loan assignment agreement india

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.

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Loan Agreement: Key Terms of Loan Contract in India

The history of money lending traces back to about 3000 BC in ancient Mesopotamia. Borrowing is a part and parcel of life. During ancient times, oral agreements between the borrower and lender were enough to enter a lending deal. Though today, with so much development around us, it is necessary to govern these agreements to protect the interests of all parties involved in a loan. A loan agreement is a formal document defining the terms between a creditor and a debtor. These days contract drafting services online are available easily. The purpose of executing a loan agreement is to protect the interests of a lender in case the borrower doesn’t repay. Through this article, we explain what a loan agreement is, its importance, and the basics of a loan agreement form.

What is a loan agreement? 

The legal document that governs the terms of credit is a loan agreement. A credit is created when one party, i.e., the borrower lends money from a lender to the other party. A written loan agreement helps the lender ensure that the loaned amount will be repaid on the terms that are mutually accepted by the parties. Loans can be of many different types. As a result, the format of a loan agreement can vary from a one-page letter to an entire legal document. The loan agreement form depends on the requirements of both parties. 

Who can be a party to a loan contract ? 

The creditor and debtor are two parties to a loan agreement. Let’s see who is eligible to enter into a loan contract below: 

• Individuals,
• Family members;
• Other legal entities; 
• Non-Banking Financing Institutes. 

Why is a loan agreement important? 

When the parties enter into a loan transaction, there is a lot of faith involved. A loan contract is a legally enforceable contract that will protect the interest of the parties in case of any event of default. It will be easier to understand the importance of an agreement from an example: 

Example: 

Rahul needs money for some personal reason. He approached his friend Anamika and she decided to lend him the required amount as a whole. However, since they are friends Anamika decides that she doesn’t need any legalities and skips executing a loan agreement. Now, as per their verbal agreement, Anamika lent Rahul the amount which Rahul had promised to pay within six months. After six months, when Anamika asks Rahul for the same, he denies the fact that it was a loan. Instead, he claims that Anamika had given the money to him as a gift. Here, Anamika will have no legal recourse as she has no proof of giving the money to Rahul as a loan. 

In this scenario, if Anamika had executed a written loan contract instead of just a verbal agreement, she would have had the following recourse: 

• Legal proof of her loan; 
• A way to get the loaned amount back by way of filing a suit for specific relief; and
• A way to protect herself from the loss of valuable resources. 

Hence, be it a personal loan from friends, family or be it a commercial loan for business. Having a well-drafted loan agreement is the most secure way of lending money. 

Also Read : Sale Deed: Format, Meaning and Purpose

Key elements of loan agreement

Just like all legal contracts, there are standard drafts of loan contract forms available everywhere. However, it is a very important contract, especially because the majority of the time personal relations are involved in loan agreements. As a result, it is important to have a comprehensive loan agreement that helps in mitigating all future risks. Let’s dive into the elements you need to consider before you enter a loan contract: 

Party Details

By Now, we have already cleared that the parties to a loan contract are the creditor and the debtor. The agreement must have a clause defining the parties with their basic details such as the name, age, occupation, and residential/registered address of the parties. 

Loan Details

One of the most important elements of the loan contract are details of the loan. Details include the amount of loan, moratorium period if any), maturity date, a penalty in case of delay, interest rate; conditions precedent to disbursement of the loan amount (if any); etc. 

Collateral/Security

Most types of loans happen after collateral or security is given by the borrower. This ensures the lender’s money is secure. In case the borrower fails to repay the amount for any reason, the lender can take ownership of the collateral/security. 

Here, the borrower usually represents and warrants the following kind of information: 

• That their financial situation is exactly similar to what they portray to lenders;
• the loan amount is used for lawful purposes;  
• They are competent to enter into the agreement; and 
• That there are no ongoing legal proceedings against the borrower. 

A reporting clause is an important aspect of commercial loan agreements. Here, the term of the loan is usually longer than most personal loan contracts. To help govern proper usage of the loaned funds, the reporting clause makes it the duty of the borrower to report regularly, for all the terms of the loan contract. 

Covenants or conditions

When the payment or repayment of a loan is based on certain conditions or covenants, all such conditions should be a part of the loan agreement that governs its terms. 

Terms of repayment and consequences of default

If the repayment of the loan amount is to be done in installments, the details of each installment, the date, amount to be paid, mode of payment, etc. all are supposed to be expressly defined in the loan contract. Apart from this various legal recourse that the lender can take, in the event of default are also part of a valid loan agreement form. 

What are the different types of loan contracts? 

Considering the various types of loans that can exist, there are many varied different types of loan contracts. Each type of loan agreement is specifically curated to meet the requirements of the parties. Let’s understand the three important types of loan contracts: 

Personal Loan Agreement

When a person needs any money for personal reasons, it is known as a personal loan agreement. Rahul from the example above was subjected to a personal loan agreement. This type of loan contract is one of the simplest loan agreement forms. 

Commercial Loan Agreement

When someone enters into a loan agreement for non-personal business reasons, a commercial loan contract applies to them. Commercial loan contracts are usually the most complex out of all loan contract forms. Here, complex details are based on many factors of the loan. For example, whether the charge on interest will be floating or fixed, etc. 

Promissory Notes

A promissory note is a very specific type of loan contract. It is a note signed by the borrower in favor of the creditor, where they promise to repay a certain amount. This is the most simple type of loan contract, used by private lenders such as nonbanking financial institutions, etc. Promissory notes are suitable for short-term unsecured credit loans. 

What are the benefits of a loan agreement?

The following are the benefits of having a written loan contract: 

• It formalizes the entire credit transaction; 
• Acts as proof that the loan amount given was a credit, not a gift; 
• Protects the interest of both parties; 
• Allows a recourse in case of default; and lastly
• Its legal enforceability helps in mitigating future risks. 

When does a loan agreement become legally valid and enforceable? 

All different types of contracts of loan become legally valid and enforceable after following these steps: 

• Drafting it per the Indian Contracts Act, of 1872; 
• Both parties review the agreement;
• Print it on a non-judicial stamp paper of appropriate value; and  
• Signing by both parties on each page of the agreement. 

If you are looking to enter a legally enforceable contract of loan, feel free to contact LegalWiz.in experts .

Frequently Asked Questions

Yes, you can write or draft a loan agreement on your own, based on your specific requirements. However, since it is a legally enforceable document, it is better to take advice from legal counsel before you draft your loan contract.

Yes, a loan agreement can be modified based on mutual consent of both parties. You will have to draft a new loan contract, which also has all the terms of the old agreement.

