assignment of debt law india

• Submission Guidelines

Assignment of Debts under the Insolvency and Bankruptcy Code

[ Aayush Mitruka  is a lawyer based in Delhi]

Synergies Dooray Automotive, the first corporate entity to be resolved under the new Insolvency and Bankruptcy Code ( Code ) posed a few very interesting questions and highlighted some grey areas in Code. In the present post I intend to discuss one important issue that came up in the context of assignment of debts.

To put things in perspective, the Code stipulates that after the National Company Law Tribunal ( NCLT ) admits an insolvency application, the Insolvency Resolution Professional ( IRP ), among other things, constitutes a committee of creditors ( CoC ) on the basis of claims received against the corporate debtor. The committee comprises all the financial creditors of the corporate debtor, and they are assigned voting shares based on the size of their debt. However, a related party to whom a corporate debtor owes a financial debt does not have any right of representation, participation or voting in the meetings of the CoC.

Before discussing the issue, it will be beneficial to allude to the brief facts of the Synergies Dooray case. In November 2016, just a week before the Code became operational, Synergies Castings, a sister concern of Synergies Dooray, assigned a major portion of its debt to third-party Millennium Finance by way of three assignment deeds. Note that Synergies Castings had acquired the debt from a consortium of banks by way of a one-time settlement in 2011. In the usual course, Synergies Castings, being a related party would not have been permitted to participate/vote in the meetings of the CoC. Therefore, the maneuvering had secured Millennium Finance ( Millennium ) a place in the CoC.

Understandably, there is no reason to complain when a creditor (related party or otherwise) assigns its loan to somebody, as that is well within their rights. However the important question is whether the assignee should get a seat in the CoC by virtue of the assignment? The Code does not seem to directly provide any answer in this regard. [1]

This particular question came up for consideration in an application filed by Edelweiss Asset Restructuring Company Limited ( Edelweiss ) against Synergies Dooray. Edelweiss challenged the assignment and the constitution of the CoC (which included Millennium), alleging that the assignment of debt by Synergies Casting to Millennium was carried out with the ulterior motive of reducing its (i.e. Edelweiss’) voting rights. It was also argued that the assignment deeds were inadequately stamped and unregistered. However, Edelweiss’ argument did not find favour with the NCLT, Hyderabad and while rejecting the application, the NCLT remarked :

“29. Therefore, the assignment deeds between the two entities also legal and permissible. At most it can be said to be similar to “tax planning” rather tax avoiding. Because of this assignment deed, not only the applicant’s share in total debt is reduced, but other financial creditors/Assignees share also proportionately reduced and they did not object to the same but only the applicant agitates with oblique motive/reasons best known to it. Therefore, a fraudulent attempt made to reduce the Applicant’s share in the total voting rights is not a plausible plea by the Applicant. In the absence of any documentary proof/evidence to the claim of the Applicant, the same is liable to be rejected. Accordingly, the bench rejects the above allegations/claim of the applicant.”

[Emphasis supplied]

Although the NCLT held that such an assignment was legal and permissible, it did not delve into the critical aspect of whether such an assignment would secure the assignee a seat in the CoC. The reasoning provided does not appear very convincing. This question ought to have been discussed at length. A reading of the above quoted paragraph also brings to fore that the decision lends it approval to an assignment undertaken even with the sole objective of securing a seat in the CoC because it is akin to “tax planning”. Edelweiss has preferred an appeal before the NCLAT and the matter is currently pending for its decision.

This issue was once again considered by the NCLT, Mumbai in the case of Fortune Pharma Private Limited . Interestingly, in this case, after filing applications initiating the corporate insolvency resolution process ( CIRP ) but before its admission, two related party creditors assigned their debts to an unrelated third party. Naturally, this diminished the voting share of the applicant creditor, who then filed an application contending that the assignments were executed with an ulterior motive. The NCLT held that disqualification that existed at the time of initiating the CIRP cannot be removed by a mere assignment. It noted that assignment is transfer of one’s right to recover debt to another person and that the rights of the ‘assignee’ are no better than those of an ‘assignor’. Accordingly, the assignee does not get the right to change its status from ‘related’ to ‘unrelated.’

In other words, the NCLT, Mumbai reasoned that since at the inception of the debt it belonged to a related party (who is barred to participate in the proceedings of CoC), the assignment of such a debt will not remove the bar. In my view, though the NCLT was correct in debarring the assignee from participating in the proceedings of the CoC, however the reasoning provided does not appear to inspire much confidence because of the following reasons.

First, it is important to understand that the bar is on the person who is holding the debt and not the nature of the debt per se. It will not be entirely correct to bar somebody (who is otherwise eligible) from voting just because it bought the debt from a related party. Imagine a situation where an original creditor (unrelated) assigns a debt to a related party. Now when this related party creditor assigns a debt to an unrelated X in the usual course of business, will X in this case be barred since at some point in time the debt was held by a related party?  The answer to this has to be in the negative.

Second, this will prove to be counter-productive and have unintended repercussions. It will strongly discourage genuine asset reconstruction companies or other interested parties from buying the debt from any related party creditor. Surely, the Code could not have intended to hinder assignments which are undertaken in the usual course of the business.

Third, how do we exactly deal with situations when a CIRP application is being made by an operational creditor under section 9 of the Code? An operational creditor needs to deliver to the corporate debtor a demand notice as per section 8 before invoking section 9. Do we, in these cases, also allow an assignment before filing of an application? It would be impractical to have a one-size-fits-all approach.

The two views and the approaches adopted by two benches of the NCLT on this critical question throws open a can of worms. Let us try to closely examine this issue.

Assignment is essentially a contractual concept and refers to an agreement by which the rights and obligations of one party can be transferred to another. By virtue of assignment, the assignee steps into the shoes of her assignor and agrees to be both bound by it and is entitled to enforce it. Further, to be valid, an assignment agreement must satisfy the requirements under the Indian Contract Act, 1872 ( Act ). Accordingly, an assignment agreement can be declared void under section 23 of the Act if the object of the assignment agreement is (a) of such a nature that, if permitted, it would defeat the provisions of any law; or (b) fraudulent; or (c) involves or implies injury to the person or property of another; or (d) the court regards it as immoral, or opposed to public policy.

At this juncture, it is significant to examine if the NCLT (which exercises summary jurisdiction) would have the power to undertake such an investigation or would it be the prerogative of a civil court? The language of section 60(5)(c) of the Code seem to suggest that the NCLT will have the authority since this will be a “ question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code .”

It cannot be the intention of the Code to allow the promoters to appoint a proxy on the CoC by means of an assignment. It is a well settled principle of law that what may not be done directly cannot be permitted to be done indirectly. However, at the same time it must also be borne in mind that the Code does not aim to discourage any bona fide assignments. In the absence of any guidance in the Code, in order to determine the validity of such assignments, the NCLT ought to investigate the objective behind the assignment. In this regard, the time and the circumstances under which the assignment is made would be one relevant factor. Among other factors, the NCLT may also consider if the assignment is executed in the usual and ordinary course of the business.

This issue undermines the efficiency of the Code and therefore warrants serious consideration. The Code envisages provisions for scrutinizing certain transactions which may compromise the CIRP. One way to address this issue could be by amending the law to include such assignments also within its ambit. Pertinently, under section 240 of the Code, the Insolvency and Bankruptcy Board of India has the power to make regulations. However, since Parliament has been quite proactive in the past in preventing the promoters trying to game the system, it would not be surprising if an amendment is brought in to bring some clarity. It remains to be seen how and when this issue does gets finally elucidated.

– Aayush Mitruka 

[1] Regulation 28 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 does not address this issue.

About the author

Cancel reply

Save my name, email, and website in this browser for the next time I comment.

Notify me of follow-up comments by email.

Notify me of new posts by email.

Thanks for the above post. Its very helpful. Can you share a draft Assignment Agreement as per IBC?

