A ₹400 crore loan. A frozen company. Who owns the rent money?

IL&FS borrowed ₹400 crore from HDFC and promised to send its rent to a special account. Then IL&FS collapsed and NCLAT froze everything. HDFC said: that rent is ours.

The money sat in an escrow account — a locked box controlled by a third bank — while two financial giants fought over who owned it. IL&FS, the fallen infrastructure behemoth, argued the rent was its frozen asset, caught by the bankruptcy freeze. HDFC Bank insisted it had already bought that rent, years before the collapse. The Supreme Court had to decide one thing: when a company promises its future rent to a lender, has it merely given security — or has it actually sold that rent?

When the rent stopped being IL&FS's money

In 2018, IL&FS borrowed ₹400 crore from HDFC. To secure that loan, IL&FS signed a stack of documents — a Master Facility Agreement, an Assignment Agreement, an Escrow Agreement, and a Power of Attorney. The arrangement was simple: IL&FS would direct all its rental income from certain properties into an escrow account. HDFC would control that account. The rent would go to repay the loan.

Then IL&FS collapsed. In October 2018, the government superseded its board. The National Company Law Tribunal (NCLT — the court that handles corporate insolvency) appointed a new board. A week later, on 15 October 2018, the National Company Law Appellate Tribunal (NCLAT — the appeal court for company law disputes) issued a comprehensive freeze order: all IL&FS assets were frozen. No one could touch them. The order landed like a stone in still water — the company's operations paused, its bank accounts locked, its future uncertain.

But HDFC kept dipping into the escrow account, collecting the rent. IL&FS's new board objected. The rent, they said, was an IL&FS asset. The freeze meant HDFC had to stop.

The argument that turned on a single question

IL&FS argued that the rent arrangement was a security interest — a promise to repay using future income. Under the freeze, all security interests held by creditors were frozen too. The rent in the escrow account, IL&FS said, was still its property, just pledged to HDFC. The freeze covered it.

HDFC argued the opposite. The documents, they said, did not create a security interest. They created an assignment — a transfer of ownership. IL&FS had sold its right to collect that rent. The rent was no longer IL&FS's property at all. It was HDFC's money sitting in an account that HDFC controlled. The freeze could not touch what IL&FS no longer owned.

The core question was this: was the transaction a loan with security, or was it a sale of future rent?

Why the labels on the documents did not decide the case

The Supreme Court, led by Justice S. Ravindra Bhat, did what courts rarely do: it ignored the names the parties had given their documents. IL&FS and HDFC had called their arrangement a "Lease Rental Discounting" facility. But the court said labels do not matter. What matters is what the documents actually do.

The court applied the substance-over-form doctrine — the principle that courts look at the real nature of a transaction, not the name parties choose to give it. It also applied the contemporaneous-documents rule — the principle that all documents signed at the same time must be read together, not in isolation. On the bench, a thick stack of agreements sat in a manila folder — the MFA, the Assignment Agreement, the Escrow Agreement, the Power of Attorney — each page a piece of the puzzle the court had to assemble.

When the court read the Assignment Agreement, the Escrow Agreement, and the Power of Attorney together, a clear picture emerged. HDFC had exclusive control over the escrow account. HDFC had the power to appropriate (take) the rent proceeds directly. IL&FS had given HDFC an irrevocable Power of Attorney — meaning IL&FS could not cancel HDFC's authority to collect the rent. The rent was not being held as collateral. It was being handed over, permanently, to repay the loan.

The courtroom fell silent as the judgment was read — the quiet of a decision that would reshape how lenders across India structure their deals. The court held that the transaction was "an assignment of actionable claims," not merely a security creation. It reasoned that the substance and effect of all contemporaneous documents, read together, showed an irrevocable transfer of the right to receive future rent. The assigned portion of the rents was HDFC's property and not caught by the freeze order.

The Transfer of Property Act's quiet role

The court turned to Sections 3 and 130 of the Transfer of Property Act, 1882 (TPA — the law that governs how property changes hands in India). Section 3 defines an "actionable claim" — a right to receive money that is not yet in your possession, like future rent from a tenant. Section 130 says you can transfer an actionable claim by simply signing a written document, without any physical delivery.

The court held that IL&FS's right to collect future rent was an actionable claim. By signing the Assignment Agreement, IL&FS had transferred that claim to HDFC. The transfer was complete the moment the documents were signed. The rent that later flowed into the escrow account was never IL&FS's property — it was HDFC's property from the moment the tenant paid it. The escrow account at the bank sat locked — but the key belonged to HDFC, not to IL&FS.

The court distinguished Section 14 of the Insolvency and Bankruptcy Code (the moratorium provision that freezes a company's assets during insolvency). That section, the court said, freezes only the assets of the corporate debtor — the company in trouble. It does not freeze assets that the debtor has already sold or transferred before the freeze began.

What the court actually decided

The Supreme Court upheld the NCLAT's earlier order of 13 May 2022. The transaction was a true assignment of receivables (future rent payments), not merely a security interest. The rent that had already been assigned to HDFC — up to the amount needed to repay the principal and interest — belonged to HDFC. Any excess rent beyond that amount belonged to IL&FS and remained frozen.

The freeze order, the court said, could not touch what IL&FS no longer owned. HDFC could keep collecting the assigned rent.

THE PLAY: When structuring a loan secured by future receivables, draft the documents as an assignment — with irrevocable control, exclusive appropriation rights, and a clear transfer of the actionable claim — not as a security interest, because a freeze order can only freeze what the borrower still owns.

Why this matters beyond IL&FS and HDFC

For every lender in India who takes future rent or receivables as collateral, this judgment changes the calculation. If you structure the deal as a security interest, a bankruptcy freeze can stop your collections. If you structure it as an assignment — a true transfer of the right to receive money — the freeze passes you by.

The court's message was clear: name your documents honestly, but know that the court will look past the name to the substance. A lease rental discounting facility that gives the lender complete control and irrevocable authority is not a loan with security. It is a sale of future money.

The procedural journey: a story of shifting fortunes

The NCLT superseded IL&FS's board on 1 October 2018. It declined a moratorium request on 12 October 2018. The NCLAT issued its comprehensive freeze order on 15 October 2018. Justice D.K. Jain (Retd.) was appointed by the NCLAT on 3 July 2020 to supervise proceedings, and he directed HDFC and the escrow bank to reverse debits — a temporary victory for IL&FS. Then, on 13 May 2022, the NCLAT held the assignment valid, ruling that the assigned portion was HDFC's property. The Supreme Court affirmed that decision on 18 October 2023, in Civil Appeal No. 4708 of 2022, reported as 2023 INSC 929.

The court also relied on a line of precedents that reinforced its approach: Yellapu Uma Maheswari v. Buddha Jagadheeswararao (2015), Assam Small Scale Ind. Dev. Corp. Ltd. v. J.D. Pharmaceuticals (2005), V. Lakshmanan v. B.R. Mangalagiri (1994), Super Poly Fabriks Ltd. v. Commissioner of Central Excise, Punjab (2008), and S. Chattanatha Karayalar v. The Central Bank of India (1965). Each of these cases stood for the same principle: courts must look at the substance of a transaction, not its label.

IL&FS borrowed ₹400 crore and promised its rent. The court decided that promise was a sale. And a sale, unlike a pledge, survives a bankruptcy freeze.