A loan agreement is enforceable in the courts of law. Hence, when you sign it, you become legally bound to it. Which makes it important for you to review the loan agreement before signing it.

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Diksha Shastri

As a writer, Diksha aims to make complex legal subjects easier to comprehend for all. As a Lawyer, she assists startups with their legal and IPR drafting requirements. To understand and further spread awareness about the startup ecosystem is her motto.

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Applicability of SARFAESI to Assignment of Loan by an NBFC

[ Siddharth Tandon is a BB.A. LL.B student at National Law University, Jodhpur]

The primary objective of enacting the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (or the SARFAESI Act) was to empower the financial institutions by identifying and remedying the problem of non-performing assets (NPA) by providing efficient solutions such as recovery of NPA without intervention of courts. Although from the time of its enactment the Act did recognise non-banking financial companies (NBFCs) as coming under the ambit of ‘ financial institutions ’, it required the Central Government to pass a notification stating the same. The need for such a notification was felt by the Central Government almost thirteen years after the Act came into force, when it was stated by the then Finance Minister of India, Mr. Arun Jaitley, in his 2015 budget speech.

After almost eighteen months, the Central Government passed a notification recognizing and listing a total of 196 substantially important NBFCs, which were allowed to take benefit of the provisions of the SARFAESI Act. The notification also listed certain conditions to be fulfilled by the NBFCs to come under the purview of the Act. The NBFCs should be:

• Covered under clause (f) of section 45-I of the Reserve Bank of India Act ( or the RBI Act), 1934, which defines ‘NBFCs’
• Registered with RBI;
• Having assets worth rupees five hundred crore and above as per their last audited balance sheet.

In addition to this, the notification also highlighted that only those NBFCs with “such security interest which is obtained for securing repayment of secured debt with principal amount of rupees one crore and above” will be allowed to make use of sections 13 to 19 of the SARFAESI Act, which are of utmost importance when it comes to recovery of loan arrears.

This is where the notification leads to a problem. Only NBFCs which have given secured loans having a principal amount of rupees one crore or more are allowed to make use of sections 13 to 19 of the Act for recovery of the loan, while the other financial institutions have a reduced threshold of rupees one lakh. Hence, an issue arises during the assignment of loan by an NBFC to any other financial institution, where the principal amount is less than rupees one crore. Will such financial institution, which otherwise would have been allowed to use the provisions of the Act, be allowed in this situation where it is an assignee of a loan from an NBFC not coming under the purview of the Act.

The word “assignment” can be defined as “a transfer or setting over of property, or of some right or interest therein, from one person to another; the term denoting not only the act of transfer, but also the instrument by which it is effected”. [i] As has previously been held in multiple cases , ‘assignment of loan or debt’ is permissible under the provisions of the Transfer of Property Act.

The law of assignment is based on the principle of “nemo dat quad non habet” , meaning that ‘the assignee cannot have better rights than that of the assignor’. This maxim forms the basis of the issue that if an NBFC itself does not have the right to make use of provisions of recovery of loan arrears of SARFAESI Act, how the assignee financial institution can do the same.

This question was dealt by the Bombay High Court in 2015 in Kotak Mahindra Bank Ltd v Trupti Sanjay Mehta and Others . In this case, an NBFC had sanctioned a loan to an institution which had defaulted in paying back the loan. The debt was subsequently assigned to a bank, which invoked the SARFAESI Act for recovery of the amount. The borrower filed an application with the Debt Recovery Tribunal (DRT) stating that as the original lender did not possess the right to enforce the Act, the assignee should not be allowed to do the same. Aggrieved by the judgment of the DRT which was pronounced against the bank, it filed a petition in the Bombay High Court.

The High Court delved into the definition of ‘borrower’ as defined in the SARFAESI Act to hold: “The third part [of the definition of ‘borrower’] … clearly restricts the definition to a ‘borrower’ of a Bank or Financial Institution who acquires any right or interest and specifically excludes any other type of Institution”. It went on to state that “by virtue of the restrictive definition, only debts which are assigned to a Bank from another Financial Institution (or vice versa), such debts alone are covered under the term “borrower”. If the legislature intended to expand the scope of “borrower” to mean any debt assigned to a Bank or Financial Institution by a Non-Banking Financial Institution or any other private person, it would not have excluded a Non- Banking Financial Institution or any other person in the last part of the definition.” It finally held: “The Objects and Reasons of the SARFAESI Act … clearly disclose that this mechanism has … been designed only for the benefit of Banks and Financial Institutions and not for other categories such as Non-banking Financial Institutions etc.”

The Court read the Act restrictively by not allowing ‘NBFCs’ to be interpreted into the provisions. But to place reliance on this case for answering the issue in contention would not be correct. This is because the Bombay High Court gave this judgment during the time when the Central Government had not come up with the notification identifying various NBFCs coming under the purview of the Act. Though it cannot be said that the notification overruled the judgment, it can definitely be stated that it changed the legal environment in which this issue exists. After the notification, the reasoning of the Bombay High Court holds little water.

Another case, which indirectly deals with this issue, is Indiabulls Housing Finance Limited v. Deccan Chronicles Holdings Limited . The Supreme Court in this case held: “No doubt, till the respondent (an NBFC) was not a ‘financial institution’ within the meaning of Section 2(1)(m)(iv) of the Act, it was not a ‘secured creditor’ as defined under Section 2(1)(zd) of the Act and, thus, could not invoke the provisions of the Act. However, the right to proceed under the Act accrued once the Notification was issued.” It further held: “… the definition clauses dealing with ‘debt securities’, ‘financial assistance’, ‘financial assets’, etc., clearly convey the legislative intent that the Act applies to all existing agreements irrespective of the fact whether the lender was a notified ‘financial institution’ on the date of the execution of the agreement with the borrower or not.”

This case, though relevant in the sense that it portrays the inclusive nature of the statute, does not directly give us the answer to the present issue.

An analysis of the present legal regime, including the cases of various courts as well as statutes have not been able to correctly provide us with a clear answer. The case of Trupti Sanjay Mehta , though directly dealing with the question, cannot be relied upon as the judgment came before the notification was passed. Similarly, the IBFSL judgment cannot be relied upon, as it is less about assignment of loan and more about whether an NBFC is allowed to make use of provisions of the Act even if the loan was given out before the notification was passed.

