Supreme Court

Infrastructure Leasing and Financial Services Ltd. Vs. HDFC Bank Ltd. and Ors.

MANU/SC/1166/2023

19.10.2023

Insolvency

Substance of a document is discernible from its terms rather than the label or its nomenclature

Present appeal, is preferred by Infrastructure Leasing and Financial Services Ltd. ("IL&FS" or "the borrower") aggrieved by an order of the National Company Law Appellate Tribunal ('NCLAT'). The point in issue is whether the documents executed by IL&FS by which rents were made over to the Respondent, Housing Development Finance Corporation Ltd. ("HDFC" or "the lender") constituted an assignment and thus fell outside the scope of an asset and security freeze order made by the NCLAT.

The parties entered into a Master Facility Agreement (MFA) on 25th June, 2018. The definition Clause in the MFA, defined [Clause 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, 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 was to give irrevocable instructions to Escrow Bank.

An Assignment and Administration Agreement was also entered on the same date i.e., 25th June, 2018 with the lender and borrower. This agreement provided for the assignment of the receivables by the borrower to the lender.

A Power of Attorney document too was executed by IL& FS on 25th June, 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 enabled HDFC to receive all rents and all other sums in respect of such premises.

The effect of these documents is what the court is concerned with. It is a known principle of contract interpretation, that the substance of a document, is discernible from its terms, rather than the label or its nomenclature.

The borrower is correct in arguing that the expression Lease rent discounting (LRD) is nowhere used in any of the documents executed at the time. Yet, 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.

It is an assignment and not a pledge. 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. There is no merit in the appeal. Appeal dismissed.

Tags : Freeze order Document Nature

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