Ad Mr Ayush. Sir.we have settlements our loans with J.M Arc on 12.8.15 in rs 7 Cr.J.M ARC not given permission to sell extra open land to deposit upfront 25% payments. Hence company not sine agreement. B.J.M ARC revoked on 11.12.15.J.M ARC file petition with NCLt for rs 14.5 cr in application. Pls advice your view.

With respect to Mr Mitruka’s views on the issue of assignment, I humbly submit that no amendment in the Code is called for. The Code, in several places, has expressly equated a creditor (by virtue of a business deal) with a creditor who has simply acquired a debt from another, say through assignment. Once the assignment agreement comes out unscathed, the assignee (of any debt) is as much a creditor as any other creditor. So, post the assignment, Millenium is a creditor in his own right. This way there is no question of any ‘related party’. A financial creditor gets a seat in the CoC, irrespective of his lineage. This should be looked at in this simple manner. In the proceedings before NCLT, Hyderabad, all that was said was that these 3 Agreements smacked of malafide because their date of signing was so close to the date of SICA Repeal . To be sure, I fail to see the connection between the two. It was known to all and sundry that SICA Repeal will be brought into force as soon as NCLTs got ready to be constituted.What was the fault of the Assignor or Assignee , even if agreements were signed on the very day on which SICA Repeal was made effective. Edelweiss does not appear to have led any evidence to show that the parties were planning to get around the section 21(2) by signing those assignment agreements. In fact, if the objective was just to get around this section, the date of signing did not need to be close to the date of SICA Repeal coming into effect. Neither NCLT nor the RP could afford to waste time on mere allegations unsupported by any evidence.

Please sir help…. Bank insolvency pr assignment ready krna h… So plz explain I am so very confused..

Invoking India’s Money Laundering Regime for Environmental Crimes: Impact on Businesses

Data-protection in the international arbitration regime.

• ‘Beneficial Owner’ is not a ‘Related Party’ under the IBC

The Unavailability of Writ Jurisdiction for Interference with One-Time Settlements

SUBSCRIBE TO BLOG VIA EMAIL Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages

• Supreme Court on the Regularization of Temporary Employees
• A Stamp Paper – What Good is it Beyond Six Months?
• SEBI’s Order in the DLF Case: A Summary
• Section 14, SARFAESI Act: Settling A Jurisdictional Conundrum
• Foreign Jurisdiction Clauses in Commercial Contracts: An Indian Perspective
• Creditors with Rejected Claims: Methods to Address Inadequacies under the IBC
• Termination of Worker For ‘Loss of Confidence’ Does Not Amount To Retrenchment
• Validity of Employment Bonds in India

Recent Comments

• Umakanth Varottil on Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP
• Araz Mirbavandi on Supreme Court Invokes Article 142 to Permit Withdrawal of CIRP
• Hari Prakash on Guest Post: Reduction of Provident Fund Contributions to Statutory Limits
• Adv Ragav on Secondment Taxation and the Northern Operating Systems Case
• Suchith on Coffee Plantations under SARFAESI: A Bitter Brew

Social Media

• View @IndiaCorpLaw’s profile on Twitter

Related Parties of the Corporate Debtor cannot circumvent Proviso to Section 21(2) of IBC by Assignment of Financial Debt to a Third Party: NCLAT Delhi

Introduction.

In the case of Peanence Commercial Pvt. Ltd. & Ors. v. Mamta Binani (RP for Rolta India Limited) [1] , the Hon’ble NCLAT upheld the decision of NCLT Mumbai Bench stating that merely assignment of financial debt by a related party to another party on an arm-length transaction does not mean the assignee should be treated as a non-related party.

Table of Contents

Brief facts of the case.

Rolta India Limited was admitted into CIRP by Order dated 19.01.2023. Rolta Private Limited (Hereinafter “ Appellant 2 ” filed their claim with the Resolution Professional (Hereinafter “RP” ). The RP admitted the entire claim amount of Appellant 2, however, since the Appellant was a related party, they were not given any voting rights or representation in the Committee of Creditors by the RP.

On 15.01.2024, Appellant 2 entered into an MoU with Peanence Commercial Pvt Ltd. (Hereinafter “ Appellant 1 ”) for assignment of debt for one-time consideration of Rs 50 crores on as is where is basis. Appellant 2 sent a letter to the RP for the approval of the assignment dated 15.01.2024. The RP informed that the RP has no authority or jurisdiction to grant approval  for the Deed of Assignment and since the nature of the debt hasn’t changed, no voting rights would be available to Appellant 1. Thereafter, Appellant 2 filed an IA no. 724 of 2024 before the Mumbai Bench of NCLT, praying to admit the Appellant 1 as a non-related party in the CoC. The Hon’ble NCLT rejected their prayer and hence the Appellants filed an appeal.  

Contentions of Both Parties

The counsel for the Appellants contended that the assignment deed could not be refused to be acknowledged as Peanence Commercial is not a related party and no disqualification is attached to the assignee to be part of the CoC. Moreover, the assignment consideration of Rs. 50 crore is an arm-length transaction and the Hon’ble NCLT had not correctly appreciated the ratio of Supreme Court in Phoenix ARC Pvt. Ltd. v Spade Financial Services Ltd [2] .

The counsel for the Respondents contended that the MoU relied on by the counsel for the Appellants indicate that no assignment agreement has taken place between Appellant No. 1 & 2. The MoU is only an agreement to enter into an assignment in future. Further, the purpose behind the assignment is to put an entity in the CoC by the Rolta Pvt. Ltd. since it cannot be a part of the CoC itself, being a related party.

Decision of the NCLAT

The Hon’ble NCLAT in its order carefully examined the contents of the MoU and noted that ‘Purchase Consideration Due Date’ clause of the MoU clearly laid down that date to pay the consideration will be immediately upon obtaining the approval of the RP of the Borrower recognising the Assignee as a non-related party. In other words, the Assignment agreement would only come into existence upon the recognition of the Assignee as a non-related party and thus getting voting rights in respect of the debt in the CoC. The NCLAT upheld the NCLT’s opinion that the assignment which was effective only upon the confirmation from the RP and thus such contingent agreement cannot be considered a bona-fide transaction.

The NCLAT considered the relevant paragraphs of Phoenix ARC Pvt. Ltd. v Spade Financial Services [3] where the Apex Court held that the proviso to Section 21(2) would apply to cases where the financial creditor ceases to become a related party solely with the intention of participating in the CoC and sabotage the CIRP.

Emphasising on the fact that the assignment is contingent on approval by the RP that the Assignee shall be given a seat in the CoC, the court held that real intent of the assignment to obtain a seat in the CoC and to create hurdles and delay in CIRP of the Corporate Debtor. Thus, the court dismissed the appeal, stating that it did not find any error in the reasoning of NCLT rejecting the I.A.

In the present case, the agreement was a contingent upon the condition that the assignee shall be awarded the status of non-related party through the assignment of financial debt, this clearly indicates that the sole purpose of the assignment was to circumvent the proviso to Section 21(2) and obtain voting rights in respect of the financial debt. This is one of the ways in which financial creditors related to the Corporate Debtor often try to obtain voting rights in the CoC. However, through the present order of the NCLAT, it has clarified that any assignee cannot be treated as a non-related party in case of assignment of financial debt by a related party. This is an important position of law as had the court allowed such an assignment deed, the objective behind the proviso to Article 21(2) would be overlooked. It can be inferred through the order that it is important for the court to consider the intent and objective of the assignment deed. In cases where the intent is to solely obtain a seat in the CoC, such as in this case, it would provide a convenient option to the financial creditors to circumvent the proviso to Section 21(2) and indirectly manipulate the decisions of the process.

[1] Company Appeal (AT)(Insolvency) No. 905 of 2024

[2] (2021) 3 SCC 475

[3] (2021) 3 SCC 475

Comments are closed.

Get in touch with us

• UK & Ireland

How is this helpful for me?