Therefore, according to the author, in order to arrive at an answer, a different and a more inclusive viewpoint needs to be taken. The right to make use of the provisions of SARFAESI Act cannot be considered as a contractual right, which can be transferred or taken away by way of contract. Thus, the fact that an assignee cannot have better rights than that of assignor is not applicable as the rule is in relation to contractual rights, and not in respect to legal rights. At this point, reliance can be placed on the case of ICICI Bank Limited v. Official Liquidator of APS Star Industries Ltd. , where it was held: “In assigning the debts with underlying security, the bank [a financial institution] is only transferring its asset and is not acquiring any rights of its client(s)…The High Court(s) has erred in not appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt … without in any manner affecting the rights of the borrower(s) in the assets.”

Thus, as long as there is no interference with the right of the borrower, the assignment of loan should be held to be rightful, along with the assignee having full discretion to make use of the Act for recovery of loan.

– Siddharth Tandon

[i] Alexander M. Burrill, A Treatise on the Law and Practice of Voluntary Assignments for the Benefit of Creditors §1, at 1 (James Avery Webb ed., 6 th ed. 1894).

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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

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India Corporate Law

Rbi’s move to revamp loan transfers in india.

On June 08, 2020, the Reserve Bank of India ( RBI ) released two draft frameworks — one for securitisation of standard assets ( Draft Securitisation Framework ) and the other on sale of loan exposures ( Draft Sale Framework ). In our previous article (available here ), we had dealt with key revisions introduced by the RBI under the Draft Securitisation Framework. This article contains a brief summary of the Draft Sale Framework.

The Draft Sale Framework is addressed to the same constituents as the Draft Securitisation Framework and is expected to operate as an umbrella framework, which will govern all loan transfers (standard and stressed assets).

The Draft Sale Framework is broadly divided into three parts viz., (i) general conditions applicable to all loan transfers; (ii) provisions dealing with sale and purchase of standard assets; and (iii) provisions dealing with sale and transfer of stressed assets (including purchase by ARCs).

The core principles of transfer appear like the previous guidelines on direct assignment. However, the scope of transfer has now been expanded to include various kinds of economic transfers of loan assets, including participation arrangements and transactions in which the loan exposure remains on the books of the transferor even after the said transactions.

Three types of transfers that have been recognised under the Draft Sale Framework viz., (i) assignment; (ii) novation; and (iii) loan participation (which includes both risk participation and funded participation). Whilst loans can be transferred via any of the aforesaid transfer methods, (a) revolver loans and loans with bullet payments of principal and interest can only be transferred through novation and loan participation; and (b) stressed assets can only be transferred through assignment and novation. Transfer by way of novation is exempt from the applicability of the guidelines, except for a diktat that approval of all parties, including the borrower, is required for novation.

RBI has indicated that all these transfers are required to result in immediate legal separation of the transferor from the assets, which are transferred and put beyond the reach of the transferor as well as the creditors of the transferor. RBI has also suggested that these should be bankruptcy remote and a legal opinion should be obtained in this regard.

In line with the position in the 2012 guidelines, transferors are not permitted to offer any credit enhancement or liquidity facility for loan transfers. Diligence requirements continue to be strict and the purchasing lender is required to apply the same standard of care while assessing the asset, as if it were originating the asset directly and cannot outsource its due diligence.

The RBI has also permitted transfer of a single loan asset or part of a single asset to a financial entity through novation or loan participation. Only financial entities carrying on business in India will be eligible to participate. Loans acquired from other entities can also be assigned.

Participation Agreements

The Draft Sale Framework also seeks to permit and regulate participation arrangements. Participation arrangements though popular in certain other jurisdictions were not common here, except inter alia , in accordance with the guidelines issued by the RBI on December 31, 1998. The1998 guidelines permitted two types of participations, inter-bank participations with risk sharing and inter-bank participations without risk sharing. While the assignment agreements that were entered into earlier were akin to participation agreements in spirit, the permissibility of participation is an interesting development and a regulatory headway made in the growth of the loan market. The Draft Sale Framework seeks to allow both risk participation and funded participation in loans. Participation agreements in respect of stressed assets has not been specifically permitted.

The Draft Sale Framework specifically recognizes transfer of external commercial borrowings by ‘eligible lenders’ (as defined under the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations), subject to any loss or hair cut being to the account of the transferor.

It is expected that the RBI will provide further clarity on whether all lenders (i.e. overseas branches, onshore branches, etc.) can purchase such assets and whether the exposure must continue to remain in foreign currency, both for standard and stressed assets

The RBI has not stipulated the requirement for a transferor to maintain minimum risk retention for loan transfers. This will enable the transferee to deal with the loan independently. However, transferors will have to comply with the ‘minimum holding period’ requirement.

Transfer of loan accounts at the instance of the borrower, inter-bank participations, trading in bonds, sale of entire portfolio of assets consequent upon a decision to exit the line of business completely, sale of stressed assets and consortium and syndication arrangements continue to remain exempt from the applicability of Chapter III of the Draft Sale Framework (which only applies to transfer of standard assets).

Stressed Assets

Stressed assets have been defined as: ‘ assets that are classified as NPA or as special mention accounts, and generally includes accounts, which are in default, as well as where lenders have given concessions for economic or legal reasons relating to the borrower’s financial difficulty ’.

Currently, the Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning (pertaining to advances), 2015, detail the criteria for standard assets, special mention accounts and non-performing assets. The classification has also been replicated in the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 ( Prudential Stressed Asset Directions ).

The Draft Sale Framework does not replace or limit the application of existing RBI directions (especially the Prudential Stressed Asset Directions). Any regulated entity (that is permitted to take on loan exposures by its statutory or regulatory framework), can purchase stressed assets directly.

Promoters and Similar Persons Not Eligible to Buy Stressed Assets

The transferor is required to ensure that the transferee is not disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016, and is not otherwise a promoter, associate, subsidiary or related person of the underlying obligor. Therefore, if there is an existing option to put loans on a promoter / similar entity, then the same may not be possible if the loan is a stressed asset.

In case of standard assets, the Draft Sale Framework has stipulated a table for MHP based on tenure of the loan. However, stressed assets are required to be held in the books of the lender for a period of 12 months.

Asset Classification and Provisioning

A purchased stressed asset can be classified as a ‘standard asset’ by the purchasing entity, in cases where the purchasing entity has no existing exposure to the borrower. However, in case, the purchasing entity has an existing exposure to the borrower whose stressed loan account is acquired, the asset classification of the purchased exposure shall be the same as the existing asset classification of the borrower with the transferee.

Transfer of Stressed Assets to ARCs

The Draft Sale Framework also deals with sale of stressed assets to asset reconstruction companies ( ARC ).

