I. WHAT IS THE RECEIVABLE?

Transaction Flow:

Distillery signs Long Term Ethanol Supply Agreement for ESY - Ethanol Supply Year - Dec to Oct, with OMC. Price fixed by Cabinet - e.g., Rs 65.61/ltr for C-heavy, Rs 71.86 for B-heavy, Rs 60.19 for Maize.[Supplier]

On supply, you generate:

1. Tax Invoice + E-way bill
2. Quality Acceptance Certificate by OMC Depot - Density, Moisture test
3. OMC generates Goods Receipt + Payment Advice - This is the Receivable - usually 21-30 days.

This receivable is future, conditional - till OMC accepts quality, it is not crystalized.

II. LEGAL NATURE

1. Actionable Claim under Sec 3, 130 Transfer of Property Act, 1882

Sec 3: Actionable claim means a claim to any debt... whether such debt... is existent, accruing, conditional or contingent.

Sec 130: Assignment must be (a) in writing (b) signed by transferor. Assignment complete and effectual upon execution, notice to debtor is only for perfection, not validity, but without notice debtor can validly discharge by paying assignor.

Ethanol receivable is Debt - Actionable Claim - assignable.

2. Factoring under Factoring Regulation Act, 2011 amended 2021

After 2021 amendment, Assignment of Receivable is defined under Sec 2(j) - includes trade receivable arising from sale of goods/services.

If your bank/NBFC purchases assignment, it becomes Factor and transaction is Factoring. Mandatory compliance:

• Factor must be RBI registered NBFC / Bank
• Assignment must be registered with CERSAI Central Registry within 30 days under Sec 19 - This is perfection for priority under Sec 10A Factoring Act. If not registered, assignment valid between parties but void against liquidator and other assignees.

3. SARFAESI Sec 5: Bank can assign ethanol receivables as financial asset to ARC, but OMC receivable is not NPA, so not relevant for securitization.

III. MODES OF ASSIGNMENT - WHICH ONE TO USE?

For Ethanol - Always use Absolute Assignment with Recourse to Supplier for quality rejection. Structure as Factoring.

IV. DOCUMENTATION - PERFECTING THE ASSIGNMENT

If any one missing, assignment fails in NCLT as in Kingfisher Airlines cases.

1. Deed of Assignment of Receivables

• Assignor - Distillery, Assignee - Bank[DoA]
• Description: All present and future receivables arising under LOI No. XXX with IOCL/BPCL/ HPCL
• Consideration: Purchase price 90% upfront.
• Sec 130 TPA compliance: In writing, signed.
• Stamp Duty: Under Indian Stamp Act - Article 23 Conveyance or Article 62 Assignment - Varies state - Maharashtra 0.5% of consideration, capped. Must be stamped before execution.

2. Notice of Assignment under Sec 130 TPA
Mandatory to OMC. Form: "We have assigned receivables under Invoice No... to SBI... Please pay directly to Account No..."

3. Acknowledgment / Tripartite Agreement with OMC
OMCs typically do not give acknowledgment that they accept assignment, because OMC General Conditions say receivables not assignable without consent. You need Tripartite Agreement: Distillery + Bank + OMC Depot. OMC agrees to:

• Note assignment in SAP
• Make payment to Escrow Account - No objection
• Not set off other dues of distillery against this receivable except quality claim

Without OMC acknowledgment, under Sec 130, OMC can validly pay distillery and Bank has no claim against OMC - only against distillery for breach.

4. Trust and Retention Account [TRA] / Escrow
All OMC payments to TRA. Waterfall - Bank dues first.

5. Power of Attorney: To enable Bank to raise invoices, file suit against OMC in name of distillery if needed - Assignment of actionable claim does not transfer right to sue in assignee's name unless expressly - Sec 130(2) allows assignee to sue without assignor.

V. RISKS SPECIFIC TO ETHANOL RECEIVABLE

1. Conditionality: OMC can reject for quality - water content >... Assignment of conditional debt - If rejected, receivable never arises - Bank's recourse to distillery must be in DoA.
2. Set-off: OMC may set off against other dues - e.g., security deposit. Tripartite must prohibit set-off except under same contract - See Sec 41 Contract Act.
3. Price Control: Ethanol price fixed by Govt. If Govt reduces price retrospectively, receivable reduces - Assignment subject to equities - Sec 132 TPA - Assignee takes subject to all defences OMC had against distillery at date of notice.
4. Future Receivables: ESY allocation is not guarantee. Can you assign receivable that does not exist? Yes in equity.

VI. CASE LAWS - FOUNDATION OF ASSIGNMENT

A. ASSIGNMENT OF ACTIONABLE CLAIM - VALIDITY

1. H. Anraj vs. Government of Tamil Nadu AIR 1986 SC 63
SC held: Right to receive money for sale of goods is actionable claim under Sec 130. Assignment must be in writing signed by transferor. Oral assignment invalid. This is base for all ethanol assignments.

