What is the significance of Actionable Claim under Transfer of Property Act and GST?

Introduction

The purpose of this is to discuss the expression "actionable claim" or "choses in action" since the same is defined to be "goods" under the proposed GST law as presented before the Parliament and received presidential assent on 13th April 2017. The word "Actionable" according to Black's Law Dictionary means "That for which an action will lie, furnishing legal ground for an action". In English law it is known as "chose in action" or "things in action". The expression ‘chose in action or thing in action' in the literal sense means thing recoverable by action as contrasted to ‘chose in possession' which is a thing of which a person may have physical possession (Halsbury's Laws of England). Thus, a person can hold two classes of rights in relation to actionable claims. One is right to properties in his possession known as choses in possession in English law. The other one is properties over which the person holds only a right of action without possession and known in English law as choses in action. In this article we are concerned only with choses in action or actionable claims. The discussion assumes importance when we consider the fact that the June 2016 Model GST law excluded actionable claim from the definition of "goods" whereas it is specifically included in the definition of goods in the SGST ACT. It is obvious that there is huge revenue potential since the business of "securitization "is flourishing in India. Many banks and Non-Banking Financial Companies assign their claims or loan portfolios to a Special Purpose Vehicle (SPV) for huge consideration and the law makers perhaps may have an eye on such types of transactions. Therefore, it is of utmost importance that we should have a reasonable idea about the law relating to actionable claim, its assignment etc with particular reference to taxation aspects.

Actionable claim[1]

1. Is a species of property. Hence, capable of ownership and transfer. 

2. Sec. 3 of TP Act defines actionable claim to a claim:  

• To any debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property 
• To any beneficial interest in movable not in possession actual or constructive of the claimant  
• Which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. 

In brief Actionable claim means:  

• A claim to an unsecured debt or  
• A claim to any beneficial interest in movable property not in possession of the claimant. 

In England: personal property, not in the possession of the claimant, which can only be recovered by taking action in the court. If an amount is certain, then only it can be considered debt, if the amount is uncertain, it is not debt  

Debts may be payable in future or conditional or contingent. 

Debt is a certain amount of money given by one person to another and the debtor is under an obligation to pay the money back. When the debt is already due, it is called existing debt and when it is due at present but it is to be paid in future, it is called accruing debt. When there exists a claim to a certain amount of money but is payable subject to a certain condition, it is called conditional debt. Similarly, when there exists a claim to a certain sum of money but becomes payable on the happening of some event/contingency, it is known as contingent debt. 

Illustrations  

• “A” owes Rs. 1000 to “B”. “B”’s claim is an actionable claim. Because, “B” can bring an action in a court and claim back the amount  
• “A” borrows Rs. 1000 from “B” and mortgages his house to him. Mortgage is not an actionable claim.
• “A” contracts to buy goods from “B”. On the due date, A fails to take delivery and B sells the goods in the open market at a loss of Rs. 1000. B has a right to claim the damages from A, but this claim is not an actionable claim.  
• “A” contracts to sell to B, 100 bales of cotton deliverable on a future day. B has a beneficial interest in the goods and it is an actionable claim. 

Pledge, Hypothecation, and Mortgage  

Pledge is used when the lender (pledgee) takes actual possession of assets (i.e. certificate, goods). Such securities or goods are movable securities. In this case the pledgee retains the possession of the goods until the pledger (i.e. borrower) repays the entire debt amount. In case there is default by the borrower, the pledgee has a right to sell the goods in his possession and adjust its proceeds towards the amount due (i.e. principal and the interest amount).  

Some examples of pledge are Gold /Jewellery Loans, Advance against goods, /stock, Advances against National Saving Certificates etc.  

Hypothecation is used for creating charge against the security of movable assets, but here the possession of the security remains with the borrower itself. Thus, in case of default by the borrower, the lender (i.e. to whom the goods / security has been hypothecated) will have to first take possession of the security and then sell the same. The best example of this type of arrangement is Car Loans. In this case Car / Vehicle remain with the borrower but the same is hypothecated to the bank / financer. In case the borrower defaults, banks take possession of the vehicle after giving notice and then sell the same and credit the proceeds to the loan account.  Other examples of these hypothecation are loans against stock and debtors.

[Sometimes, borrowers cheat the banker by partly selling goods hypothecated to bank and not keeping the desired amount of stock of goods. In such cases, if bank feels that borrower is trying to cheat, then it can convert hypothecation to pledge i.e. it takes over possession of the goods and keeps the same under lock and key of the bank] 

Mortgage is used for creating charge against immovable property which includes land, buildings or anything that is attached to the earth or permanently fastened to anything attached to the earth (However, it does not include growing crops or grass as they can be the best example when mortgage is created is when someone takes a Housing Loan / Home Loan. In this case the house is mortgaged in favour of the bank / financer but remains in possession of the borrower, which he uses for himself or even may give on rent.  