While Section 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI ) always provided that ARCs could issue debt instruments in lieu of the consideration payable for the acquisition of assets, RBI has now specifically provided for the same in the Draft Sale Framework. If such deals are done, it must clearly be established that the sale is effective. However, the Draft Sale Framework also provides that these instruments will have to be considered as debt on the books of the ARC, therefore implying that the ARC has an obligation to repay the debt and such oblgation cannot be linked to realization of the underlying asset. While this enabling provision is useful, ARCs are unlikely to opt for this route given that there is an obligation to repay the debt, the present structure of PTC may be the preferred option.

It is relevant to note that FPI entities continue to have the right to invest in security receipts and will also have the right to invest in the bonds issued by the ARC.

It is specifically clarified that transfer of stressed assets to non-ARCs can only be on a cash-consideration basis.

Swiss Challenge Method

In an attempt to de-regulate price discovery, the mandatory Swiss Challenge Method has been done away with. Lenders are now expected to put in place board approved policies on adoption of an auction-based method for price discovery.

Right of First Refusal

Under the current Guidelines on Sale of Stressed Assets by Banks, issued by the RBI on September 1, 2016, a bank selling a stressed asset is required to offer the right of first refusal to an ARC, which has already acquired the highest and significant share (~25-30%) in the asset. Such ARC is required to be provided the right to match the highest bid. In line with these guidelines, the Draft Sale Framework also provides the right of first refusal to ARCs, which hold a significant stake in the asset. Additionally, the Draft Sale Framework also provides that in the event such ARC does not want to purchase the asset or if no ARC holds a significant portion, then such right of refusal will have to be extended to a ‘financial institution’, if such institution holds a significant stake in the asset.

The Draft Sale Framework is a significant move by the RBI and is expected to streamline loan transfers in the country. This framework reinforces the RBI’s focus on addressing the health of banks and bad debt in the country, whilst remaining committed to a balanced approach on sale of assets. If passed in its current form, it will be a positive move by the regulator in developing a robust market for secondary transfers.

*Authors would like to thank Vidhi Sarin , Associate for her inputs.

Loan Assignment Agreement

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Updated October 04, 2021

A loan assignment agreement is when another entity agrees to take over the debt of someone else. This is when the debtor has changed for any type of event such as when a business or real estate is purchased. The new owner will agree to assume the debts of the past debtholder and release them from any further obligation under the loan.

Lender-Approval

In most loan agreements, the lender will require that the new debtor is approved under their credit standards. This is to protect lenders from having a loan be transferred to uncreditworthy individuals.

The stamp duty payable during assignation of debt by Asset Reconstruction Companies – By Adv. Haaris Moosa

In Phoenix Arc Private Limited, Mumbai Vs. M/S. Cherupushpam Films Pvt Limited, Ernakulam (2023) ibclaw.in 48 NCLT (hereafter Phoenix ARC) the question raised before the NCLT, Kochi Bench was whether stamp duty has to be paid on a deed assigning debt to an Asset Reconstruction Company (ARC).  The NCLT Kochi Bench has held that the ARC is bound to pay the appropriate stamp duty as per the relevant state legislation, in this case the Kerala Stamp Act, 1959 (KSA, 1959

The stamp duty payable during assignation of debt by Asset Reconstruction Companies

Adv. Haaris Moosa

Stamping has been used by litigators as a deus ex machina for long. Insufficient stamping determines the fate of a case quite independent of its facts or merits. The interplay of the stamping legislations with the Insolvency and Bankruptcy Code, 2016 (IB Code, 2016), has not been adequately analysed by either courts or tribunals.  Stamping in India is regulated by both Union and State legislations since it is covered by Entry 91 of the Union List and Entry 63 of the State List. The Union legislation is the Indian Stamp Act, 1899 (ISA, 1899)((< https://legislative.gov.in/sites/default/files/A1899-2.pdf > )) and almost all the States have their own stamping statutes. The stamping legislations of old vintage have stood their ground even with the coming of avant garde legislations meant to streamline commercial transactions like the Arbitration and Conciliation Act, 1996, SARFAESI Act, 2002, Companies Act, 2013 and now the IB Code,2016.

In Phoenix ARC Private Limited, Mumbai Vs. M/S. Cherupushpam Films Pvt Limited, Ernakulam (2023) ibclaw.in 48 NCLT  (hereafter Phoenix ARC ) the question raised before the NCLT, Kochi Bench was whether stamp duty has to be paid on a deed assigning debt to an Asset Reconstruction Company (ARC).  The NCLT Kochi Bench has held that the ARC is bound to pay the appropriate stamp duty as per the relevant state legislation, in this case the Kerala Stamp Act, 1959 (KSA, 1959)((< https://keralaregistration.gov.in/fileUploads/The%20Kerala%20Stamp%20Act.pdf >)).  The Hon’ble NCLT held that the applicability of KSA 1959((< https://keralaregistration.gov.in/fileUploads/The%20Kerala%20Stamp%20Act.pdf >)) is not ruled out by the prescription under Section 8F of the Indian Stamp Act, 1899 (ISA, 1899) which exempts ARCs from paying any stamp duty on “ any agreement or other document for transfer or assignment of rights or interest in financial assets of banks or financial institution s” covered under section 5 of the SARFAESI Act, 2002.

KSA, 1959 in section 25, declares the assignment of a debt to be a conveyance, and the duty payable has been pegged at 8%. In the instant case, the Tribunal found that the assignment deed was to be stamped at 8% as per Section 25 of KSA, 1959 since the agreement was made in Kerala. Interestingly in the instant case, the stamp duty as per KSA, 1959 comes to Rs. 6,33,99,500/- while the assignment deed was found to be made on a non-judicial stamp paper of Rs. 500/-. Consequently, the Tribunal found the assignment deed to be unenforceable for insufficient stamping. Phoenix ARC breaks new ground in holding that the assignment of a debt to an Asset Reconstruction Company is liable to be stamped as per the concerned state stamping legislation.

In Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta [2019] ibclaw.in 07 SC  (hereafter Essar Steel ) the supreme court confirmed the decision of the NCLAT, [2019] ibclaw.in 109 NCLAT in affirming the decision of the NCLT in rejecting an application that suffered from insufficient stamping. And held that “Further, the submission of the Appellants that they have now paid the requisite stamp duty, after the impugned NCLAT judgment, would not assist the case of the Appellants at this belated stage. These appeals are therefore dismissed.” (( [2019] ibclaw.in 07 SC , para 99)) Quite to the contrary, in Praful Nanji Satra v. Vistra ITCL (India) Ltd. (2022) ibclaw.in 550 NCLAT , the NCLAT went on to reject an argument for dismissal of an application for insufficient stamping, holding that the only issue that the NCLT in IBC proceedings can look at is whether there has been a default, and nothing further. It was also held that insufficient stamping is a curable defect. The effect of insufficient stamping has attracted contradictory judgments from the NCLAT and the Supreme Court. However, Phoenix ARC follows the correct law laid down by the Supreme Court in Essar Steel .

