3 of the Escrow Account Agreement provides Bank s Covenants which reads as follows:- 3. BANK S COVENANTS: (a) The Escrow Bank hereby agrees to act as such and to accept all monies to be delivered to or held in the Escrow Account, pursuant to the terms and conditions of this agreement. This Escrow Bank shall hold and safeguard the Escrow Account, during the terms of this Agreement and shall hold all cash in the Escrow Account, at the request of the Borrower and to safeguard the repayment of the Facility and for the benefit of the Borrower and the Lender in accordance with the terms mentioned herein. (b) The Escrow Bank shall not be required to verify and ensure that the money(ies) deposited is the Receivables and all money(ies) deposited at any time in any quantum should be treated as the Receivables. (c) The Escrow Bank agreed that during the currency of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Facility Agreement. (e) The Borrower hereby irrevocably authorizes the Escrow Bank to pay and to transfer the money(ies) received in the Escrow Account to the Lender as per the terms and conditions agreed in the Offer Letter, Facility Agreement and this Agreement as may be applicable from time to time. 25. An Assignment and Administration Agreement was also entered on the same date i.e. 25.06.2018 with lender and borrower. Assignment and Administration Agreement provided for assignment of the receivables by the borrower to lender. Clause 3 is as follows:- 3. It has been agreed that the authorised indebtedness incurred by the Borrower in terms of the Facility Agreement by way of the Facility together with the interest thereon shall be 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 as more particularly detailed in the Schedule-1 ( Borrower s Contracts ) to this Agreement (hereinafter referred to as Receivables ). xxx xxx xxx 1. Assignment and Pledge of Receivables All the Receivables derived/ to be derived from the operation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st Act, 2002; (iii) The acceleration, premature withdrawal or other withdrawal, invocation of any term loan, corporate loan, bridge loan, commercial paper, debentures, fixed deposits, guarantees, letter of support, commitment or comfort and other financial facilities or obligations vailed by IL FS and its 348 group companies whether in respect of the principal or interest or hedge liability or any other amount contained therein. (iv) Suspension of temporarily the acceleration of any term loan, corporate loan, bridge loan, commercial paper, debentures, fixed deposits and any other financial facility by the IL FS and its 348 group companies by any party or person or Bank or Company, etc. as of the date of first default. (v) Any and all banks, financial institutions from exercising the right to set off or lien against any amounts lying with any creditor against any dues whether principal or interest or otherwise against the balance lying in any bank accounts and deposits, whether current or savings or otherwise of the IL FS and its 348 group companies. The interim order will continue until further orders and not be applicable to any petition under Article 226 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the operation of Client s Contracts and shall include Deferred Receivables as stated in Appendix-1 of the Schedule-1. The Schedule-1 contains details of occupant/ tenants of the IL FS Financial Service Centre with total payments of rental per month. All receivables have been assigned by Assignment and Administration Agreement dated 25.06.2018 by the borrower in favour of the lender which was set aside for the purposes of payment of principal and interest as and when same becomes due. 33. Learned Counsel for both the parties has addressed elaborate submission on the nature and character of the Assignment as used in the Assignment Agreement between the parties. The Assignment has been defined in the Black Law Dictionary, is as follows:- ASSIGNMENT. A transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein. Bostrom v. Bostrom, 60 N.D. 792, 236 N.W. 732, 734. It includes transfers of all kinds of property, Higgins v. Monckton, 28 Cal.App.2d 723, 83 P.2D 516, 519. But is ordinarily limited to transfers of choses in action and to rights in or connected with property, as distinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Law Dictionary, Special Deluxe Ed., p. 106, is a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein . It has further been stated as The transfer by a party of all its rights to some kind of property, usually intangible property such as rights in a lease, mortgage, agreement of sale or partner- ship. It has to be examined whether there was sub-letting or otherwise parting with possession in terms of Sec. 13(1)(e) of the Act. 36. The Andhra Pradesh High Court in The Managing Director and Ors. vs. The Official Liquidator, High Court of A.P., Hyderabad and Ors.- 2012 (6) ALD 630 in paragraph 18 has also noticed the distinction between the security and assignment . In paragraph 18, following has been observed:- 18. A clear distinction has been drawn in common law, between a security and an assignment. (Ashby Warner and Co. v. Simmons 1 (1938) 8 CC 111, The principle that the burden of a contract cannot be transferred so as to discharge the original contractor without the consent of the other party means that, as a general rule, the assignee of the benefit of a contract invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by assignment of receivables only a security interest was created in favour of the lender and by debiting the Escrow Account, security interest has been enforced by the lender which is clear breach of order dated 15.10.2018. We need also to notice that after deposit of the receivables in the Escrow Account whether the borrower has any right or interest in the said amount which has been assigned for repayment of facility. We have noticed the Clause 4.8 of the Master Facility Agreement by which the borrower gives irrevocable instructions to the Bank. We have already extracted Clause 5(c) of the Schedule-1 Special Conditions for Rental Discounting which clearly provides that the receivables shall be exclusive property of the lender for the purpose of secured repayment of the secured facility. When the receivables are exclusive property of the lender, the borrower cannot deal with the said property which has been deposited in the Escrow Account. 