Kerala High Court: Transfer Of Loan Account To Asset Reconstruction Company Won't Amount To “Conveyance” Under Section 2(D) Of Kerala Stamp Act, 1959

Background Facts:

Abdul Azeez (Petitioner), a Class A Contractor approved by the Government of Kerala, availed of financial advance from South Indian Bank ('Bank'). In 2015, due to an accident, he defaulted on the payments leading the Bank to invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI') to recover the amounts.

On 17.03.2017, Petitioner's assets and liabilities in respect of the loan account had been assigned to Phoenix ARC. Ltd. (Respondent). The Petitioner contended that the Assignment Deed is not seen stamped as per the Stamp Act. The stamp duty payable for the assignment of debt is as conveyance mentioned in Article 22 of the Schedule of the Stamp Act.

The present writ petition has been filed by the Petitioner against the Respondent to set aside the Order passed by the Chief Judicial Magistrate, Thrissur appointing an Advocate Commissioner to assist the Respondent in taking possession of the petition schedule property following Section 14 of SARFAESI.

Verdict of the Court:

The Kerala High Court dismissing the writ petition held that the transfer of a loan account by a Bank/Financial Institution to an ARC would not amount to “conveyance” as defined in Section 2(d) of the Stamp Act.

It noted that the proceedings under SARFAESI are proceedings to enforce security interest, without the intervention of the court.

The Court noted that what is transferred by a Bank/Financial Institution to an ARC is only economic interest and there is no conveyance of property or proprietary rights. The transfer of legal ownership of the loan is limited to the extent of the economic interest transferred.

The Court took note of Section 25 of the Stamp Act which is read as follows:

Section 25. How transfer in consideration of debt, or subject to future payment etc., to be charged

provides that where any property is transferred to any person in consideration, wholly or in part, of any debt due to him or subject either certainly or contingently to the payment or transfer of any money or stock, whether being or constituting a charge or encumbrance upon the property or not such debt, money or stock is to be deemed the whole or part, as the case may be of the consideration in respect whereof the transfer is chargeable with ad valorem duty:

Provided that nothing in this section shall apply to any such certificate of sale as is mentioned in Article 16 of the Schedule.

Explanation:­ In the case of a sale property subject to a mortgage or other encumbrance any unpaid mortgage money or money charged, together with the interest, if any, due on the same, shall be deemed to be part of the consideration for the sale:

Provided that, where property subject to a mortgage is transferred to the mortgagee, he shall be entitled to deduct from the duty payable on the transfer the amount of any duty already paid [* * * *] 1 in respect of the mortgage.

It observed that Article 22 in the Schedule to the Stamp Act deals with conveyance as defined in Section 2(d) not being a transfer charged or exempted under No.55 immovable property and provides for the rates of stamp duty payable. Further, the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 defines transfer in the context of transfer of loan exposures to mean a transfer of economic interest in loan exposures by the transferor to the transferee, with or without the transfer of the underline loan contract, in the manner permitted.

The Court noted that Article 22 of the Stamp Act takes into account only those conveyances as defined in Section 2(d), thus would only apply when there is a sale of immovable property. Even assuming that the transfer of loan interest by a financial institution involves the transfer of any interest in the secured asset and therefore it amounts to conveyance, even then such conveyance will not fall in any of the categories mentioned in Article 22.

Thus, the petitioner's argument that the conveyance itself is invalid cannot be accepted since presently, the Bank has not conveyed any property. What is transferred is only the debt and the right to recover the debt.

In conclusion, the Kerala High Court observed that the registration of the Agreement in question is pending before the competent Sub Registrar's office and thus, no defense of insufficient stamp duty to escape liability can be taken. Thus, no ground for interfering with the proceedings initiated by Respondent exists.

Case Title: Abdul Azeez vs. The Authorized Officer, Phoenix ARC. Ltd. and Anr.

Case No.: WP(C) No. 33707 of 2023 with OP (DRT) No. 453 of 2023

Counsel for Petitioner: Advs. P.Chandrasekhar, Aype Joseph, Merin Rose

Counsel for Respondent: Advs. A.Kevin Thomas, A.V. Thomas (Sr.), Nidhi Sam Johns, Lijo Joseph (Thoppil)

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