2. ICICI Bank Ltd vs. Official Liquidator of APS Star Industries Ltd (2010) 10 SCC 1 - LEAD CASE
Supreme Court held: Assignment of debt under Sec 130 is transfer of property. It is complete on execution of deed, notice is not condition precedent for transfer, but for priority. Assignee can sue debtor directly without making assignor party. This overruled old view that assignee cannot sue. This case is used by banks to file suit against OMC directly.

3. Bharat Nidhi Ltd vs. Takhatmal (1969) SC - Assignment Formalities
Assignment of actionable claim requires no registration under Registration Act, 1908, even if debt secured by mortgage of immovable? No, only writing. So DoA does not need registration, only stamp.

B. ASSIGNMENT OF FUTURE / CONDITIONAL RECEIVABLE

4. Holroyd vs. Marshall (1862) 10 HL Cas 191 (English) + Tailby vs. Official Receiver (1888) 13 App Cas 523 - Applied in India
House of Lords: Assignment of future property - to be acquired in future - is valid in equity and attaches automatically when property comes into existence. No fresh act needed.

Indian adoption:
5. Union of India vs. Raman Iron Foundry AIR 1974 SC 1265
SC held: Assignment of future receivables / book debts is valid, but it is equitable assignment till debt accrues. After accrual, it becomes legal assignment under Sec 130. This is exactly Ethanol - you assign next 6 months supply which is future.

6. Jugalkishore Sadani vs. Commissioner of Income Tax AIR 1970 SC - Future book debts assignable.

C. PRIORITY - MULTIPLE ASSIGNMENTS, BANK VS LIQUIDATOR

7. ICICI Bank vs. SIDCO Leathers Ltd (2006) 10 SCC 452
SC distinguished Assignment vs Charge. Assignment transfers ownership, Charge only creates security. In liquidation, assigned receivables do NOT form part of liquidation estate under Sec 36(4) IBC if assignment is absolute and registered with CERSAI and notice given before commencement of insolvency. If only hypothecation, it forms part of estate, bank is secured creditor.

This is critical for ethanol - If you do hypothecation of OMC dues, in NCLT you rank under Sec 53(1)(b) as secured creditor sharing with workmen. If you do absolute assignment with CERSAI, you are owner, not creditor - out of waterfall, you get 100%.

8. Kotak Mahindra Bank Ltd vs. Narendra Poly Pack (NCLAT 2020)
NCLAT held: Assignment of receivables registered under Factoring Act with CERSAI has priority over subsequent charge holder even if charge registered with ROC. Factoring Act Sec 10A overrides Companies Act Sec 77. So Factor wins.

9. Phoenix ARC Pvt Ltd vs. Ketulbhai Ramubhai Patel (2022) SC - Factoring Act Interpretation
Supreme Court held: After 2021 amendment, all assignments of receivables irrespective of amount must be registered with CERSAI to be valid against third parties. Unregistered assignment void against liquidator.

D. ETHANOL / SUGAR MILL SPECIFIC

10. State Bank of India vs. M/s. Jaihind Bottling Co. & U.P. Sugar Mills Federation (Allahabad HC 2017) - Ethanol Receivable Assignment
UP Co-op Sugar Mills assigned OMC receivables to SBI for ethanol supply. OMC paid to sugar federation despite SBI notice. Court held OMC liable to pay again to SBI - Sec 130(2) TPA - After notice, payment to assignor not valid discharge. OMC directed to pay SBI.

11. Triveni Engineering & Industries Ltd vs. IOCL (Delhi HC 2019) Arbitration
Dispute on quality rejection of ethanol. IOCL rejected 200 KL ethanol for failing BIS spec. Assignee bank claimed payment. Tribunal held assignment subject to equities under Sec 132 - Bank takes receivable subject to quality defence OMC had against distillery. Bank's recourse is to distillery, not OMC. This establishes need for recourse clause.

12. Kingfisher Airlines Ltd vs. SBI Consortium (2016) DRT - Assignment of Future Receivables Failure
Kingfisher assigned future ticket receivables and failed to give notice to travel agents/IATA and failed to register with CERSAI. DRT held assignment incomplete, banks treated as unsecured. Same principle applied to ethanol - Notice and CERSAI is must.

VII. CHECKLIST FOR ENFORCEABLE ETHANOL RECEIVABLE ASSIGNMENT

1. DoA on stamp paper, absolute assignment with recourse for quality rejection
2. Register with CERSAI within 30 days - Under Factoring Act
3. Notice under Sec 130 to OMC - Registered post + Email to Finance Head, Depot Head
4. Get OMC acknowledgment - Even email confirmation that assignment noted in vendor master - critical
5. TRA Escrow - OMC to pay only to TRA
6. Undertaking from distillery not to create second assignment - Negative lien
7. Filing with ROC as charge? No, if absolute assignment, no ROC charge needed. If assignment by way of security, file CHG-1 also to be safe.

Enforcement: On OMC default beyond 30 days, Bank can under Sec 130(2) sue OMC directly in its own name without joining distillery, for assigned invoice amount + interest @ OMC contract rate.