Related party debt assignment cannot bypass CoC exclusion when used in bad faith to influence CIRP

An assignee of a related party debt is not automatically barred from the Committee of Creditors merely because the debt was originally held by a related party; under Section 21(2) of the Insolvency and Bankruptcy Code, the exclusion turns on the assignee's relationship with the corporate debtor. That principle, however, does not permit an assignment used as a device to bypass the statutory bar. Where the transfer is made in bad faith after commencement of CIRP to secure CoC participation and influence the resolution process, the assignee may be treated as excluded. On the stated facts, the assignee was denied CoC membership and voting rights.

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Issues: Whether an assignee of a related party debt, where the assignment occurred after commencement of CIRP and appears intended to secure a place in the Committee of Creditors, is entitled to representation, participation and voting rights in the Committee of Creditors.

Analysis: The governing principle under Section 21(2) of the Insolvency and Bankruptcy Code, 2016 is that the exclusion from the Committee of Creditors is linked to the relationship of the financial creditor with the corporate debtor, and not merely to the debt itself. A third-party assignee who is not otherwise a related party is not automatically disqualified. However, that principle is subject to the caveat recognised in precedent that assignment cannot be used as a device to circumvent the statutory bar, and where the transfer is made in bad faith or with the object of indirectly participating in the Committee of Creditors and affecting the CIRP, the assignee may be treated as falling within the exclusion.

Conclusion: The assignee was rightly denied a seat in the Committee of Creditors and voting rights, as the post-CIRP assignment was found to have been made to secure participation in the Committee of Creditors and to impact the rights of other creditors.

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