• Claim the judgments where you have appeared by linking them directly to your profile and maintain a record of your body of work.
• Interact directly with CaseMine users looking for advocates in your area of specialization.
• Creating a unique profile web page containing interviews, posts, articles, as well as the cases you have appeared in, greatly enhances your digital presence on search engines such Google and Bing, resulting in increased client interest.
• The cases linked on your profile facilitate Casemine's artificial intelligence engine in recommending you to potential clients who might be interested in availing your services for similar matters.

  Know more  

SUGGESTIONS

• Visual Try our Visuals feature which gives you an instant snapshot of the most relevant and landmark case laws.">

Cases cited for the legal proposition you have searched for.

• Judgments 10301
• Commentaries NEW

...leviable on excess drawing/temporary overdraft limit before assignment of debt to the Appellant (Assignee) and charging of such penal interest against the Corporate Debtor after assignment of ...be a component of debt not covered by the assignment . Besides it is not a crystallised debt in the hands of the Appellant (Assignee). Viewed in this context, the claim cannot be said to have been...lawful assignee of the debt owed by the Corporate Debtor to Karnataka Bank Limited is aggrieved of upholding of rejection of its claim to the extent of charging penal interest against the Corporat...

... of BIFR, it was not disclosed to the Company Court till the winding-up order was passed on 19-4-2010, the assignment of debt of Rs 160 crores by IFCI for Rs 85 lakhs, are admitted facts. The order..., staking a claim for being substituted as a secured creditor under the Sarfaesi Act consequent to the assignment of debt to it by IFCI. That the claim was not simply with regard to assignment of an...Navin Sinha, J.— Leave granted. The appellant is an assignee of debt by Industrial Finance Corporation of India Ltd. (hereinafter called as “IFCI”) for the outstandings of M/s...

...these circumstances, the assignment of debt to the petitioner was not a bona fide one. It had been done on 31-3-2006 surreptitiously without knowledge of answering respondent and stood vitiated. He also...expeditiously within a time frame.6. Learned counsel for petitioner submits that the challenge to the assignment of debt apart from being legally unsustainable, was devoid of merit and was...petitioner thereby recognizing the assignment of debt in favour of the petitioner.7. During the course of arguments, we had put to learned counsel for the parties that prima facie there does...

...Securitisation Act") on the ground that the debt of the plaintiff to the ICICI Bank has been assigned in favour of the respondent bank by executing the deed of assignment under the...observation that assignment of the debt is valid. It is further observed that a benefit under the contract can always be assigned. Reference is made to the...passed in Civil Application No.395/2009 dated 10.08.2009 was passed in view of the judgment of the Division Bench of this Court prohibiting the assignment of debt . However, as the judgment ...

...submitted that, in any event, an activity of assignment of debt would fall within five of the clauses in Section 6(1) of the BR Act, 1949, namely, clause (a), clause (c), clause (g), clause (l) an....20. In reply, Shri T.R Andhyarujina, learned Senior Counsel appearing for the borrower, inter alia submitted that the assignment of financial instruments in possession of ICICI Bank Ltd. to Kota...clients of ICICI Bank in favour of the assignee”. That, the assignment of a debt can never carry with it the assignment of the obligations of the assignor. Unless there is a nova...

...liabilities of the petitioner. In fact, the reading of the petition and the arguments now raised show that the grievance is in respect of assignment of debt by the Bank. The borrower has no intere...such transaction but even if such transaction is finalized, the petitioner will not have any right to dispute the assignment of debt . The petitioner as a borrower is bound by the terms of the contract...executed by the petitioner with the Bank.In view of the said fact, we do not find any intervention, at the instance of the petitioner, in respect of assignment of debt , is warranted...

... assignment of debt . The prayer as sought by the Applicant is as under:- a. "Allow the present Application and take on record the change in Committee of Creditors pursuant...to assignment of debt by Standard Chartered Bank (SCB) in favour of Assets Care and Reconstruction Enterprises Limited vide an Assignment Agreement dated 21.11.2023...: MS. ANU JAGMOHAN SINGH SHRI KISHORE VEMULAPALLI MEMBER (Technical) MEMBER (Judicial) ORDER SHEET OF THE HEARING HELD ON 04.01.2024...

Can't display summary as content is Scanned, Please open the judgment to see full content.

...counsel appearing for Axis Bank opposed to grant liberty to the applicant in IA 112/2018 to file another Application.In the memo it is clearly stated so far as assignment of debt is... of debt .Learned counsel appearing for Applicant in IA 173/2018 represented that notice served on Asst. Provident Fund Commissioner, Mumbai on 23.06.2018 and offered to file proof of ....Applicant in IA 112/2018 filed memo seeking permission to withdraw IA 112/2018 on the ground that assignment has already taken place and IA 112/2018 become infructous.Learned...

..., 2002 (for short, the SARFAESI Act). Appellant No. 1, thereafter, wrote a letter to the defendants, who were the guarantors/mortgagors, informing them about the assignment of the debt . Appellant No. 2...appeal.4. Mr. S.L Gupta, the learned Counsel appearing for the appellants, has submitted that after the assignment of the debt by appellant No. 1 under section 5 of the rddbfi act in... assignment of debt .5. Mr. Gupta has also contended that though leave of the Tribunal was not sought by the applicant for the continuance of the O.A, yet the Tribunal below could not have...

...file of the first respondent and quashing the same and further directing the first respondent to release the deed of assignment of debt . 2. The case of the petitione.... The third respondent executed a deed of conveyance as assignment of debts dated 26.03.2009 thereby assigning the debts recovery rights to the petitioner, which is the subject matter of the said debt . As.... Thereafter, it was presented for registration. The second respondent impounded the assignment of debts under Section 33 of the Indian Stamp Act and issued a notice dated 11.08.2009 thereby seeking as to why stamp duty sho...

...Claiming himself to an employee of one M/S Fort Gloster Industries Ltd. and on the ground that due to non starting of commercial production by the management in view of assignment of ...information applying the provisions of Section 8(1)(d)&(j) of the Act. On appeal, finding that most of the information sought was in the form of queries and also on the ground that in terms of the...provisions of section 13(1) of the banking companies (acquisition & transfer of undertaking) act of 1970, the bank has to maintain secrecy of the accounts of its customers, the AA dismissed th...

...for the Official Liquidator submitted that the issue which was pending before the Hon'ble Supreme Court with regard to assignment of debt has been now decided by the Hon'ble...Court with regard to the issue of assignment of debt . The applicant is a company which is registered as Securitization and Reconstruction Company under Section 3 of the Securitization and...Industrial Investment Bank of India (IIBI) in view of deed of assignment executed on 26.03.2009. 2. Heard learned advocate Mr. Hemang M. Shah for the applicant and learned...

...confirmation and shall make such appointment after confirmation by the Board.3. In this case a technical issue had cropped up in the past that whether on Assignment of Debt , the Assignees who...were originally the “related party”, be treated as “non-related party” on Assignment of Debt . So the question that when an Assignor assigns a Debt then whether the Assignee steps into the shoes of the...Assignees as “non-related party” on transfer of Debt from a related party. It was concluded that since the Debt belonged to a “related party Financial Creditor” hence on transfer its status shall remain...

...the debt in favour of the assignee. According to them when the debt or the decree was assigned for a consideration at a throwaway price of Rs. 55 lac and odd, by virtue of the alleged assignment ...1. The Court:- The present writ petition is filed in the nature of Public2. Interest Litigation contending that the agreement dated 17th November, 2009, wherein assignment ... of debt /decree executed between the creditor bank and assignee in respect of the debts of the company under liquidation is an unconscionable one. According to the petitioner a group of employees under...

...-1 dated 25 January, 2002, the Government ordered the reduction of stamp duty payable on an instrument of securitization of loans or assignment of debt with underlying securities, to 75 p...this order the duty with which an instrument of securitization of loans or assignment of debt with underlying securities chargeable under Article 20 (a) of Schedule I to the said Act to 75 paise f..., the Bank assigned the debt in favour of the appellant herein, which is an Asset Reconstruction Company registered with the Reserve Bank of India under Section 3 of The Securitisation and Reconstruction...

