Assignment of debt from related party to third party rejected as malafide attempt to circumvent restrictions

NCLAT dismissed appeal challenging refusal to acknowledge debt assignment from related party to third party. Related party creditor, whose claim was admitted but excluded from CoC due to related party status, attempted to assign debt to bring assignee into CoC. Tribunal found assignment agreement was contingent on assignee receiving CoC membership and was malafide attempt to circumvent related party restrictions. Email evidence showed assignor sought confirmation that assignee would be treated as non-related party. NCLAT upheld lower court's finding that assignment was designed to create hurdles and delay CIRP proceedings, citing Phoenix ARC precedent.

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Issues Involved:

1. Whether the Resolution Professional erred in refusing to acknowledge the assignment of debt from Rolta Private Limited to Peanence Commercial Private Limited.
2. Whether the assignment of debt was a bona fide transaction or a malafide attempt to circumvent the related party restrictions in the Committee of Creditors (CoC).
3. Whether the Adjudicating Authority correctly applied the precedent set by the Supreme Court in "Phoenix ARC Private Limited vs. Spade Financial Services Limited & Ors."

Issue-wise Detailed Analysis:

1. Refusal by the Resolution Professional:

The primary issue was whether the Resolution Professional (RP) had the authority to approve the assignment of debt from Rolta Private Limited, a related party, to Peanence Commercial Private Limited, an unrelated party. The RP refused to acknowledge the assignment, stating that they lacked jurisdiction to grant such approval. The RP emphasized that the assignment was contingent on obtaining their approval for the assignee to be recognized as a non-related secured financial creditor with voting rights in the CoC. The Tribunal supported the RP's stance, noting that the RP's role does not include the power to reconstitute the CoC or alter creditor status based on assignments, as per the Insolvency and Bankruptcy Code (IBC) and CIRP Regulations.

2. Bona Fide vs. Malafide Transaction:

The Tribunal examined whether the assignment was a genuine transaction or an attempt to circumvent the related party restrictions. Rolta Private Limited, being a related party, was not entitled to voting rights in the CoC. The assignment agreement stipulated that the Rs. 50 crore consideration was payable only upon RP's approval of the assignee's non-related status and voting rights. The Tribunal found this condition indicative of a malafide intent to gain CoC entry through an unrelated party, contrary to the IBC's objectives. The Tribunal observed that the assignment was structured to exploit a loophole, allowing Rolta Private Limited to indirectly influence the CoC, which the IBC seeks to prevent.

3. Application of Supreme Court Precedent:

The Tribunal evaluated the Adjudicating Authority's application of the Supreme Court's judgment in "Phoenix ARC Private Limited vs. Spade Financial Services Limited & Ors." The Supreme Court had clarified that the exclusion under the first proviso to Section 21(2) of the IBC pertains to the relationship between the financial creditor and the corporate debtor. It warned against related parties divesting their status solely to join the CoC. The Tribunal agreed with the Adjudicating Authority's interpretation that the assignment aimed to bypass the related party exclusion, aligning with the Supreme Court's caution against such manipulations.

Conclusion:

The Tribunal upheld the Adjudicating Authority's decision to reject the application, concluding that the assignment was not a bona fide transaction but a strategic maneuver to enter the CoC through an unrelated party. The Tribunal found no error in the Adjudicating Authority's reliance on the Supreme Court's judgment and dismissed the appeal, reinforcing the principles of transparency and fairness in the insolvency resolution process.

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