Assignee beware when buying from a related party financial creditor; Risk of disqualification from participating in the CoC: NCLAT


If the assignee has been brought into the corporate insolvency resolution process (“CIRP”) for the sole purpose of participating and diluting the voting share of creditors in the Committee of Creditors (“CoC”), then such assignee is also disqualified, even if it by itself is not a related party.

This has been held in the matter of M/s Rare Asset Reconstruction Ltd. v. Sh. Avishek Gupta [Company Appeal (AT) (Ins.) No. 1304 of 2023]

JC Key Takeaways:

1)  This can have a negative effect as ARCs, etc. may avoid aggregating debt held by related parties. This in turn can impact settlements and even recoveries pre-IBC.

2)  Assessing motive for assignment of debt by a related party is subjective and yet unavoidable now.

3) Additional assessment will be fact specific and is recommended to establish and demonstrate assignment was in good faith.

4)  Given the objectives of SARFAESI and IBC, one does wonder whether this judgment will stand the test of time.

Technical Details:

1)  During the CIRP of the Corporate Debtor (“CD”), Srei Equipment Finance Limited (“Assignor”), a related party of the CD, assigned the loan availed by the CD to an Asset Reconstruction Company (“Assignee”). The Assignee filed its claim in the CIRP on the same date as entering into the Assignment Agreement. Although this CIRP was set aside, the CD was again admitted to CIRP in another application filed against it.

2)  The claim by the Assignee was admitted as a financial debt, but it was disqualified by the Resolution Professional (“RP”) from being a member of the Committee of Creditors (“CoC”). This was on the basis of the claimant being a related party. On analysis of facts, the RP noted that the assignment was done by the Assignor to circumvent its disqualification from the CoC by virtue of being a related party.

3)  The NCLAT observed that when a related party financial creditor assigns its debt to a third party in good faith, such third party should not be disqualified from participating, voting, or being represented in the CoC.

4)  Where it may be proved that the assignment of debt by a related party financial creditor is in bad faith or with a fraudulent intent to vitiate the CIRP, the assignee should be treated akin to a related party financial creditor. Consequently, the assignee would be disqualified from representation, participation or voting in the CoC.

5)  In this case, the NCLAT noted that the pleadings and allegations demonstrated serious doubts about the genuineness of the entire assignment agreement.

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