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 Esc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lender by Assignment Agreement dated 25.06.2018. We are of the view that transaction documents have to be read holistically in order to ascertain the true meaning and the intent of transaction entered between the parties. Schedule-1 Special Conditions for rental discounting clauses 3(c), 5(b), 5(c) and 5(h) clearly proves that the receivables have been assigned to lender and that borrower has no right or interest remaining in the receivables so assigned. The fact that the receivables become payable in future makes no difference as the assignment in favour of borrower is in presenti. The Power of Attorney also ensures that neither a borrower nor any of its judgment creditors can have access or recourse to the receivables, which can only be dealt with by the instructions of lender. Even an ordinary Escrow Agreement, judgment creditors or the entity itself, cannot have its access/ recourse to the monies lying in the Escrow Account, the escrow being an arrangement whereby the money has to be transferred upon satisfaction of pre-determined conditions, with the beneficial interest vesting in the beneficiary of the escrow. We may in this context refer to a judgment of Court of Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e depositor until the condition of an escrow is met applied to defeat wrongful delivery by escrow agent and sale to third party with knowledge of the escrow); 28 Am.Jur.2d Escrow Sec. 10 (1966); 30A C.J.S. Escrows Sec. 9 (1965); Annot., 15 A.L.R.2d 870 (1951); Annot., 141 A.L.R. 1432 (1942). For other purposes, it is recognized that some interest in escrowed property is transferred to the ultimate grantee under the escrow at the creation of the escrow. Forest Hills Construction Co. v. City of Florissant, 562 S.W.2d 322 (Mo.1978) (ultimate grantee entitled to dividends earned by escrow account before condition was met where escrow agreement made no provision for dividends). The interest transferred at the creation of an escrow is generally referred to as an equitable interest. See 28 Am.Jur.2d Escrow Sec. 10 (1966); 30A C.J.S. Escrows Sec. 9 (1965); Annot., 141 A.L.R. 1432 (1942). Finally, it has been held that the transfer of legal title that occurs when conditions of an escrow are met can relate back to the creation of the escrow when equity so requires. See Donnelly v. Robinson, 406 S.W.2d 595 (Mo.1966) (transfer of realty by life tenant and remaindermen via escrow related ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ECP Commercial II LLC. The loan was secured with a mortgage and an agreement to assign rents to the creditor in the event of default. In the agreement to assign rents, Town Center irrevocably, absolutely and unconditionally [agreed to] transfer, sell, assign, pledge and convey to Assignee, its successors and assigns, all of the right, title and interest of [Town Center] in . . . income of every nature of and from the Project, including, without limitation, minimum rents [and] additional rents The agreement purported to be a present, absolute and executed grant of the powers herein granted to Assignee, while simultaneously granting a license to Town Center to collect and retain rents until an event of default, at which point the license would automatically terminate without notice to [Town Center]. Rents from the residential complex are Town Center s only source of income. On December 31, 2013, Town Center defaulted on its obligation to repay the loan. On December 22, 2014, ECP sent a notice of default and a request for the payment of rents to all known tenants of the Town Center property. The notice complied with the terms of the agreement and with Mich. Comp. Laws 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er ha[s] a valid property interest in the rents. Id. at 734. The assignor has the legal right to collect the rents directly from tenants once notice of the default has been filed in the county s register and served on the tenants. Mich. Comp. Laws 554.231, 554.232. Michigan courts have generally treated the assignment of rents as a transfer of ownership once the agreement has been completed and recorded and a default has occurred. See Otis Elevator, 522 N.W.2d at 733 (stating once [the assignee] recorded the mortgage and the mortgagor s default, the assignment of rents was valid and enforceable as between the mortgagor . . . and the mortgagee. ). Otis Elevator implies that this should be regarded as a transfer of all rights in the rents. 522 N.W.2d at 733 (finding that the assignor no longer had an interest in the rents. ). A more recent decision of the Michigan Court of Appeals confirmed that the assignor loses any right to collect the rents after the assignee has perfected its rights following an event of default. Ashley Livonia A P, L.L.C. v. Great Atl. Pac. Tea Co., Inc., No. 319288, 2015 WL 3757546, at *5 (Mich. Ct. App. June 16, 2015) (per curiam). We therefore pred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy petition was filed in this case. The broad language of the agreement evidences an intention to transfer ownership. 43. The order dated 15.10.2018 does not negate the Assignment Agreement nor it purport to take away the property right of lenders in the lease rental receivables. However, we are also clear in mind that insofar as the amount of receivables deposited in the Escrow Account which is in excess of principal and interest, on the said amount the right is still retained by the borrower and in event, any amount in excess to the said principal and interest has been transferred to or debited in the lender s account that need to be reversed, of course, after adjusting the shortfall in debiting any interest or principal of any earlier months. 44. We find substance in the submission of Shri Nakul Dewan, Learned Senior Counsel appearing for the Escrow Bank that Escrow Bank cannot be held to have committed the contempt of the order dated 15.10.2018 nor there is any question of purging the contempt by Escrow Bank since the Escrow Bank has only followed its Escrow Agreement, and acted on instructions of lender which it was obliged to do as per Escrow Agreement. 45. There i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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