NCLT Mumbai Refuses To Unwind IL&FS–SREI Transactions, Applies Doctrine Of Election
The Mumbai Bench of the National Company Law Tribunal (NCLT) on 13 April held that a party which has consistently treated transactions as valid, independent and enforceable cannot later seek to unwind them by taking a contradictory stand.
Applying the doctrine of election and the principle that one cannot approbate and reprobate, a Bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar refused to unwind financial transactions between Infrastructure Leasing and Financial Services Ltd (IL&FS) and SREI Infrastructure Finance Ltd. It held:
“... we are of the view that, having elected to treat IFIN's loans to Third Party Borrowers and SIFL's loans to the IL&FS Group Entities as independent, valid, and enforceable transactions for several years, the Applicant cannot now be permitted to take a opposite stand and contend that the same transactions were a fraud or a single composite arrangement liable to be collapsed.”
IL&FS argued that the lending structures were designed to circumvent RBI restrictions on intra-group lending, as reflected in inspection reports dated 1 November 2017 and 22 March 2019, and findings of the Serious Fraud Investigation Office in May 2019. It sought recognition of IL&FS Financial Services Ltd (IFIN) as the direct creditor in place of SREI entities by collapsing the interlinked transactions.
The Tribunal held that the relief effectively sought modification of concluded contracts, which required consent of all parties and which the parties had not given. It also noted that IL&FS, since 2019, had itself proceeded on the basis that the transactions were independent and enforceable by initiating proceedings and filing claims accordingly.
Reiterating the doctrine of election, the Bench held that IL&FS could not adopt an inconsistent stand after deriving benefit from its earlier position. It observed:
“...the principle that one cannot approbate and reprobate is a fundamental maxim of equity and is inherent in the doctrine of election. A party that has made a conscious, deliberate, and sustained election, having derived benefit therefrom, cannot be permitted to resile from that position and assert a wholly inconsistent stance when it perceives a commercial advantage in doing so. Having thus elected, for a period of several years, to treat the transactions as independent and enforceable, the Applicant cannot now be permitted to contend that the impugned transactions were sham and fraud liable to be collapsed.”
Accordingly, the NCLT dismissed the applications. It, however, kept the order in abeyance for 15 days to enable the parties to pursue legal remedies.
For IL&FS: Adv. Ashish Kamat, Adv. Animesh Bisht, Adv. Niket Mehta, Adv. Karan Sangani, Adv. Keshav Bansal
For SFIO: Purvi Nema Assistant Director SFIO, Adv. Bhardwaj
For SIFL: Sr. Adv. Arun Kathpalia, a/w Sr. Adv. Gaurav Joshi, Adv. Pooja Mahajan, Adv. Saurabh Bachhwat, Adv. Savar Mahajan, Adv. Srivatsava Reddy, Adv. Urvashi Giridhar & Kaushik Puranik