It is to be noted that proceedings under Code are non-adversarial. Any applicant seeking to initiate corporate insolvency proceedings is required to produce documents that satisfy the Adjudicating Authority (the NCLT) proving the default committed by the corporate debtor. Such an applicant is also required to ensure that the financial contracts on which they rely are legally sound and are not truncated. While structuring true sale transactions for assignment of debt (standard assets or NPA), compliance under the applicable stamping legislations must be ensured to avoid legal complications.

Disclaimer:  The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws ( http://www.ibclaw.in ). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws ( http://www.ibclaw.in ) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

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Loan Agreement

What is a loan agreement.

A Loan Agreement is a written promise from a lender to loan money to someone in exchange for the borrower's promise to repay the money lent as described by the Agreement. Its primary function is to serve as written evidence of the amount of debt and the terms under which it will be repaid , including the rate of interest (if any). The Loan Agreement serves as a legal document that is enforceable in court, creating obligations on the part of both the borrower and the lender.

The Loan Agreement can be used to record the terms and conditions of a loan made between individual persons or companies who are Indian citizens . Loans by a foreign lender to an Indian borrower are covered under different rules and regulations made thereunder, and this document has not been adapted to be used for a loan by a foreign lender to an Indian company/individual.

When lending money to a friend or family member, or engaging in a commercial loan between two businesses for a specific purpose, various options are available in the Loan Agreement. The Loan Agreement can be used for a simple interest-free loan or include automatic interest calculation. Additionally, there is flexibility to establish a repayment schedule, include guarantors, and demand that the borrower provide collateral for the loan.

It may be noted here that in India, there are laws that regulate money lending and a person/entity in the business of making loans would need to be registered as a moneylender or with the Reserve Bank of India as a banking company or a non-banking financial company.

Is it mandatory to have a Loan Agreement?

Yes, in most situations where property is used as collateral , it is necessary to have a written loan agreement. However, it's better to have a written loan agreement in all cases. Including all major clauses will help the lender and the borrower establish their relationship and seek legal protection in case of a dispute.

What does the "Collateral or Security of Loan" mean?

A collateral or security for a loan refers to the immovable or movable property attached to the loan as security. In case, the borrower fails to repay the loan amount, the Lender can attach and sell the collateral to recover the outstanding loan amount. Following are some of the collateral or security of a loan:

• Land and other immovable property - There are some additional formalities to be complied with if the loan is secured by a charge over a property i.e. in case of a default in repayment of the loan the lender would be entitled to sell the property and recover the loan amount, interest, and other amounts payable by the borrower.
• Movable property such as assets, machinery etc. – Security over movable property can be created by way of hypothecation and execution of a deed of hypothecation .
• Pledge over shares and other movable assets – Another type of security that is often provided is the creation of charge on financial instruments such as shares of a company.

What does a "guarantor" mean?

A guarantor is someone who promises to pay the borrowed amount if the borrower defaults , ensuring the lender's security and the repayment of the loan.

What must a Loan Agreement contain?

The Loan Agreement must include the following clauses:

• Parties involved: the name and details of the lender, borrower, guarantor, etc.
• Loan amount: the total sum of money borrowed.
• Interest rate: The type of interest such as simple interest or compound interest and rate of interest.
• Repayment schedule: defines the frequency and amount of loan repayments.
• Late payment charges: penalties or charges on delayed payment by the borrower.
• Prepayment clause: conditions of paying off the loan early by the borrower.
• Collateral details: description of any collateral pledged for the loan.

What is not allowed in a Loan Agreement?

The Loan Agreement should not contain any clauses that have unfair terms, excessively high interest rates, or conditions that could negatively impact the legal rights of the borrower including restricting the borrower from repaying the loan amount before the due date, changing the terms by the lender without the consent of the borrower, appointment of the arbitrator solely by one party, etc.

Who can enter into a Loan Agreement?

Any individual (18 years or older) or legal entity in India not prohibited by law can enter a Loan Agreement. Only Indian citizens can enter into this Loan Agreement. An Indian citizen is an individual who is legally recognized as a member of the Republic of India. This status is primarily obtained by birth, descent, registration, or naturalization as outlined in the Indian laws. An entity can also be considered an Indian citizen if it is a corporate body incorporated or registered in India .

What can be the duration of a Loan Agreement?

The duration of a Loan Agreement can vary significantly based on the type of loan and the lender's policies . It can range from a few days for overdrafts to many years for home loans.

What has to be done once the Loan Agreement is ready?

The Loan Agreement will be legally binding when it has been printed on non-judicial stamp paper or e-stamp paper, and signed by each party . The value of the stamp paper would depend on the state in which it is executed. Each state in India has provisions in respect of the amount of stamp duty payable on such agreements. Information regarding the stamp duty payable can be found on the State government websites.

Each Party should sign and return a copy of the Loan Agreement . Where a company is a party to this agreement, they should ensure that the Loan Agreement is signed by an authorized signatory , which is usually a director as authorized by a board resolution of the company.

Where the Lender has requested that the borrower provide a guarantor, such guarantor should also carefully read the entire Loan Agreement and its guarantee obligations, and sign where indicated.

Each Party should keep a signed copy of the Loan Agreement. To do this, two different copies can be signed (or three if there is a guarantor as well), or if only one copy is signed, it can be photocopied and then distributed between the parties.

Which documents should be attached to a Loan Agreement?

The following documents shall be attached to a Loan Agreement:

• Proof of identity of the parties involved in the Loan Agreement such as Aadhaar, GST certificate, etc.
• Income proof of the borrower including salary slips, income tax statements, bank statements, etc.
• Collateral documents like property papers, vehicle registration certificates, etc.

Is it necessary to register the Loan Agreement?

Yes, The necessity of the registration of the Loan Agreement is as per the nature of the Loan Agreement . Security over real assets i.e. immovable property is created by way of a mortgage. A mortgage (other than an equitable mortgage) for repayment of more than INR100 must be by way of a registered instrument (indenture of a mortgage). A mortgage of immovable property (other than an equitable mortgage) must be registered within 4 months . The Loan Agreement needs to be registered at the office of the Sub-registrar where the collateral property is located or where any of the parties to the agreement resides.

Certain security interests must also be registered with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI). In some cases, prior permission is required to be obtained from the income tax authorities to create charges on immovable properties.