...Section 434 of the Companies Act claiming that sum of more than Rs. 13.30 crores was due as on 31.8.2007 The appellant gave reply, disputing ...Regulation Act, 1949 will govern the assignment of debt as per RBI guidelines.2. Maxlux Glass Private Ltd. v. ICICI Limited...that assignment of debt is an activity covered by the Banking Regulation Act.9. Apart from the above, we asked learned counsel for the appellant whether the appellant was willing to pay...

...record. 4. In the result, this SA is allowed in view of sale becoming infructuous in terms of memo filed on behalf of respondent and in view of assignment of debt to C...on 28.12.2022 did not materialise for want of bidders. In the meanwhile, the loan account of borrower was assigned to CFM Asset Reconstruction Private Limited vide Assignment Agreement dated...day of April, 2023 Present: Shri Ganapathi K.R.K. Presiding Officer SARFAESI APPLICATION No. 04 of 2023 1...

...initiated as yet by the 3 respondent under SARFAESI Act. The factum of assignment of debt is confirmed by the learned counsel for the 1 and the 2 respondents.3. The petitioners state...Justice)The debt of the 1st and the 2nd respondents stands assigned to the 3rd respondent, which has called upon the petitioners to pay the amount of Rs. 24,20,515/-, as quantified on...Writ Petition filed under Article 226 of the Constitution of India, praying for issuance of a writ of ...

...-XXVI and is formed as per section 3 of the SARFAESI Act, 2002. The applicant claims to have got assigned the debt due with underlying securities from IndusInd Bank, under the supplement of assignment of ...defendants, they failed to repay the amount resulting the assignor bank issuing the possession notice dated 10.08.2017. The applicant got assigned the entire debt of defendant under the supplement assignment of ...are produced as Exhibit A5 to A7 respectively. The memorandum of deposit of title deeds in regard to the schedule properties is produced as Exhibit A8. Supplement assignment of debt agreement...

Keyword Alert(s)

Create alert, update courts.

• Supreme Court & High Court

Overruled By

Our algorithms sense that you may get better results by trying out the same excerpt in our CaseIQ interface.

If Secured Financial Creditors have assigned their entire debt from the Borrower to the Successful Resolution Applicant under a Resolution Plan, they cannot invoke the Personal Guarantees after approval of the Resolution Plan – State Bank of India Vs. Mr. Prashant S. Ruia – DRT Ahmedabad Bench (DRT-1)

It was argued on behalf of Personal Guarantors that as the entire debt of the principal borrower came to be assigned to the ArcelorMittal, no debt could be said to be due on the books of account of the Bank. In other words, the argument is that no debt exists as on date so far as the Applicant - Bank is concerned. The entire debt owed by the principal borrower to the Bank stood completely extinguished in light of the resolution plan. In the absence of any debt remaining to be paid to the Bank, the question of enforcing the personal guarantees in relation thereto would not survive. The Tribunal held that a conjoint reading of the clauses of the Deed of Guarantee and the approved Resolution Plan reveals that the Secured Financial Creditors have assigned their entire debt from the Borrower (i.e.ESIL) to the resolution applicant (i.e.Arcelor) under the Resolution Plan and have also accepted the amounts paid to them by Arcelor in discharge of the total debt owed by the ESIL to such Financial Creditors. This factual matrix invariably leads to the singular conclusion that the debt owed by the ESIL to the said Financial Creditors stands fully and finally satisfied.

In case you've already logged in, click here to know why you're not able to access this content.

Related Posts

Decoding the going concern sale under the liquidation process in ibc (insolvency and bankruptcy code, 2016).

Login with GoogleOR Username Password Remember…

Read Post »

Decoding the Code – Rights of Secured Creditors under Insolvency and Bankruptcy Code, 2016 and IBC vs. SARFAESI Act, 2002

All about SARFAESI under IBC

KEB Hana Bank Vs. Mr. Rohit Nath – DRT Chennai Bench (DRT-II)

The word used “may” under section 99(2) cannot be construed as mandatory one and it gives only discretionary however to the resolution professional – keb hana bank vs. mr. rohit nath – drt chennai bench (drt-ii).

By reading section 99(2), it is…

Either type keywords in “Search here” bar or follow below instructions:

• Step-I : If you have IBC Laws Case Citation, selection in “Case Citation” otherwise select the query subject using “Case Subject” or select “Section wise Cases” or any other parameter(s) from drop-down.
• Step-II: Scroll down, the function will list all relevant case laws.
• Step-III : To filter more, select Tribunal/Court/Bench etc.

Bookmark IP Tool  or remember this link:   https://ibclaw.in/ibc-case-laws/   for future reference. For YouTube Guide, Click here .

• Member can add new topic in a Forum or Sub-Forum and also can reply existing topic(s).
• Member can subscribe a specific Topic or specific Forum/sub-forum or can subscribe all forum, in which they will receive email on new updates/reply on such topic/forum. This is also available free of cost.
• All Topics are categorised in Forums and Sub-Forums which is helpful to identify the each topic in separate category for existing as well as new visitors and can find it in easy way.
• We have nos. of Whatsapp Groups but unable to maintain trailing of discussed topics for the time being. This Forum will help to create such trailing.
• Member can see recently activities in Activity Section.
• We minimised complexity in designing to make it simple for our visitors.

You feedback is highly appreciated and help us to motivate our team. Feedback here.

IBC Commentary Index(Clickable)

Allahabad High Court On Stamp Duty On Debt Assignment

Contributor.

Introduction

Assignment of debt is one of the most common forms of transactions in financial markets. It essentially entails transfer of a debt from a creditor (assignor) to a third-party (assignee).

One of the biggest challenges faced in debt assignment transactions in India is the significant stamp duty implication on the deed of assignment. Considering the volume of assignment transactions undertaken generally by banks and financial institutions or by asset reconstruction companies (" ARCs "), the stamp duty levied becomes a significant cost in such transactions.

The Constitution of India (" Constitution ") confers upon the Parliament and each State Legislature the power to levy taxes and other duties. The subjects on which the Parliament or a State Legislature or both can legislate are specified in the Seventh Schedule of the Constitution. The Seventh Schedule is divided into 3 (three) lists:

• Union List;
• State List; and
• Concurrent List.

The Parliament has the exclusive power to legislate on the subjects enumerated in the Union List. The State List enumerates the subjects on which each State Legislature can legislate and such laws operate within the territory of each State. The Parliament, as well as the State Legislatures, have the power to legislate over the subjects listed in the Concurrent List.

The entry pertaining to levy of stamp duty in the Union List is as follows: -

" 91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts."

The entry pertaining to levy of stamp duty in the State List is as follows: -

" 63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty. "

The entry pertaining to levy of stamp duty in the Concurrent List is as follows: -

" 44. Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty . " [emphasis supplied]

From the aforementioned entries, it is clear that the power to legislate on the rate of stamp duty chargeable on instruments of debt assignment (since it is not covered under Entry 91 of the Union List) is with the State Legislature. However, the power to determine whether stamp duty can be charged or not on a specific instrument is in the Concurrent List.

In this regard, it may be noted that pursuant to the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (" Amendment Act "), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (" SARFAESI ") and the Indian Stamp Act were amended to provide for an exemption from stamp duty on a deed of assignment in favour of an ARC.

As mentioned above, the power to legislate on whether stamp duty is payable or not on an instrument is in the Concurrent List. Therefore, the Parliament has the power to legislate on the aforesaid subject.

Pursuant to the Amendment Act, section 5(1A) was inserted in SARFAESI which provides that any agreement or document for transfer or assignment of rights or interest in financial assets under section 5(1) of SARFAESI in favour of an ARC is not liable to payment of stamp duty.

