Debt assignment to independent ARCs and CoC voting rights under s21(2) IBC; assignee admitted, plans reconsidered

Applying SC authority on s.21(2) IBC, the Appellate Tribunal held that related-party disqualification in the CoC operates only in praesenti and attaches to the creditor, not to the debt; an assignee that is not itself a related party is entitled to membership and voting unless the assignment is a mala fide device to circumvent disqualification. On facts, the assignees were independent ARCs with no common shareholding or directorial links with the corporate debtor or the earlier related-party creditor, and no evidence showed a colourable assignment. Consequently, the assignee financial creditor was held not to be a related party and was directed to be included in the CoC with proportionate voting rights; the impugned orders were modified accordingly and resolution plans were to be reconsidered by the reconstituted CoC.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1) Whether a financial debt assignee which is not a "related party" in praesenti is disqualified from representation, participation, and voting in the Committee of Creditors on the footing that the original lender was treated as a related party of the corporate debtor/shareholder.

2) Whether the orders disqualifying the lender's vote (and consequently rejecting the resolution plan for want of requisite voting threshold) required modification once the debt stood assigned, unchallenged, to independent third-party asset reconstruction entities having no common shareholding/directorship with the corporate debtor.

3) What consequential directions should follow regarding reconstitution of the Committee of Creditors and consideration of pending resolution plans in light of the assignee's entitlement to participate with proportionate voting rights.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility of a third-party assignee (in praesenti not a related party) to be in the CoC with voting rights

Legal framework (as discussed by the Court): The Court examined the disqualification concerning CoC participation/voting for "related party" financial creditors under the Insolvency and Bankruptcy Code, 2016, and applied the Supreme Court's reasoning that such disqualification is relationship-based and operates in praesenti, not as an attribute of the debt.

Interpretation and reasoning: The Court treated the question of the original lender's "related party" status as of diminished relevance after assignment, because the debt had been assigned first to one asset reconstruction company and later to another, and both assignments were accepted and not challenged. The Court noted that there was no case that the present assignee is a related party of the corporate debtor. On the materials placed, the Court found no common directors or shareholders between the corporate debtor and the assignee entities, and no basis to infer that the assignment was undertaken merely to gain CoC entry or to circumvent the statutory disqualification. The Court therefore applied the principle that the disability attaches to the related-party financial creditor (relationship), not to the debt itself, and that an unrelated third-party assignee does not carry that disability merely by taking an assignment.

Conclusions: The Court held that the present assignee, being the financial creditor in praesenti and not a related party of the corporate debtor, is entitled to participate in the CoC with proportionate voting rights. The impugned directions disqualifying participation/voting were modified accordingly.

Issue 2: Consequence for the rejection of the resolution plan based on exclusion of the lender's vote

Legal framework (as discussed by the Court): The Court considered the statutory voting threshold for approval of a resolution plan (as referenced in the judgment) and the basis on which the plan had been rejected by excluding the vote share of the creditor treated as a related party.

Interpretation and reasoning: The plan had been rejected because, after excluding the vote share attributed to the lender treated as a related party, the plan did not meet the requisite voting threshold. The Court held that, once the assignee is found eligible to sit and vote in the CoC (being unrelated in praesenti), the premise for continuing the impugned disqualification and the consequent effect on plan consideration cannot stand to that extent. The Court therefore did not sustain the impugned orders insofar as they denied CoC rights to the present assignee.

Conclusions: The Court modified the impugned orders dated 04.01.2024 and 16.01.2024 to the extent they operated to exclude the present assignee from CoC participation/voting; the assignee must be included with proportionate voting rights, removing the basis for treating its vote as excludable on "related party" grounds.

Issue 3: Directions on reconstitution of CoC and consideration of pending resolution plans; effect on interim restraint

Legal framework (as discussed by the Court): The Court addressed the operational consequence of its finding on CoC composition and referred to the interim restraint that had prevented the resolution professional from placing received plans before the CoC.

Interpretation and reasoning: The Court recorded that a fresh and revised invitation for resolution plans had been issued and that two plans were received but were not placed before the CoC due to an interim order restraining such consideration. With the assignee's entitlement to be included and vote restored, the Court held that the interim restraint no longer served and stood vacated. The proper course was to reconstitute the CoC by including the assignee with proportionate voting rights and allow the insolvency process to proceed by considering the pending plans.

Conclusions: The Court directed that the assignee be made a CoC member with proportionate voting rights and that the pending resolution plans may be considered by the reconstituted CoC to carry forward resolution of the corporate debtor; the earlier interim order restraining consideration of plans stood vacated. Appeals were disposed of with no costs.

---