In case of a charge being created by a company over property or instruments such as its shares, the filing must be made with the Registrar of Companies , regarding the creation of the charge.

How does the security or collateral work in a Loan Agreement?

Collateral works as security or protection to the Lender in case the borrower refuses to pay the outstanding loan amount. In case, even after sending a demand letter, the borrower refuses to make the loan payment as per the Loan Agreement, the lender can initiate legal proceedings to seize or attach the collateral.

The borrower can then sell the collateral through public auction or other means and if any balance is due after such sale, the borrower will be liable for such balance amount.

Which laws are applicable to a Loan Agreement?

This agreement is subject to the broad principles of the Indian Contract Act, 1872 .

The Companies Act, 2013 regulates the giving of loans, guarantees, or security by companies to their directors (whether directly or indirectly).

Banks are required to comply with directions issued by the Reserve Bank of India regarding interest rates that can be charged by them.

If the Loan Agreement is between an Indian citizen and a foreign person the rules and regulations of the Foreign Exchange Management Act, 1999 will apply.

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• What to do after Finishing a Contract?
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• How to Lend Money and do not Lose them Forever?

Loan Agreement - Template, online sample - Word and PDF

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RBI's Framework for Transfer of Loan Assets

Aditya Bhardwaj

ARTICLE 28 September 2021

As an anticipated measure for the banking and financial sector, the Reserve Bank of India (RBI) has, towards the close of past week, issued the comprehensive framework for the sale or transfer of loan assets. Taking immediate effect from the date of its issuance, the framework titled ‘ Master Directions - Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 ’ issued vide circular DOR.STR.REC.52/21.04.048/2021-22 dated September 24, 2021 (the ‘ Master Directions ’) is being seen as a pivotal move by the Regulator towards introducing an efficient secondary market for loans and ensuring proper credit-risk pricing, besides improving transparency in the identification of embryonic stress in the banking system as well as resolution of stressed loan exposures.

The Master Directions owes its genesis to the ‘ Draft Framework for Sale of Loan Exposures ’ which was released by RBI in course of the first COVID-19 induced lockdown in the Country. The draft had taken into consideration the recommendations of the ‘ Task Force on Development of Secondary Market for Corporate Loans ’ constituted by RBI under the chairmanship of Mr. T.N. Manoharan in May, 2019 and comments from the stakeholders were invited. One of the key components of the Task Force’s recommendation was to separate the regulatory guidelines for direct assignment transactions from the securitisation guidelines and treat it as a sale of loan exposure. The RBI had, accordingly, reviewed the recommendations and thought it prudent to comprehensively revisit the guidelines for sale of loan exposures, both standard as well as stressed, which were earlier spread across various circulars. The erstwhile guidelines or circulars on sale of loan exposures were particular to the asset classification of the loan exposure being transferred and / or the nature of the entity to which such loan exposure is transferred as well as the mode of transfer of the loan exposures. The need for a review also stemmed from the necessity to dovetail the guidelines on sale of loan exposures with the Insolvency and Bankruptcy Code, 2016 (‘ IBC ’) and the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 (“ Prudential Framework ”), which has witnessed substantial traction and developments towards building a robust resolution paradigm in India in the recent past.

The consolidation by RBI of a self-contained, comprehensive, and independent set of regulatory guidelines on transfer/sale of loan exposures is being seen as a laudable step in the direction of putting together a ‘ robust secondary market in loans which can be an important mechanism for management of credit exposures by lending institutions and also create additional avenues for raising liquidity ’. This write-up attempts to briefly summarize some key components of the Master Directions.

The Master Directions whilst superseding a host of existing circulars/directions (or a portion thereof) in relation of transfer of loan exposures (Chapter VI), has put forth a unified and singular framework for the sale of loan exposures by banks and other financial institutions. The exhaustive breadth of the framework is quite evident from the Chapters under the Master Directions which not only provide for ‘ General Conditions applicable to all Loan transfers ’ (Chapter II), but also cater specifically to transfer of loan exposures of standard assets (Chapter III) as well as stressed loan exposures (Chapter IV), including their respective and intrinsic modalities. The framework concludes with the imperative of ‘ Disclosures and Reporting ’ (Chapter V) and stipulates the mechanism for the stakeholders in that regard.

Applicability

On expected lines, nearly all constituents of the Financial sector regulated by RBI are mandated to ensure compliance to the Master Directions, both as a transferor as well as transferee of the loan exposures – Scheduled Commercial Banks, all NBFCs (including HFCs), Regional Rural Banks, Co-operative Banks, All India Financial Institutions and Small Finance Banks. In addition, the Master Directions also permits asset reconstruction companies (ARCs) and companies (save a financial service provider) to be ‘transferees’ of the loan exposures only if the same is pursuant to the resolution plan under the Prudential Framework and if they are permitted to take on loan exposures in terms of a statutory provision or under the regulations issued by a financial sector regulator.

It would be pertinent to take note that though all lenders permitted to acquire loans are required to ensure compliance to the extant Master Directions; yet, the acquisition of loans pursuant to securitisation are required to be independently dealt under the provisions of RBI’s ‘ Master Directions – RBI (Securitisation of Standard Assets) Directions, 2021 ’ dated September 24, 2021 (the ‘Securitisation Guidelines’). The coverage of the Master Directions includes transfer of loan exposures through novation, assignment, or risk participation. In cases of loan transfers other than loan participation, legal ownership of the loan shall be mandatorily transferred to the Transferee to the extent of economic interest transferred under the loan exposures.

For the Transferees which are financial sector entities (not falling under clause 3 of the Master Directions) and the ARCs, the prudential norms (asset classification, provisioning norms etc) of their respective sectoral regulators (SEBI, IRDA, PFRDA etc) shall be applicable post-acquisition of loan exposure under the Master Directions.

