IBC Does Not Prohibit An Assignee From Continuing Pending Section 7 Proceedings: NCLAT Delhi

Background Facts

Housing Development Finance Corporation Limited ("HDFCL") has sanctioned a loan to the Siti Networks Ltd. ("Corporate Debtor") on 06.09.2016. The Corporate Debtor was classified as Non-Performing Asset on 30.06.2019. Thereafter, on 17.02.2022 HDFCL filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") seeking initiation of Corporate Insolvency Resolution Process against the Corporate Debtor and notices were issued.

On 29.06.2022, HDFCL vide Registered Assignment Deed assigned the debt of the Corporate Debtor to the Assets Care and Reconstruction Enterprise Limited ("ACREL/Assignee"). The Corporate Debtor was also informed about the assignment vide letter dated 06.07.2022. the Assignee filed an application before Adjudicating Authority seeking to be substituted as Financial Creditor in place of original Applicant (HDFCL) and to be permitted to pursue the Section 7 petition filed by HDFCL. The Adjudicating Authority vide an order on 01.11.2022 allowed ACREL (Assignee) to be substituted on the basis of assignment. The Adjudicating Authority held that there was no binding precedent from higher forum and there is no express prohibition in the IBC to prevent the assignee to come on record and continue the pending proceedings. The Corporate Debtor challenged the order dated 01.11.2022 before NCLAT.

Contentions Of Parties

The Corporate Debtor ("Appellant") argued that the assignee could not have been permitted to continue Section 7 proceedings. Although it is open for the assignee to file a fresh petition under Section 7 of IBC, on the strength of assignment. On the other hand, the Assignee ("ACREL/Respondent") argued that by virtue of assignment, which happened after filing of the Section 7 petition by HDFCL, the assignee has every right to be substituted to continue the proceeding. The Assignee placed reliance on Section 5(4) of the SARFAESI Act, 2002 which provides for continuation and prosecution of any proceeding by an assignee who acquires financial asset. The relevant portion is as under:

"5. Acquisition of rights or interest in financial assets.-…….. (4) If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding of whatever nature relating to the said financial asset is pending by or against the bank or financial institution, save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way, prejudicially affected by reason of the acquisition of financial asset by the [asset reconstruction company], as the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or against the [asset reconstruction company], as the case may be."

Decision Of The NCLAT

The Bench opined that Section 5(4) of the SARFAESI Act, 2002 does contemplate continuation of all proceedings after acquisition of financial assets by an assignee. There is no dispute that ACREL was assigned the debt by HDFCL during pendency of Section 7 proceedings. Further, Order XXII Rule 10 of Civil Procedure Code, 1908 contemplates continuance of proceeding on the basis of devolution of rights with the leave of the Court, which is applied generally in civil proceeding and suit.

"As has been observed rightly by the Adjudicating Authority, there is no prohibition in the IBC or any of the Regulations from continuing the proceeding by an assignee. Section 5(7) of the IBC which defines 'Financial Creditor' also includes a person to whom such debt has been legally assigned or transferred to. By virtue of assignment, Respondent No.1 become the Financial Creditor and having stepped in the shoes of 'Housing Development Finance Corporation Limited', it has every right to continue the proceeding which was initiated by Respondent No.2."

The Bench held that there is no prohibition under IBC or its Regulations from continuing the proceeding by an assignee. The Bench upheld the order of the Adjudicating Authority and dismissed the appeal.

Case Title: Siti Networks Ltd. v Assets Care and Reconstruction Enterprises Ltd. & Anr.

Case No.: Comp. App. (AT) (Ins.) No. 1449 of 2022

Counsel For Appellant: Mr. Bharat Sood, Advocate

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