In several States, notifications have been issued for remission and/ or reduction of stamp duties on debt assignment transactions. For instance, in Rajasthan, the stamp duty chargeable on any agreement or other document executed for transfer or assignment of rights or interests in financial assets of banks or financial institutions under section 5 of SARFAESI in favour of ARCs 1 has been remitted. Further, in Maharashtra, the stamp duty on instrument of securitization of loans or assignment of debt with underlying security has been reduced to 0.1% (zero point one percent) of the loan securitized or the debt assigned subject to a maximum of Rs. 1,00,000 (Rupees one lac) 2 .

Certain State Governments, such as those of Rajasthan and Tamil Nadu have reduced the stamp duty based on the nature of the financial asset being assigned. In Rajasthan, the stamp duty has been reduced for assignment of standard assets whilst in Tamil Nadu, the stamp duty has been reduced for assignment of non-performing assets and assignment in favour of ARCs.

This paper discusses a decision passed by the Allahabad High Court in the case of Kotak Mahindra Bank Limited v. State of UP & Ors. 3 (" Kotak case "), where it was held that an instrument of assignment is chargeable with stamp duty under Article 62(c) (Transfer) of Schedule 1B of the Indian Stamp Act, as applicable in Uttar Pradesh (" UP Stamp Act "), as opposed to Article 23 (Conveyance) of Schedule 1B of the UP Stamp Act.

The stamp duty payable in various States under Article 23 or the relevant provision for conveyance is on an ad valorem basis whereas the stamp payable under Article 62(c) or relevant provision for transfer of interest secured, inter alia , by bond or mortgage deed, is a nominal amount. For instance, in Uttar Pradesh, the stamp duty payable under Article 62(c) is Rs. 100 (Rupees one hundred).

Decision in the Kotak case

In the Kotak case, Kotak Mahindra Bank Limited (" Kotak ") had purchased and acquired certain loans from State Bank of India (" Assignor ") along with the underlying securities.

The question for consideration before the full bench of the Allahabad High Court was whether the deed executed by the applicant with the underlying securities would be chargeable with duty under Article 62(c) or Article 23 of Schedule 1B of the UP Stamp Act.

The court observed that in order to determine whether an instrument is sufficiently stamped, one must look at the instrument in its entirety to find out the true character and the dominant purpose of the instrument. In this case it was observed that the dominant purpose of the deed of assignment entered into between Kotak and the Assignor (" Instrument "), was to transfer/ assign the debts along with the underlying securities, thereby, entitling Kotak to demand, receive and recover the debts in its own name and right.

Article 11 of Schedule 1B of the UP Stamp Act provides that an instrument of assignment can be charged to stamp duty either as a conveyance, a transfer or a transfer of lease. The court observed that since the Instrument was not a transfer of lease, it would either be a conveyance or a transfer.

The court referred to the definition of conveyance in the UP Stamp Act, which reads as follows:

" Conveyance" . — "Conveyance" includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for [by Schedule I, Schedule IA or Schedule IB] [as the case may be];" [emphasis supplied]

The court held that the term conveyance denotes an instrument in writing by which some title or interest is transferred from one person to other and that the use of the words "on sale" and "is transferred" denote that the document itself should create or vest a complete title in the subject matter of the transfer, in the vendee. In this case since under the Instrument, the rights of the Assignor to recover the debts secured by the underlying securities had been transferred to Kotak, it was held that the requirement of conveyance or sale cannot be said to be satisfied.

The court further observed that debt is purely an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property. Where a transaction does not affect the transfer of any immovable or movable property, Article 23 of Schedule 1B cannot have any applicability.

The court's view was that since debt along with underlying securities is an interest secured by bonds and/ or mortgages, transfer of such debt would be chargeable under Article 62(c).

The court further clarified that under the Instrument, merely the right under the contract to recover the debts had been transferred. Since the borrower(s) had never transferred the title in the immovable property given in security to the Assignor, the Assignor could merely transfer its rights i.e. mortgagee's rights in the property to recover the debts. It was further observed that the Assignor never had any title to the underlying securities and that it merely had the right to enforce the security interest upon default of the borrower(s) in repayment. The right transferred to Kotak was primarily the right to recover the debts, in accordance with law, by proceeding against the underlying security furnished by the bonds/ mortgage deed(s).

Therefore, the court held that the Instrument was chargeable with stamp duty under Article 62(c) of Schedule 1B of the UP Stamp Act.

Whilst coming to the conclusion that assignment of debt would not constitute a conveyance, the court referred to the definition of conveyance to state that debt is an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property.

In this regard, it may be noted that there are various judicial precedents 4 , where it has been held that an interest (including mortgage interest) in immovable property is itself immovable property.

However, even assuming assignment of debt with underlying securities over immovable property amounts to a conveyance, it may be pertinent to refer to the definition of conveyance in the UP Stamp Act which specifically excludes a conveyance which is otherwise provided for by the Schedule to the UP Stamp Act.

Article 62(c) of the UP Stamp Act reads as follows:

" 62. Transfer (whether with or without consideration) –

(c) of any interest secured by a bond, mortgage- deed or policy of insurance-- "

In view of the above, transfer of any interest secured by a mortgage deed, which is covered under Article 62(c), would be excluded from the meaning of conveyance and would be chargeable to stamp duty under Article 62.

In this regard it may be pertinent to refer to the definitions of 'bond' and 'mortgage deed' under the UP Stamp Act, which is as follows:

" " Bond " includes-

• any instrument whereby a person obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be;
• any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and
• any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another "

" " Mortgage-deed ". — "mortgage-deed" includes every instrument whereby, for the purpose of securing money advanced, or to be advanced, by way of loan, or an existing or future debt, or the performance of an engagement, one person transfers, or creates, to, or in favour of another, a right over or in respect of specified property; "

In view of the above, where a debt secured by a bond or a mortgage deed is assigned under a deed of assignment, the stamp duty payable on such deed of assignment will be under Article 62(c) of the UP Stamp Act or corresponding provisions of the Stamp Act of other States.

However, in cases of unsecured loans or loans secured by an equitable mortgage (where there is no mortgage deed), the deed of assignment would attract ad valorem stamp duty chargeable on conveyance, since the same will not get covered under Article 62(c) or similar provisions in other states.

The market practice until now has been to stamp the deed of assignment of debt under the relevant article for Conveyance in the applicable Stamp Act. In fact, in States such as Maharashtra, the State Government has issued notifications for reduction of stamp duty on a deed of assignment under the article for Conveyance.

The judgment passed by the Allahabad High Court in the Kotak case may prove to be a welcome step in reducing the incidence of stamp duty on debt assignment transactions. However, it would need to be seen whether in other States a similar view is taken by stamp duty authorities.

1. Notification No. F4(3)FD/Tax/2017-110 dated March 8, 2017 issued by Finance Department (Tax Division) Government Of Rajasthan.

2. Notification No.Mudrank-2002/875/C.R.173-M-1 dated May 6, 2002 issued by Revenue & Forests Department, Government of Maharashtra.

3. Reference Against MISC. Acts. No. 1 of 2016, order dated February 9, 2018.

4. Bank of Upper India Ltd. (in liquidation) v. Fanny Skinner and Ors. , AIR 1929 All 161. See also Prahlad Dalsukhrai and Ors. v. Maganlal Muljibhai Tewar , AIR 1952 Bom 454 and Harihar Pandey v. Vindhayachal Rai and Ors. , AIR 1949 Pat 170.

Originally published February 13, 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Finance and Banking

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Law of Assignment of Receivables

– Vinod Kothari

– With edits/updates by Richa Saraf

[Updated as on 08th April, 2020]

Assignment of receivables out of transactions is growing astronomically; though without any numerical evidence, but one can say that the total volume of sale of loans and sale of receivables might be exceeding global trades in goods and services put together. Assignment or transfer of receivables is taking place for variety of purposes – securitisation, loan sales, originate-to-transfer transactions, security interest, transfer of servicing or collection function, sale of distressed loans to loan resolution companies, and so on.

While the global usage of assignment of receivables has become so common, the body of law that defines what can be assigned, what is the impact of restrictions on assignment, what happens upon assignment, etc., is still anchored in 19 th Century principles, and in most countries, there may not be a specific law dealing with assignments. This is a pity, given such clear laws dealing with sale of goods.