Basic Ingredients

Before venturing into the other nuances, it is an imperative that one accounts for the understanding of some key ‘constructs’ which cut across the Master Directions:

• Transfer : Quite apparently, the expression denotes the process of transfer of the economic interest in a loan exposure by the transferor and acquisition of the same by the transferee. The subject matter of transfer being the ‘ economic interest ’ of the transferor in the loan exposure, it is important that the risks and rewards associated with loans are clearly demarcated and separated in favour of the transferee; especially when some portion of the economic interest in the loan exposure is retained by the transferor.
• Transferor : Often referred as ‘assignor’ (in assignment transactions) or ‘grantor’ (for risk participation), transferor under the Master Directions would include Clause 3 entities which transfer their economic interest in the loan exposures.  
• Transferees : These refer to entities in whose favour the economic interest in the loans are transferred and would include Clause 3 entities as well as the ARCs/companies to the extent permitted under the Master Directions. It is clarified that the transferee should neither be a person disqualified under the IBC nor, in cases of loan exposures where frauds have been identified, belong to an existing promoter group of the borrower or its subsidiary / associate / related party etc. (domestic as well as overseas).
• Minimum Holding Period (MHP) : As the expression suggests, the MHP refers to a threshold period for which the transferor should hold the loan exposures, along with its risks and rewards, before the economic interest in respect thereto is transferred. The intent of having a MHP is to ensure that the loan has been seasoned in the books of the originator (or the transferor) for a certain specified time period. The MHP for loans with tenor upto 2 years and more than 2 years, as per the Master Directions, have been capped at 3 months and 6 months, respectively.
• Permitted Transferees : These include (i) Scheduled Commercial Banks, (ii) NBFCs (including HFCs), (iii) All India Financial Institutions and (iv) Small Finance Banks. The significance of carving out the foregoing financial sector entities from Clause 3 of the Master Directions lies in the fact that the transferor is permitted to transfer its loans (which are not in default) to permitted transferees only through novation, assignment, or loan participation. For the stressed exposures, the transfer is mandated only to such permitted transferees and ARCs and singularly through assignment or novation of such loan exposures.

Underlying Elements

The finer nuances of the Master Directions would certainly surface once the provisions have been widely given effect to by the stakeholders; however, as it stands, the framework undoubtedly promises to streamline the procedures and requirements for the stakeholders considering transfer of their loan exposures – standard as well as stressed. Some fundamental provisions of the Master Directions have been summarized as below:

• Overarching Transfer conditions : Quite categorically, the Master Directions stresses on the necessity of delineation of Transferor’s ‘risks and rewards’ associated with the loan exposures to the extent of the transfer. In fact, it is stated that not only should the transferee have the unrestrained and unconditional entitlement to transfer or dispose of the loans to the extent of economic interest acquired by it, but also in the event of any economic interest in the loan exposure is retained by the transferor, the loan transfer agreement should demarcate the distribution of the principal and interest income from the transferred loan between the transferor and the transferee. The Master Directions also caution against any modification of terms of the underlying financing agreement and require that any change, in course of such transfer, should withstand the test of not being categorised as ‘Restructuring’ under the Prudential Framework. It would be significant to take note that the transfer of loan exposures under the Master Directions not only should be without recourse to the Transferor, but also the transferor or transferee should not be constrained to obtain consent from the transferee/ transferor, as the case may be, in the event of resolution or recovery in respect of the beneficial economic interest retained by or transferred to the respective entity. In addition to the foregoing, the Master Directions also prescribe for the enumerated conditions applicable to all transfers of loan exposures:
• The Transferor shall have no obligation to re-acquire or fund the re-payment of the loans or any part of it or substitute loans held by the Transferee or provide additional loans at any time;
• If the security interest is held by the Transferor in trust with the Transferee as the beneficiaries, the Transferee shall ensure that a mutually agreed and binding mechanism for timely invocation of such security interest is put in place;
• Any rescheduling, restructuring or re-negotiation of the terms of the underlying agreement attempted by Permitted Transferee, after the transfer of assets to the transferee, shall be as per the Prudential Framework;
• The Clause 3 entities, regardless of whether they are transferors or otherwise, should not offer credit enhancements or liquidity facilities in any form in the case of loan transfers.
• Board-approved Policy : The Transferors are mandated to put in place a comprehensive Board-approved policy for transfer and acquisition of loan exposures under the Master Directions. These guidelines must, inter alia , lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management, periodic Board level oversight, etc. Further, the policy must also ensure the independence of functioning and reporting responsibilities of the units and personnel involved in the transfer/acquisition of loans from that of personnel involved in originating the loans.
• Transfer of Standard Assets : The transfer of loan exposures classified as ‘standard’ can be undertaken through the mechanisms of assignment or novation or a loan participation. The transfer of such loan exposures should be only on a cash basis to be received at the time of transfer of loans; besides, the requirement of the transfer consideration being arrived at in a transparent manner on an arm's length basis. The Master Directions require the Transferees to monitor, on an ongoing basis and in a timely manner, the performance information on the loans acquired, including through conducting periodic stress tests and sensitivity analyses, and take appropriate action required, if any. Further, the Transferor’s retention of economic interest, if any, in the loans transferred should be supported by legally valid documentation supported by a legal opinion.

The requirements of Chapter III of the Master Directions are, however, not applicable to certain identified loan transfers, as below:

• transfer of loan accounts of borrowers by a lender to other lenders, at the request/instance of borrower;
• inter-bank participations as per the RBI’s circulars;
• sale of entire portfolio of loans consequent upon a decision to exit the line of business completely;
• sale of stressed loans; and
• any other arrangement/transactions, specifically exempted by the RBI.
• Minimum Risk Retention : The Master Directions are explicit in their requirement of the requisite due diligence in respect of the loans exposures and mention that the said exercise cannot be outsourced or delegated by the Transferee. In order to ensure a systemic departure from the conventional practice of placing solitary reliance on the due diligence of the originator (or the Transferor), the Master Directions mandate the Transferee to undertake the due diligence of the loan exposures through its own staff, at the level of each loan, and as per the same policies as would have been done had the Transferee been the originator of the loan. In case the due diligence of entire portfolio is undertaken by the Transferee, the requirement of a minimum retention requirement (MRR) of the Transferor can be dispensed with.

However, in case of loans proposed to be acquired as a portfolio, if a transferee is unable to perform due diligence at the individual loan level for the entire portfolio, the Transferor shall retain at least 10% of economic interest in the transferred loans as MRR. In such a case as well, the Transferee is required to undertake due diligence at the individual loan level for not less than one-third (1/3 rd ) of the portfolio by value and number of loans in the portfolio. As per the Master Directions, in case of multiple Transferees, the MRR would still be on the entire amount of transferred loan, even if any one of the transferee is unable to perform the due diligence at an individual level.

