Dec 06, 2023

Actionable Claims arising from Assignment of Rent Receivables – Analysis of SC judgment in ‘IL&FS Ltd. v. HDFC Bank Ltd. & Anr.’


Infrastructure Leasing and Financial Services Limited (“Appellant”) had availed a financial facility from Housing Development Finance Corporation Limited (“Respondent”) of an amount of Rs. 400 crores. A Master Facility Agreement (“MFA”) was entered between the Parties on June 25, 2018, which provided for creation of a separate escrow account with Housing Development Finance Corporation Bank Limited (“Escrow Bank”). In furtherance to the MFA, an Assignment Agreement was also executed between the Appellant and the Respondent, through which it was agreed that the debt of the Appellant together with the interest thereon, would be payable from the gross income and revenue to be derived from the operation of the business centre services agreements/lease/leave and license agreements.

An asset freeze order dated October 15, 2018 (“Asset Freeze Order”) was passed by the National Company Law Appellate Tribunal (“NCLAT”), thereby freezing the Appellant’s assets and securities, however, during the duration of the Asset Freeze Order, the Respondent and the Escrow Bank continued debiting amounts from the Appellant’s account with the Escrow Bank, in accordance with the MFA, stating that the receivables (i.e. rent) in respect of the secured property were assigned by the Appellant in favour of the Respondent and that the assets ceased to belong to the Appellant. As a result, the Appellant vide its letter dated January 4, 2019, called upon the Respondent to reverse the amount which was debited from the Appellant’s account with the Escrow Bank.


The NCLAT, vide its order dated May 13, 2022, (“Impugned Order”), held that no proprietary interest continued with the borrower i.e. the Appellant with respect to the part of the receivables deposited in the escrow account which were sufficient to meet the principal and interest (payable by the Appellant) and were assigned by the Appellant to the Respondent, and therefore the Appellant could not exercise any right over such part of the receivables. It was further held that, the right over receivables deposited in the escrow account beyond the amount of principal and interest, can be reverted back to the borrower i.e. Appellant.


The present appeal was initiated by the Appellant against the Impugned Order in the Hon’ble Supreme Court of India (“Court”), to challenge, whether the documents executed by the borrower, i.e. the Appellant by which rents were made over to the Respondent, constituted an assignment and thus fell outside the scope of an asset and security freeze in terms of the Asset Freeze Order issued by the NCLAT.

  1. Contentions

The Appellant, in the present matter, argued that the assignment of rental rights for the repayment of debt was simply to create a security interest and not aimed at creating an actionable claim. To support this claim, they contended that the MFA entailed the repayment of loan in 96 (ninety six) months and there was no transfer of property or title. Further, it was claimed that post the Asset Freeze Order, the Escrow Bank was not entitled to debit any amount.

The Respondent refuted the submissions of the Appellant and contented that the facility extended to the borrower, i.e. the Appellant was a lease rental discounting (“LRD”) loan transaction, which is materially different from a traditional loan transaction. It was further submitted that 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. The Respondent further relied on certain clauses of the MFA which recognized that the assigned receivables are the exclusive property of the lender, i.e. the Respondent, and therefore outside the ambit of the Asset Freeze Order which was restricted only to the Appellant’s assets and securities.

  1. Observations and Judgment.

To provide a clear interpretation, the terms of the MFA were analyzed by the Court. The approach instilled by the Court while analyzing the clause, was consistent with the principle reinforced in the judgment titled S. Chattanatha Karayalar v. The Central Bank of India & Ors [1], where the Court held that “..if the transaction is contained in more than one document between the same parties they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document…”. Accordingly, it was held that, even though certain terms of the MFA would lead one to infer those receivables or rents, which the Appellant is entitled to, form the security for the loan extended to it by the Respondent, these terms cannot be read in isolation since the MFA itself adverts to other documents, all of which, were executed by the parties contemporaneously. Moreover, the condition in the assignment agreement clearly indicates that the rents payable to the Appellant stood unconditionally assigned to the Respondent. Therefore, the Court held that, upon 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 Court further deliberated upon the issue that whether such amounts payable on a future date are to be considered property and, therefore, capable of transfer. For this, the Court analyzed the definition of ‘Actionable Claims’ and its constituents under Section 3 of the Transfer of Property Act, 1882 (“TPA”). Section 3 of the TPA recognizes the enforceability of actionable claim to any (a) debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property; or (b) beneficial interest in the moveable property, not in the possession of the claimant.

The Court observed that though the documents executed by the Appellant, do not use the term LRD, but in effect they can be considered as an LRD agreement. Financial agreements such as the LRD allow a lender to give credit facilities to the owners of commercial real estate. Under these agreements, the lender receives an assignment of all or a significant portion of the rent or receivables owed by the owner. Ensuring that the borrower’s obligations are automatically released from the proceeds payable in connection with the property is the main goal of this arrangement. The Court underlined that these sums correspond to unpaid debts.

Therefore, future rent receivables are essentially the unsecured debt that the borrower would have been otherwise entitled to claim, but since the borrower has to repay the debt through such rent, the creditor becomes the one entitled to claim the rent. Even in the present matter, the tenants of the properties were being asked to pay due amounts directly to the escrow account with the Escrow Bank, further strengthening the contention of the assignment.

  1. Decision in the present matter:
  • The Court held with clarity that rent payments made by lessees, licensees, and tenants of the Appellant are essentially debts. The creditor, Respondent, received an unconditional assignment of these debts. Despite various allusions to pledge in the agreements, the Court made it clear that the nature of the transaction was, in reality, an assignment and not a pledge.
  • Based on the principle that all contemporaneous papers must be read in connection to one another and to ascertain the genuine intention of the agreement, the Court concluded that the parties intended for the rents to be assigned.
  • Further, while discussing the provisions of the TPA, it was held that there can be a transfer of debts. Herein, the rents payable by the Appellant, stood transferred to the Respondent, which is defined as ‘Actionable Claim’.
  • The conclusions held by the NCLAT in the order, dated May 13, 2022, are correct and valid in the eyes of law, therefore the Appeal was dismissed.


In the instant matter, the Court’s ruling validates the transferability of debts and actionable claims under the TPA in a larger sense; and upheld the NCLAT’s conclusions being unexceptionable; and therefore, dismissing the challenges to its correctness. The Court under this judgement has underlined the character of LRD arrangements, qualifying it to be an ‘Actionable Claim’ and transferable to the lender as per TPA. The analysis and interpretation rendered by the Court are consistent with the legal framework delineated in the TPA and establish a precedent that may carry noteworthy consequences for like instances in the future. This is certainly a very welcome judgement for lenders and financial institutions, who rely on the security documents for disbursements and recoveries of their loans.

The authors have been involved in some of the largest lease rental discounting transactions including the foreclosures of such mortgages and implementations of the same for banks and other financial institutions.

Watch this space for more updates on the sector …


[1] 1965 (3) SCR 318






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