Related party debt assignment cannot bypass CoC exclusion if the transfer is a bad-faith route to indirect participation.

A debt assignee is not automatically disqualified from committee of creditors participation merely because the assignor was a related party financial creditor, but the assignment must be scrutinised for good faith. The first proviso to Section 21(2) of the Insolvency and Bankruptcy Code cannot be bypassed through a colourable transfer of debt designed to secure indirect CoC entry. Where the assignment occurs during CIRP, the claim is filed immediately, and the assignor retains substantial beneficial interest, the assignee may be treated as akin to a related party and excluded from representation, participation and voting rights. On these facts, the NCLAT upheld exclusion and found no basis to interfere.

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Issues: Whether an assignee of debt, where the assignor was a related party financial creditor of the corporate debtor, can be permitted to participate, represent and vote in the committee of creditors and whether the assignment in question was made in good faith or to circumvent the statutory exclusion under the insolvency law.

Analysis: The exclusion under the first proviso to Section 21(2) of the Insolvency and Bankruptcy Code is directed against related party financial creditors and cannot be avoided by a colourable transfer of debt. A third-party assignee is not automatically disqualified merely because the assignor was a related party, but the circumstances of the assignment must be examined to determine whether it was effected in good faith or with a fraudulent intent to secure indirect participation in the committee of creditors. On the facts, the assignment was executed during the pendency of CIRP, the assignee filed its claim on the same day, the assignor retained substantial beneficial interest, and the surrounding materials created serious doubt about the bona fides of the transaction. The materials relied upon, including the insolvency law committee view and the governing principle that related party creditors cannot obtain indirect entry into the committee of creditors, supported exclusion of the assignee.

Conclusion: The assignee was correctly treated as akin to a related party financial creditor and was not entitled to representation, participation or voting rights in the committee of creditors.

Final Conclusion: No interference was warranted with the order rejecting the application challenging exclusion from the committee of creditors, and the appeal failed on merits.

Ratio Decidendi: A related party financial creditor cannot evade the statutory bar under Section 21(2) of the Insolvency and Bankruptcy Code by assigning its debt to a third party in bad faith or with a fraudulent intent to secure indirect participation in the committee of creditors; in such cases the assignee may be treated as akin to a related party and excluded.

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