Introduction-

An interesting Judgement was passed by the National Company Law Appellate Tribunal (NCLAT), New Delhi bench on 11.02.2025 comprising Justice Ashok Bhushan as a Chairperson, along with Barun Mitra and Arun Baroka as Technical Members, stating that to secure a seat in the Committee of Creditor (CoC), ‘related party’ can’t transfer their debt as it would affect the interest and rights of other creditors.

Facts of the Case-

On 13.10.2023 CIRP was commenced against the Corporate Debtor i.e. Rolta Bi & Big Data Analytics Pvt. Ltd. Public Announcement was made on 16.10.2023 inviting claims and the late date of submission of claims was 28.10.2023.

Appellant i.e. Greenshift Initiative Pvt Ltd entered into an Assignment Agreement with the Corporate Debtor on 06.11.2023 and claimed to be a member of COC on that basis.

Ms. Sonu Gupta who acted as Resolution Professional (RP) admitted the claim of Rs 3.48 Lacs of the Appellant but did not permit it to sit in COC.

Hence the Appellant filed an Interlocutory Application (I.A.) to get a seat in COC with voting rights, the impugned order rejected this application on 13.01.2025. Aggrieved by the order this appeal was filed to NCLAT, Delhi bench.

Arguments-

Counsel for the Appellant relied upon the judgment of the Hon’ble Supreme Court in

[1]which stated that a third-party assignee who is not a ‘related party’ to the corporate debtor should be allowed to participate in the CoC, which was clearly stated in Para 100, 101 & 102,which is as follows:

“100. Therefore, it could be stated that where a financial creditor seeks a position on the CoC based on a debt that was created when it was a related party of the corporate debtor, the exclusion that is created by the first proviso to Section 21(2) must apply. For, it is on the strength of the financial debt as defined in Section 5(8) that an entity claiming as a financial creditor under Section 5(7) seeks a position on the CoC under Section 21(2). If the definition of the expression ‘related party’ under section 5(24) applies at the time when the debt was created, the exclusion in the first proviso to Section 21(2) would stand attracted. 

101. However, if such an interpretation is given to the first proviso of Section 21(2), all financial creditors would stand excluded if they were a ‘related party’ of the corporate debtor at the time when the financial debt was created. This may arguably lead to absurd conclusions for entities that have legitimately taken over the debt of related parties, or where the related party entity had stopped being a ‘related party’ long ago.

102. In this regard, it is relevant to note the observations in the Insolvency Law Committee Report of 2020 clarifying the eligibility of third-party assignees of the debt of a related party creditor, to be members of the CoC. It was observed: 

“11.09 … As a third-party assignee, who by itself is not a related party, would not have any such conflict of interest, it should not be disabled from participating in the CoC. Further, the aforesaid disability is not related to the debt itself but is based on the relationship existing between a related party creditor and the corporate debtor. Therefore, as the disability imposed under the first proviso to Section 21(2) pertains to the related party's financial creditor and not to the debt it is owed, the Committee agreed that it is clear that when a related party's financial creditor assigns her debt to a third party in good faith, such third party should not be disqualified from participating, voting or being represented in a meeting of the CoC.

11.10. However, the Committee discussed that 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. As a related party is expressly prohibited from participating in the CoC, it cannot do so indirectly by assigning its debt to a third-party assignee to circumvent this restriction. Therefore, to prevent any misuse, the Committee recommended that before including an assignee of a related party financial creditor within the CoC, the resolution professional should verify that the assignee is not a related party of the corporate debtor. 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).”

Resolution Professional (RP) argued that the Appellant had entered into an Assignment agreement after the commencement of CIRP with the motive to come in CoC. A reply was also filed by the RP opposing the application of the Appellant.

Conclusion-

• NCLAT observed that: 
  “... 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 at present is not a related party would not be debarred from being a member of the CoC. However, this proposition comes with a condition that it must not be done to participate 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 then excluded from CoC.

Judgment-

The NCLAT held that with the given facts of the case, it was clear that the Appellant entered into an Assignment Agreement with the Corporate Debtor to gain a seat in CoC, which would then affect the interest and rights of other Creditors. The Adjudicating Authority has righty rejected the application of the Appellant claiming the right in the CoC. There was no merit in the appeal and thus appeal was dismissed.

• Phoenix ARC Private Limited vs. Spade Financial Services Ltd. & Ors. 1 Feb. 2021. Accessed 23 Feb. 2025.

.    .    .