NCLAT: Assignment Agreement By Corporate Debtor, Malafide Exercise To Prolong CIRP.

Brief Facts:

Rolta Private Limited, Corporate Debtor, submitted a substantial claim of Rs. 634,55,43,228. Despite the admission of its claim by the Resolution Professional (RP), Rolta Private Limited was denied representation, participation, and voting rights in the CoC. This denial stemmed from its status as a related party, a measure designed to prevent conflicts of interest and ensure impartial decision-making in the insolvency proceedings.

Amidst these proceedings, Rolta Private Limited entered into a Memorandum of Understanding (MoU) with Peanence Commercial Private Limited. The MoU proposed the assignment of Rolta Private Limited's admitted claim to Peanence Commercial Private Limited for a consideration of Rs. 50 crores. This assignment was contingent upon the RP's approval and recognised Peanence Commercial Private Limited as a non-related secured financial creditor with full voting rights in the CoC. This move aimed to circumvent the statutory disqualification imposed on related parties under the Insolvency and Bankruptcy Code (IBC).

The dispute escalated when the RP declined to approve the assignment and argued that he lacked the jurisdiction to alter the nature of the debt or confer voting rights as sought by Rolta Private Limited and Peanence Commercial Private Limited. Subsequently, they filed an application before the National Company Law Tribunal (NCLT), Mumabi for seeking validation of the assignment and challenging the RP's decision.

Rolta Private Limited and Peanence Commercial Private Limited argued before the NCLT that the assignment was a bona fide transaction conducted at arm's length. They contended that Peanence Commercial Private Limited, being an unrelated party, should be entitled to participate as a financial creditor in the CoC, as per the Supreme Court's interpretation in "Phoenix ARC Private Limited vs. Spade Financial Services Limited & Ors.". They argued that the RP misinterpreted the provisions of Section 21(2) of the IBC, which governs the eligibility and disqualification of related parties in the CoC.

Conversely, the Resolution Professional (RP) argued that he was bound by the statutory provisions and lacked the authority to approve the assignment under the current legal framework.

The NCLT, in its decision, upheld the RP's stance and dismissed the application filed by Rolta Private Limited and Peanence Commercial Private Limited. It held that the assignment, as proposed in the MoU, was contingent upon approvals that the RP could not grant under the existing legal framework.

Feeling aggrieved, Rolta Private Limited and Peanence Commercial Private Limited approached the NCLAT.

Observations by the NCLAT:

The NCLAT upheld the RP's decision to deny approval for the assignment. It referred to the decision of the Supreme Court in"Phoenix ARC Private Limited vs. Spade Financial Services Limited & Ors.", which clarified the conditions under which related parties can participate in the CoC. The Supreme Court held that the purpose of excluding related parties from voting rights is to prevent conflicts of interest and maintain impartiality in the decision-making process of the CoC.

Furthermore, the NCLAT referred to the intent behind the assignment and held that it appeared to be a strategic manoeuvre by Rolta Private Limited to circumvent the statutory restrictions imposed on related parties. The NCLAT held that allowing such assignments could potentially distort the balance of creditor rights and influence the outcome of the resolution process unfairly.

The bench held that:

“the whole exercise is a malafide exercise by Rolta Private Limited whose claim has been admitted and who being related party has not been given berth in the CoC and by means of alleged assignment is trying to bring Peanence Commercial Private Limited into the CoC. The real intent of the assignment is clear from the email send to the Resolution Professional where the Resolution Professional has been requested to confirm that Assignee would be declared as nonrelated party to the Corporate Debtor, meaning thereafter the Assignee shall get a berth in the CoC.”

Therefore, the NCLAT upheld the decision of the NCLT, Mumbai.

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Case Title: Peanence Commercial Private Limited and Anr vs Mamta Binani

Case Number: Company Appeal (AT) (Insolvency) No. 905 of 2024

Advocate for the Appellants: Mr Arun Kathpalia, Sr. Advocate and Mr. Abhijeet Sinha, Sr. Advocate with Ms. Priyambada Mishra, Advocate.

Advocate for the Respondent: Mr. Sandeep Bajaj, Ms. Aakanksha Nehra, Ms, Gunjan Nayyar, Advocates for RP.

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