• Transfer of Stressed Assets : Chapter IV of the Master Directions deals specifically with the transfer of stressed loan exposures to ARCs and other Permitted Transferees. It is specifically stated that the mechanism for transfer of such stressed accounts can be consummated only through assignment or novation. Besides the requirement of a Board-approved policy for transfer as well as acquisition of stressed loan exposures and the parameters thereof, the Master Directions mandate such transfers to ARCs and other Permitted Transferees only. Importantly, the Transferor is necessarily required to undertake an auction through a ‘ Swiss Challenge method ’ both in cases where (i) the aggregate loan exposure to be transferred is Rs. 100 crore or more after bilateral negotiations; and even under (ii) a transfer pursuant to the Resolution Plan approved in terms of the Prudential Framework (irrespective of the monetary threshold).
• Accounting : In the event the transfer of loan exposures results in loss or profit, which is realised, the same should be accounted for and, accordingly, reflected in the P&L account of the Transferor for the accounting period during which the Transfer is consummated. However, the unrealised profits (if any) arising out of such Transfers, shall be deducted from the Common Equity Tier 1 (CET 1) capital or net owned funds of the Transferor for meeting regulatory capital adequacy requirements till the maturity of such transferred exposures. The Master Directions prescribe maintenance of borrower-specific accounts both by the Transferor as well as the Transferee of the retained and transferred loan exposures, respectively. It has been further clarified that the extant requirements of RBI for ‘income recognition, asset classification, and provisioning’ shall, accordingly, be ensured by the transferor and the transferee with respect to their respective shares of holding in the underlying loan exposures.

Though it would be quite nascent to present an analysis of the Master Directions even before it has been actually implemented, yet there are indeed some crucial aspects which underline the significance of the Master Directions issued by RBI which can be summarized as follows:

• Identification and Resolution of Stressed Exposures : Though quite a premature assessment, yet it is felt that the framework under Master Directions could facilitate the development of a robust distressed asset ecosystem and speed-up the resolution of various stressed exposures, which could be driven by the ensuing characteristics of the Master Directions:
• Early Identification and Resolution of Stressed Exposures : The framework has expanded the definition of stressed exposures (‘stressed loans’) to include both non-performing assets (NPAs) and special mention accounts (SMAs). Also, the deregulation of the price discovery process will enable faster and more efficient pricing of exposures – especially when coupled with a wider range of eligible investors.
• Enhanced Viability of Stressed Asset Takeover Structures :   More importantly, the Master Directions allow investors in stressed assets to classify the exposure as standard, although subject to any other exposure to the same entity on the investor’s books not being sub-standard on the date of the acquisition of the asset. This could significantly lower capital charge and provisioning requirements for the acquirer/investor of the stressed assets. Given that most stressed assets are restructured as well – often including a complete management overhaul, the rationalisation of the capital charge and provisions could make such assets more attractive to prospective acquirers.
• Impetus to Long-Term Funding structures : The Indian credit markets have for long been bereft of avenues for mobilising capital through long-term debt instruments. As a result, liability structures for corporate borrowers in sectors such as power generation and roads front load cash outflows during the project life. This, at least in part, reflects the non-availability of long-dated liabilities for the financial sector. Therefore, an ecosystem which allows lenders to off-load long-dated exposures after a certain time period with reasonable foresightedness could enable borrowers to raise long-term debt instruments from the financial system in a cost-efficient manner.
• Independent Credit Evaluations Could Prove Critical : The Master Directions mentions that transferees may have the loan pools rated before acquisition so as to have a third-party view of their credit quality in addition to their own due diligence; though, the latter is a mandatory requirement and cannot substitute for the due diligence that the transferee(s) are required to perform. Also, in case of transfer of stressed assets, it becomes critical to ensure that the valuation of the exposure and associated risk capital allocation are based on an assessment of the asset to meet its contractual debt obligations. Even restructured accounts have subsequently come under stress in some cases due to fundamental weaknesses in the business profile, heightened management risk/weak governance structures and unsustainable debt levels even after restructuring. Though not prescribed as a mandatory requirement under the Master Directions, yet a third-party evaluation by a credit rating agency could provide an added layer of assessment and valuations for such exposures along with subsequent capital charge and provisioning norms could be linked to the outcome of such evaluation.

The contents of this article are for general information and discussion only and is not intended for any solicitation of work. This article should not be relied upon as a legal advice or opinion.

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...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 Corporate...

...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) and....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 novation of t...

...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...

... 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...

...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 ...

...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...

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... 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...-5697/2023 1. This is an Application filed under Regulation 28 of the CIRP Regulations, 2016 r/w Rule 11 of NCLT Rules, 2016 by M/s ARCK Resolution Professionals LLP being...

..., 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...

...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...

...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 petitioner is.... 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...

...-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 for..., 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...

...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...Recovery Tribunal, Ahmedabad for recovery of the dues of the company in liquidation. The Debt Recovery Tribunal passed an order on 31.01.2007. Industrial Investment Bank of India, thereafter, informed...

...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...

...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...

...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...-section 4 of Section 22 the Adjudicating Authority is required to forward the name of the replaced Resolution Professional as proposed by the Committee of Creditors to the Board for its...

...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 debt of...

...:“An assignment of debt cannot be treated as forming part of a cause of action for the purpose of giving jurisdiction to the Court at the place of the assignment . ...traversed, in order to support his right to the judgment of the Court, in the case of assignment of a debt the plaintiff will be bound to prove that the debt was assigned in his favour by the assi...and therefore the assignment is a part of the cause of action. Therefore, in a suit brought by an assignee of a debt , the cause of action partly arises because of the assignment ...

...the impugned order dated 12.12.2011 vide Pa.Mu. No. 61460/P1/2009 on the file of the 1 respondent and quash the same and further direct the 1 respondent to release the deed of assignment of debt ....validity of the agreement presented for registration. The consideration of Rs. 25 lakhs is payable to the petitioner if he collects the debt of Rs. 25 crores from the said A.L. Vadivelu. But, the actual ...not otherwise specifically provided for by Schedule I.”5. The word “conveyance” includes the following acts:(i) Transfer/ Assignment of decree;(ii) Transfer/ Assignment ...

...from the date of the Deed of Assignment , we stand released from the ownership under the Financial Instruments as per the terms of the Deed of Assignment , and you shall look only to Kotak Mahindra ...and finds no merit in the present petition. The assignment of debt is permissible in terms of Section 130... of the Transfer of Property Act, 1882. Learned counsel for the petitioner could not point out any prohibition in the documents of loan prohibiting assignment of debt in favour of an another...

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Assignment Of Loan

Jump to section, what is an assignment of loan.

Under an assignment of loan, a lender (the assignor) assigns its rights relating to a loan agreement to a new lender (the assignee). Only the assignor's rights under the loan agreement are assigned. The assignor will still have to perform any obligations it has under the facility agreement.

The debtor, the recipient of the loan, must be notified when a debt is assigned. When there is an assignment of a loan, a Notice of Assignment (NOA) is sent out to the debtor informing them that a new party is now responsible for collecting any outstanding amount.

Assignment Of Loan Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.14 5 dex1014.htm ASSIGNMENT OF LOAN DOCUMENTS , Viewed October 21, 2021, View Source on SEC .

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