Pledge, Hypothecation and Mortgage under Indian Law Pledge 

Section 172 of the Indian Contract Act defines pledge as "The bailment of goods as a security for the payment of a debt or performance of a promise" The bailor in this case is called a Pawnor and the bailee is called Pawnee.[2]

To create a valid pledge in the eyes of Law, the three important points needs to be noted:  

• Delivery of Possession: As in bailment, in pledge too delivery of possession is required. For example, in Revenue Authority v. Sundarsanam Pictures[3], it was held NOT to be pledged because the film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. Thus, there was no delivery of the goods at the time of agreement;  
• Delivery is in return of a loan or promise to perform something. Therefore, if your friend gives you his Motor-cycle to go to college, it is not pledge but can be called simple bailment;  
• It should be in pursuance of a contract: The delivery must be done under a contract (oral or written). However, it is not necessary that delivery and loan take place at the same time. Delivery can be made even after the loan is received. 

Hypothecation: was not defined under Indian Law for long time and was used more on the basis of practice. However, now under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, hypothecation is defined as "a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property". 

Mortgage: is defined in Section 58 of the "Transfer of Property Act 1882". It is the transfer of an interest in specific immovable property for the purpose of securing payment of money advanced by way of loan.[4]

Transfer of actionable claim (Section 130) 

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 authorized agent[5], 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. 

Exception: Nothing in this section applies to the transfer of a marine or fire policy of insurance or affects the provisions of section 38 of the Insurance Act, 1938 (4 of 1938).[6] 

Illustrations 

• A owes money to B, who transfers the debt to C. B then demands the debt from A, who, not having received notice of the transfer, as prescribed in section 131, pays B. The payment is valid, and C cannot sue A for the debt.   
• A, affects a policy on his own life with the insurance company and assigns it to a bank for securing the payment of an existing or future debt. If A dies, the bank is entitled to receive the amount of the policy and to sue on it without the concurrence of A's executor, subject to the proviso in sub-section (1) of section 130 and to provisions of section 132. 

Section 136 talks about, Incapacity of officers connected with Courts of Justice. No judge, legal practitioner or officer connected with any Court of Justice shall buy or traffic in, or stipulate for, or agree to receive any share of, or interest in, any actionable claim, and no Court of Justice shall enforce, at his instance, or at the instance of any person claiming by or through him, any actionable claim so dealt with by him as aforesaid.[7]

Actionable Claim under GST 

An actionable claim, as defined under GST Act, is a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. 

To re-iterate in a concise manner, actionable claim is a claim which can be made by the creditor, for any type of debt other than a debt secured by mortgage of immovable property, or by hypothecation or pledge if it is a movable property, which is not in possession of the claimant, be it actual or constructive. The claimable debts must be recognized by the civil courts as worthy of affording grounds for relief. Actionable claims can be enforced in a court of law. 

Examples of Actionable Claims 

• Claim for arrear rent 
• Claim for rent to fall due in future 
• An option offered to re-purchase the property once sold 
• Contract for purchase of Goods is endorsed by the purchaser declaring that, he has relinquished all his rights and interest in the goods purchased, to the mentioned person in the contract 
• Lottery Tickets 
• Benefit of a contract giving option to purchase a land 
• Right to benefit of a contract 
• Right to credit in a provident fund 
• Dividend on shares 
• Insurance money 
• Share in a partnership property 
• Rights under a license 

What is not an Actionable Claim? 

• A decree for debt 
• Right to sue 
• A claim in share of profit 
• A copyright 
• Coupons and vouchers 

Actionable claims are only applicable for Goods, and not for services. Goods, as described in the CGST Act, are, every kind of movable property other than money, but includes actionable claims. 

What is the significance of actionable claim and what are the legal attributes thereof insofar as the law in India is concerned?  

As the expression "Actionable Claim" itself denotes, it is a claim on which action lies for certain reliefs in the law courts. It excludes, the claims which have been already adjudicated or decreed so that no further action can be based thereon and also the claims, through actionable are secured by mortgage or pledge or hypothecation. This exclusion is reflected in the definition of "Actionable Claim" contained in Section 3 of Transfer of Property Act[8]. 

Conclusion 

Actionable claim is a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in possession either actual or constructive, of the claimant, which the civil courts recognize as affording grounds of relief whether such debt or beneficial interest be existent, accruing or conditional or contingent. Actionable claim is a claim to any debt, other hand a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in possession either actual or constructive, of the claimant, which the civil courts recognize as affording grounds of relief whether such debt or beneficial interest be existent, accruing or conditional or contingent. So, the actionable claim is very important for the transfer of property act. Debts secured by mortgage etc. are excluded from the definition of “Actionable Claim” because such debts are not the claims to property but the property itself.

[1] Transfer of Property Act, 1882, s. 3.

[2] Indian Contract Act, 1872, s. 172.

[3] AIR 1968 MAD 319.

[4] Transfer of Property Act, 1882, s. 58.

[5] Id. at s. 131.

[6] Id. at s. 131(A).

[7] Id. at s. 136.

[8] Id. at s. 3.