Related Party Can't Assign Debt To Bypass Disqualification From Participating In CoC: NCLAT

Background Facts:

On October 13, 2023, the Corporate Insolvency Resolution Process ("CIRP") was initiated against Rolta Bi & Big Data Analytics Pvt. Ltd. ("Corporate Debtor"). Greenshift Initiatives Pvt. Ltd. (“Appellant”/ “Assignee”) entered into an Assignment Agreement with Rolta Pvt. Ltd. (“Assignor”) on 6.11.2023 (after initiation of CIRP) and claimed to be a member of the CoC on that basis.

The Resolution professional admitted the Rs. 3.48 lakh claim of Appellant but did not permit it to sit in the CoC. The Appellant filed an IA to get a seat in the CoC with voting rights.

The application was rejected by the impugned order dt. 13.01.2025 on the ground that the Assignor was a 'related party'. The appellant filed the appeal against the order.

Submissions:

ounsel for the Appellant submitted that the mere fact that the assignor was a 'related party' cannot ipso facto imply that the Assignee/Appellant is also a related party. The counsel relied on Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021), where the Supreme Court held that a third-party assignee who is not a 'related party' to the corporate debtor should not be barred from participating in the CoC.

The Resolution Professional (RP) argued that the Appellant had entered into the Assignment Agreement after the commencement of CIRP with the motive to come in the CoC.

Observations:

The NCLAT noted that in Phoenix ARC Private Limited, it was observed:

“... in certain cases, a related party creditor may assign its debts with the intention of circumventing the disability imposed under the first proviso to Section 21(2) by indirectly participating in the CoC through the assignee. ... In cases where it may be proved that a related party financial creditor had assigned or transferred its debts to a third party in bad faith or with a fraudulent intent to vitiate the proceedings under the Code, the assignee should be treated akin to a related party financial creditor under the first proviso to Section 21(2).”

The Tribunal observed that a financial creditor who, in praesenti, is not a related party would not be debarred from being a member of the CoC. However, this proposition comes with a caveat—it must not be with the intention of participating in the CoC to sabotage the CIRP by diluting the vote share of other creditors. In line with the object and purpose of the first proviso to Section 21(2), such a party should be excluded from CoC.

The RP had opposed the Appellant's claim for a seat in the CoC, relying on the first principles of law that “one cannot assign a better right than he himself possesses” and had stated that “disqualification that existed at the time of initiating the CIRP cannot be removed by a mere assignment”.

The Tribunal determined that the purpose of the assignment was to gain a seat in the CoC in order to influence the rights and interests of other creditors. It dismissed the Appeal.

Case Title: Greenshift Initiatives Pvt. Ltd. vs. Sonu Gupta, Resolution Professional of Rolta Bi & Big Data Analytics Pvt. Ltd.

Case Number: Company Appeal (AT) (Insolvency) No.1936 of 2024

For Appellant : Mr. Rahul Chitnis, Ms. Priyambada Mishra, Advocates.

For Respondent : Ms. Sonu Gupta, RP in person.

Date of Order: 11.02.2025