Before getting into the subject, just a bit of clarity on the jargon. Assignment of debt, assignment receivables, assignment of actionable claims, assignment of choses in action, assignment of things in action, transfer of receivables, sale of receivables, loan sales, etc are all terms that point to the same thing. This article is relevant for each of these. Assignment may lead to securitisation –this article does not deal with the law of securitisation.

Commercial risks in originate-to-transfer model:

This article is on the legal issues of assignment; however, as most assignments take place in context of loan trading or receivables acquisition business, it is important to mention some significant commercial risks of the originate-to-transfer model.

The subprime crisis of 2007-8 brought to focus the risks of what came to be known as the originate-to-distribute model. The word “distribute” pertains to securitisation transactions – a more generic word is “transfer”. There are plenty of commercial transactions today which are originated and sold by the originators to others. Banks/brokers originate loans and sell them; vendors originate leases and sell them; within the world of financial institutions, trading in loans takes place very commonly. Hence, it may sound highly anachronistic to talk of the risks of originate-to-distribute model, but then, some significant risks are as follows:

• The originator extracts the whole or substantially the whole of his equity in the transaction; therefore, originator does not have significant skin-in-the-game. In most cases, originators may also be putting the assets off the balance sheet – hence, originators may not have sufficient stakes, to be vigilant about the transaction.
• The originator’s business model may be non-compliant with several applicable laws. Hence, the assignee’s rights would be subjected to all such counterclaims that the originator would have faced.
• Since originator extracts equity upfront, originator may have business policies aimed at the short-term, compromising the long term.
• After all, the assignee acquires such rights as the originator has, in the originating agreement. Assignee would not have drafted/approved the origination agreement. Hence, if there are any deficiencies, gray areas or weaknesses in the origination agreement, the same will be inherited by the assignee as well.
• If the originator has made any promises, representations or other averments, at the time of doing the transaction, the assignee will be affected thereby. Sometimes, there may be correspondence, mail trails etc which may not have been disclosed to the assignee.

All this highlights the need for the assignee to be extra vigilant.

Meaning of assignment:

While the current level of commercial use of assignment has never been seen in the past, assignment of debt or contractual benefits has been there ever since law of contract has existed, and has almost been the same over the ages.

The word assignment is used in context of incorporeal, that it, intangible assets. Corporeal assets are transferred; incorporeal assets are assigned, as the physical dimension of transfer, meaning change of hands, is not applicable in case of intangible assets. As physical assets may be transferred either for sale, or security, or exchange, or gift, likewise, assignment of incorporeal assets may be done either for sale, or exchange, or gift, or pledge or creation of security interest. If it is a sale, gift or exchange, the assignment will be absolute; if it is merely by way of a security interest, it may be conditional or specific.  

Assignment of contract or assignment of benefits under contract:

Users are quite often confused as to whether a contract is being assigned, or benefits under a contract are being assigned. A contract is a bunch of mutual rights and obligations. Assignment of a contract would mean assignee steps in the shoes of the assignor and assumes all the rights and obligations of the assignor. For example:

• X enters into a contract of sale with Y where X is the seller. The contract would obviously provides for rights and obligations of either party. X will have the obligation to deliver what he promised to sell, and to ensure that the subject matter adheres to such specifications, conditions and fitness as is either explicitly agreed upon or implied. X has the right to receive the price. Y has the obligation to pay the price, and the right to receive goods.

o Assignment of the benefits under the contract by X would mean the receivables under the contract, that is, the price for the goods, may be assigned to P.

o Assignment of the contract by X would mean P becomes the counterparty to the contract of sale, which is now a contract between P and Y.

• This is true for most contracts, as any contract would imply a bunch of mutual rights and obligations.

The general position in law is that a contract is assignable only with the consent of the counterparty. This is most logical, because holding otherwise would expose the counterparty to obligations of a party with whom it never dealt. Holding otherwise would land up Y in contract with P, who Y had never selected.

On the contrary, assignment of the benefit of contract, that is, rights arising out of contract, does not at all impact the counterparty, as the counterparty can still enforce his rights, that is, the assignor’s obligations, against the assignor. All assignor transfers is his rights. In the example above, if X transfers the receivable to P, there is no adverse implication for Y.

In  Khardah Company Ltd v. Raymon & Co (India) Private Ltd. AIR 1962 SC 1810 [1] , the Constitution Bench laid out the principle as follows:

“An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties.”

Similarly, in  Indu Kakkar v. Haryana State Industrial Development Corporation Ltd. and Another (1999) 2 SCC 37 [2] , a two-judge Bench of the Apex Court held, in reliance upon Khardah Company (supra), that:

“Assignment by act of parties may cause assignment of rights or of liabilities under a contract. As a rule a party to a contract cannot transfer his liabilities under the contract without consent of the other party. This rule applies both at the Common Law and in Equity (vide para 337 of Halsbury’s Laws of England, Fourth Edition, Part 9). Where a contract involves mutual rights and obligations an assignee of a right cannot enforce that right without fulfilling the co- relative obligations.”

Even in a case of assignment of rights simpliciter , an assignment would necessarily require the consent of the other party to the contract if it is of a ‘personal nature’. This is elucidated by learned authors Pollock and Mulla in their commentary on The Indian Contract and Specific Relief Acts (R. Yashod Vardhan, and Chitra Narayan eds., 15 th edn., Vol. I) at page 730:

“A contract which is such that the promisor must perform it in person, viz. involving personal considerations or personal skill or qualifications (such as his credit), are by their nature not assignable. The benefit of contract is assignable in ‘cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it.’ The contractual rights for the payment of money or to building work, for e.g., do not involve personal considerations.”

In Kapilaben vs Ashok Kumar Jayantilal Sheth (2019) [3] , the Supreme Court observed as follows:

“10. It is important to note that in the modern context where parties frequently enter into complex commercial transactions, it is perhaps not so convenient to pigeonhole contracts as being either ‘general’ or of ‘personal nature’ or as involving the assignment of purely ‘rights’ or ‘obligations’. It is possible that a contract may involve a bundle of mutual rights and obligations which are intertwined with each other. However, as this Court has held in Indu Kakkar (supra), the same rule as laid down in  Khardah Company (supra) and as stated in  Section 15(b) of the Specific Relief Act, may be applied to such contracts as well. Where the conferment of a right or benefit is contingent upon, or coupled with, the discharge of a burden or liability, such right or benefit cannot be transferred without the consent of the person to whom the co-extensive burden or liability is owed.

It further has to be seen whether conferment of benefits under a contract is based upon the specific assurance that the co- extensive obligations will be performed only by the parties to the contract and no other persons. It would be inequitable for a promisor to contract out his responsibility to a stranger if it is apparent that the promisee would not have accepted performance of the contract had it been offered by a third party. This is especially important in business relationships where the pre-existing goodwill between parties is often a significant factor influencing their decision to contract with each other. This principle is already enshrined in  Section 40 of the Contract Act:

“40. Person by whom promise is to be performed.- If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representative may employ a competent person to perform it.” It is clear from the above that the promisor ‘may employ a competent person’, or assign the contract to a third party as the case may be, to perform the promise only if the parties did not intend that the promisor himself must perform it. Hence in a case where the contract is of personal nature, the promisor must necessarily show that the promisee was agreeable to performance of the contract by a third person/assignee, so as to claim exemption from the condition specified in Section 40 of the Contract Act. If the promisee’s consent is not obtained, the assignee cannot seek specific performance of the contract. B. Application of the above principles to the present case.”

General rule on assignment of benefits under contract:

The general rule on assignment is:

• Assignment of a contract is permissible only with the consent of the counterparty;
• Assignment of rights of benefits under a contract is permissible without the consent of the counterparty.

If the assignment of the contract is done with the consent of the counterparty, that amounts to a novation- that is, partial re-writing of the terms of the original contract.

