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Infrastructure Leasing and Financial Services Ltd. vs. HDFC Bank Ltd. & Anr.

Civil Appeal · 2023 INSC 929Decided 19 Oct 2023
Civil Appeal No. 4708 of 2022
S. Ravindra Bhat · Dipankar Datta

Background

IL&FS, a major infrastructure financing company, took a Rs. 400 crore credit facility from HDFC Bank in 2018, securing repayment through documents that assigned a portion of its rental income into an escrow account. Shortly after, IL&FS collapsed financially and the NCLT superseded its board; the NCLAT then froze IL&FS's assets and barred creditors from enforcing security interests against it. A dispute arose over whether the rental receivables assigned to HDFC counted as IL&FS's "assets" covered by the freeze, or whether they had already become HDFC's own property through the assignment, entitling HDFC to keep debiting the escrow account.

Decision Breakdown

The Supreme Court examined the Master Facility Agreement, the Assignment and Administration Agreement, the Escrow Agreement and the Power of Attorney together, applying the principle that the substance of a transaction, not the labels used in the documents (such as "pledge"), determines its true legal character. It held that the rent receivables had been unconditionally and absolutely assigned by IL&FS to HDFC, making this a Lease Rental Discounting arrangement rather than a mere security interest, so the receivables (an "actionable claim" transferable under the Transfer of Property Act) had already ceased to be IL&FS's property before the freeze order. The Court therefore upheld the NCLAT's ruling that HDFC was entitled to the assigned receivables sufficient to cover principal and interest, dismissing IL&FS's appeal.

Lesson Learnt

Courts look at the real substance and combined effect of all related transaction documents, not just the specific words like "pledge" or "security" used in one clause, to decide whether an asset has been genuinely transferred to another party or merely offered as collateral.

Official source (sci.gov.in)View Judgment (PDF)

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