Exceptions to the assignability of benefits under a contract:

The rule that the benefits under a contract are assignable, is subject to some important exceptions:

• Contracts involving the credit, skill or personality of the assignor cannot be assigned. For example, a bank agrees to give a loan to X. X cannot assign the right to receive the loan to P, as the loan was based on the credit of X. Likewise, if a tailor agrees to stitch a suit for X, X cannot assign the right to have a suit stitched to Y.
• Contracts of personal service cannot be assigned. For example, if Y agrees to serve the office of X, X cannot assign the service contract to P.
• If the contract expressly prohibits the right of a party to assign his receivables or benefit under a contract, then such receivables/benefit are not assignable, or not assignable without the consent of the counterparty. There have been several rulings on the impact of prohibition under contract on assignability of benefits under, particularly, something a like a debt. More than a century ago, in Re Turcan (1888) 40 Ch.D.5 , it was held that if a life insurance policy was not assignable, it did not prevent the insured from declaring himself as a trustee for the assignee. In Barbados Trust Company Ltd Bank of Zambia and Anr [2007] EWCA Civ 148 [4] , the House of Lords held that a prohibition on assignment operates only between the assignor and the counterparty to the contract, and not between the assignor and assignee- hence, the contract to assign would still operate as equitable assignment.

Whether receivables can be assigned?

Section 3 of the Transfer of Property Act, 1882 (“ TP Act ”) defines ‘actionable claim’ as follows:

““actionable claim” means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent”

Sections 130-137 of the TP Act contains provisions with regard to assignment of actionable claims and lays down the procedure for assignment of receivables. Section 130 of the TP Act states that:

“(1) The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent, shall be complete and effectual upon the execution of such instruments, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of the transfer as is hereinafter provided be given or not:

PROVIDED that every dealing with the debtor other actionable claim by the debtor or other person from or against whom the transferor would, but for such instrument of transfer as aforesaid, have been entitled to recover or enforce such debt or other actionable claim, shall (save where the debtor or other person is a party to the transfer or has received express notice thereof as hereinafter provided) be 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.”

So, the assignment of receivables shall be effected upon execution of an instrument and the transferee shall, on the strength of the instrument, attain lawful rights to recover the claims from the debtor in his own name without any reference to the transferor.

In the case Mulraj Khatau v. Vishwanath Vaidya (1913) 15 BOM LR 9 [5] , the Bombay High Court held that an assignment by a debtor when effectuated by a written instrument is governed by Section 130(1) of the TP Act and only thereafter all the rights and remedies are vested in the transferee [6] .

Therefore, it appears from the above, the receivables are assignable in accordance with the provisions of the TP Act.

Principles for assignment of receivables:

For a valid transfer of receivables, the following principles are generally accepted:a)        The receivables must exists at the time of assignment;b)        Receivables must be identifiable;c)        Assignment of rights and not obligations;d)       No contractual restriction on transfer;e)        There must not be a right of set-off or claims against the assignor. As held by the Apex Court, in ICICI Bank Limited v. Official Liquidator of APS Star Industries Ltd. & Others [7] , “ rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties. A benefit under the contract can always be assigned. That, there is, in law, a clear distinction between assignment of rights under a contract by a party who has performed his obligation thereunder and an assignment of a claim for compensation which one party has against the other for breach of contract.”

The benefits arising out of a contract are assignable from the assignor to the assignee, and in this context, the relevant case is Mulkerrins (formerly Woodward (FC)) v. Pricewaterhouse Coopers [2003] UKHL 41 [8] . The House of Lords held that, “ The general rule is that the benefit of a contract may be assigned to a third party without the consent of the other contracting party. If this is not desired, it is open to the parties to agree that the benefit of the contract shall not be assignable by one or either of them, either at all or without the consent of the other party.”

Assignment of future benefits under contract vs. assignment of benefits under future contracts:

A contract may give rise to benefits in future- for example, a contract of sale on credit creates a right to receive the sale price at the appointed time. This is an existing debt, though payable in future. There is no doubt as to the assignability of such debt.

A contract may also create future receivables, which either do not exist now, or are contingent, conditional or uncertain right now. For example, if a landlord has let out property to a tenant, the tenant will have rentals to pay in future, but as these rentals are based on continuing performance, they have not become unconditional or non-contingent right now. The rule on assignability of future debt is that future debt is also assignable, though such an assignment would operate when the receivable comes into existence. There is elaborate discussion on assignment of future debt in Vinod Kothari: Securitization: Financial Instrument of the Future .

However, as regards assignability of contracts in future, that is, contracts not yet entered into, it is highly speculative and contingent, and other than as a promise on the part of the assignor to assign benefits of such contracts as may be entered into in future, such an assignment has no relevance.

Assignment of receivables in case of pending litigation: Whether disputed receivables can be assigned?

Another major question that arises is that whether future debt or receivables is assignable. This question must be answered in affirmative keeping in mind the case law of Tailby v. Official Receiver [1888] 13 A.C. 523, in which it has been held that all future debts, properties and expectancies are assignable. In the case of Mc Dowell and Co. Ltd. v. District Registrar 2000 (3) ALD 199 [9] , the Andhra Pradesh High Court held that “the definition of actionable claim has been extended so as to include such equitable choses in action as debts or beneficial interest in moveable property whether existent, accruing, conditional or contingent.”

Rights of the assignee:

Rights of assignee are no better than those of the assignor, as the assignee steps into the shoes of the assignor. A very old text [ Alfred W. Bays American Commercial Law Series, 1920, sec 122] puts it as follows: “ The theory of contract being that it is a personal relationship between two or more persons who have chosen each other, assignment of rights thereunder, without the other party’s consent, is permitted, as we have seen, upon the theory that the contractual arrangement is not thereby disturbed. It follows from this, that such assignment cannot be permitted to increase the obligations of the other party thereunder. Therefore, the assignee will take the right as it actually exists, not as it may seem to be; and will take it subject to all adjustments and defenses to which the assignor would have been subject had there been no assignment ”. That is to say, the counterparty to the contract cannot be put to a disadvantage by virtue of an assignment, as assignment is merely a transfer of rights that the assignor had.

Assignment of receivables vs. sale of the asset:

Practitioners are sometimes not clear about assignment of receivables, versus sale of the asset from which receivables arise. Take, for instance, the case of a lease of an asset. Assignment of receivables would mean sale of the lease rentals, not the asset. In that case, the leased asset still remains the property of the assignor – that is, the assignor has retained the residual interest in the asset. However, it would be different if the lessor sells the asset that has been leased out.

Assuming that it is contractually possible to sell the leased asset, if X sells the asset to P, there is no need to separately assign the receivables arising out of the lease. The lease rentals flow from the asset- if the asset has been transferred, the receivables automatically flow from the asset.

Whether consent from debtor required? Whether notice to debtor required?

The general rule is if the assignment is silently done between the assignor and assignee, and has not been notified to the debtor, it would nevertheless be good as between the assignor and assignee, but would not be operative against either the debtor or the world at large. Such an assignment is called equitable assignment.

The proviso to Section 130 of the TP Act provides that dealing of debt/actionable claim by the debtor shall be valid as against the transfer between the assignor and the assignee, save where the debtor is a party to the transfer or has received express notice thereof.

Issues pertaining to assignment:

There are host of legal/taxation/accounting issues that pertain to assignment of receivables, and the complete matrix may be indeed very complex. Following is only a brief pointer to the legal issues that may arise:

Legal formalities on assignment:

Legal systems of most countries would lay down what is required to give effect to assignment. For example, sec 136 of the UK Law of Property Act deals with the procedural formalities to give effect to a transfer of a “thing in action”, that is, actionable claims. Section 130 of the TP Act in India deals with assignment of actionable claims. These legal provisions essentially provide that an assignment must be by way of an agreement in writing, and such assignment must be notified to the debtor. Why is notice to the debtor required? The answer is obvious – how is the debtor expected to reconise the rights of the assignee, who he never dealt with, and has not been notified of. The interpretation of this requirement is that if the assignment is silently done between the assignor and assignee, and has not been notified to the debtor, it would nevertheless be good as between the assignor and assignee, but would not be operative against either the debtor or the world at large. Such an assignment is called equitable assignment.

Stamp duty on assignment:

As per Indian Stamp Act and mostly all state stamp acts (such as Maharashtra), a “conveyance” includes every instrument, by which property, whether movable or immovable, or any estate or interest in any property is transferred to, or vested in, any other person,  inter vivos , and which is not otherwise specifically provided for by Schedule I. Therefore, the respective stamp act will have to be looked into to determine the stamp duty payable on assignment. For instance, Clause 25(a) of Schedule- I of the Maharashtra Stamp Act shall be applicable on assignment transactions, which provides that stamp duty shall be payable at 3% of the market value of the property.

Implication of inquorate stamp duty:

Section 35 of the Indian Stamp Act, 1899 provides that instruments not duly stamped are inadmissible in evidence and cannot be acted upon for any purpose. The relevant extract is reproduced below for reference:

“35. Instruments not duly stamped inadmissible in evidence, etc.- No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped:

Provided that- (a) any such instrument shall be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion.”

In SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited , (2011) SCC 66 [10] and Garware Wall Ropes Limited vs. Coastal Marine Constructions and Engineering Limited , (2019) 4 SCC 2019 [11] or in Chilakuri Gangulappa vs. Revenue Divisional Officer, Madanpalle (2001) [12] , the Hon’ble Supreme Court of India while holding that an insufficiently stamped instrument cannot be relied upon for any purpose, however, observed that the concerned court has to follow the procedure provided under the Indian Stamp Act, 1899 for impounding the instrument before permitting a party to enforce the said insufficiently stamped instrument.

Initiation of insolvency petition in case of assignment transactions:

Section 5(7) of the Insolvency and Bankruptcy Code defines a “financial creditor” to mean “ any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to .”

There have been umpteen cases where the assignee of the debt has initiated insolvency petition against the corporate debtor on occurrence of default, and the same has been admitted by the Adjudicating Authority. However, there have been cases where the petition was challenged on grounds of technical issues, such as non- registration of assignment agreement or inadequate stamp duty. In this regard, it is pertinent to refer to the following rulings to understand what will be the consequences in such a case:

• In Lalan Kumar Singh, Executive Director (under suspension) & shareholder of M/s. GPI Textiles Ltd., vs. M/s. Phoenix ARC Pvt. Ltd., & Anr. [13] , the Hon’ble National Company Law Tribunal Appellate Tribunal held that- “ The assignment cannot be challenged in the petition under Section 7 and that too by a party who had the knowledge of ‘Assignment Deed’ as back as in the year 2012 ”. In fact in the said case, the Tribunal relied on a letter written by the ‘Corporate Debtor’, from which it was clear that the ‘Corporate Debtor’ agreed for assignment by HSBC in favour of ‘Phoenix’, and accordingly, held that – “in this background, it is not open to the appellant either to raise allegation of mala fide against the HSBC or to allege that the assignment is illegal.”
• In the case of Edelweiss Asset Reconstruction Co. Ltd. vs. Sejal Glass Ltd . [14] , the Corporate Debtor had not contended that the debt does not exist or the default did not occur but had only raised technical defences as to the validity of documents being not duly stamped. Here, the Hon’ble National Company Law Tribunal, Mumbai Bench held that even if the agreements, as alleged, are not admissible as an evidence of debt and default, there are several other documents that show the admission by the corporate debtor of the debt that it owes to the petitioner, and accordingly, the petition was admitted.
• In Edelweiss Asset Reconstruction Company Limited vs. M/s Winsome Yarns Ltd. [15] , the issue in hand was w.r.t. the maintainability of the petition as the entitlement of the petitioner to file the petition under Section 7 of the Code as a financial creditor of the corporate debtor, which was solely dependent on the enforceability of assignment agreement. In the said case, the Hon’ble National Company law Tribunal, Chandigarh Bench did not allow the petition, observing as follows:

“In normal circumstances, the presumption of the validity and enforceability goes in favour of the document on record. The onus of proving a document as invalid and unenforceable is heavily on the person who is challenging the said document. Bald allegations without sufficient basis cannot shift the onus from the person questioning the validity to the person placing reliance on a particular document. In the instant case, the respondent-corporate debtor by placing reliance on the above referred documents of the Revenue Authorities whereunder a categorical finding was given that the Assignment Agreement is inadequately stamped and that the petitioner was directed to pay an amount of ₹1,45,85,000/- towards the deficit stamp duty, able to shift the onus to the petitioner.

Once the corporate debtor by placing reliance on the orders of the relevant Revenue Authorities able to show that the Assignment Agreement is unenforceable and the petitioner not is not able to produce any stay order thereof, this Adjudicating Authority has no other option except to reject the petition.”

Off balance sheet treatment following assignment:

One of the most tricky questions for parties to ask is – does the assignment lead to an off-the-balance sheet treatment for the assignor? The answer may not be short, but some quick rules are as follows:

• Assignment is a case of a sale – sale may be a true sale or just a sale. However, for accounting off-balance sheet treatment (also called “de-recognition”), what is required is not a legal sale, but a transfer of risks and rewards. Hence, there may be cases where there is no legal sale, and yet, because of transfer of risks and rewards, the receivables in question may go off the books. Contrary, there may be cases where there has been a legal sale, and yet, off balance sheet treatment is not allowed.
• The accounting off-balance sheet is determined as per accounting rules, contained in IFRS 109 [Ind AS 109] These rules focus on transfer of substantial risks and rewards, or retention of substantial risks and rewards, and put up the next condition where there is no substantial transfer of risks and rewards – whether there has been a surrender of control.

For details of IFRS 9/IndAS 109, see our write-ups here – http://vinodkothari.com/category/corporate-laws/accounts-and-audit/ .

IFRS 9 was preceded by IAS 39 – see Vinod Kothari’s article on IAS 39 – see http://vinodkothari.com/ifrs_9/

True sale, which is usually an issue in case of securitisation/direct assignment transactions, has been discussed at length in our write up here – http://vinodkothari.com/2019/01/assignment-of-receivables-in-financing-transactions/

Our write up on GST on assignment of receivables can be viewed here –

http://vinodkothari.com/2018/06/gst-on-assignment-of-receivables-wrong-path-to-the-right-destination/

[1] https://indiankanoon.org/doc/1986314/

[2] https://indiankanoon.org/doc/1664346/

[3] https://indiankanoon.org/doc/165234715/

[4] https://www.casemine.com/judgement/uk/5a8ff71b60d03e7f57ea79a3

[5] https://indiankanoon.org/doc/1275075/

[6] Singheshwar Mandal v. Smt. Gita Devi and Anr AIR 1975 Pat 81, available at https://indiankanoon.org/doc/1829491/

[7] https://indiankanoon.org/doc/118222303/

[8] https://publications.parliament.uk/pa/ld200203/ldjudgmt/jd030731/mulkrn-1.htm

[9] https://indiankanoon.org/doc/143906316/

[10] https://indiankanoon.org/doc/24736/

[11] https://indiankanoon.org/doc/26596259/

[12] https://indiankanoon.org/doc/1225176/

[13] https://nclat.nic.in/Useradmin/upload/18622573155c1b69ddd0df3.pdf

[14] http://www.sejalglass.co.in/docs/EDELWEISS-ASSET-RECONSTRUCTION-CO-LTD-vs-SEJAL-GLASS-LIMITED-CP-1799-OF-2018-NCLT-ON-13.02.2019-FINAL.pdf

[15] https://nclt.gov.in/sites/default/files/Feb-final-orders-pdf/CP%20IB%20NO%20291%20OF%202018%20EDELWEISS%20ASSET%20VS%20WINSOME%20YARNS.pdf

You might also like

Leave a reply, leave a reply cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Subscribe to receive regular updates!