NCLAT: Corporate Debtor Cannot Assign or Transfer Debts

NCLAT: Corporate Debtor Cannot Assign or Transfer Debts

Tribunal did not find that the Appellant could rely on Section 11(a) or (b) to find fault with the CIRP which had already been initiated and dismissed the appeal

A National Company Law Appellate Tribunal (NCLAT), New Delhi, bench of Justices A.I.S. Cheema, Member (Judicial) and V.P. Singh, Member (Technical), in the case of Greenpolis Welfare Association vs Three C Shelter Private Limited & Anr. on 6 January 2021 observed, "when the definitions of Financial Creditor and Operational Creditor are read with the definition of Corporate Debtor, it is clear that while Financial Creditor and Operational Creditor can assign their debt, the same is not applicable to a Corporate Debtor."

The appellant claimed to be association representing 350 homebuyers in the project Greenpolis of the Three C Shelters Pvt. Ltd. (Corporate Debtor or Respondent No.1). The appellant claims that it is the largest Financial Creditor of Corporate Debtor and was aggrieved by the admission order which allowed "though to the relief of the Appellant, the Petition was not admitted".

It argued that the Corporate Debtor (CD) lured appellant to book units in the project which was being developed by the CD and made false representations about timely possession. The appellant vehemently argued that Respondent No.2 (Straight Edge Contracts Pvt Ltd.) was not an Operational Creditor (OC) but was itself a Corporate Debtor.

It further claimed that CD cannot be subjected to the Corporate Insolvency Resolution Process (CIRP) alone since the project is jointly developed with Orris Infrastructure and that OC could not have initiated insolvency proceedings against the CD as there was a bar under Section 11(b) of Insolvency and Bankruptcy Code, 2016 (IBC).

The tribunal, however, did not find substance in the averments made by the appellant because the present application under Section 9 was undisputedly filed by the Respondent No.2 at a time when CIRP against the Respondent No.2 had been set aside on 13 March 2020, had to be appreciated on its own facts and documents.

The Tribunal highlighted the provision of IBC, 2016 and added, "the definition of Financial Creditor in Section 5(7) and definition of Operational Creditor in Section 5(20) 'includes' any person to whom the debt has been legally assigned or transferred. This, however, does not apply to the definition of Corporate Debtor as found in Section 3(8). Section 3(8) states that 'Corporate Debtor' means a corporate person who owes a debt to any person."

The Tribunal further expounded the other averment of the appellant is that CIRP against Respondent No.1 alone would not be feasible without joining Orris Infrastructure Pvt. Ltd. However, the tribunal conceded with the decision of the Adjudicating Authority and stated, "The Adjudicating Authority cured defect and we do not wish to interfere on technical grounds, as it will serve no purpose. Record shows that both Respondents are now under CIRP and we would trust the IRPs/RPs to follow the law. As such, alleged collusion would be irrelevant, even otherwise."

Further the question of the alleged bar under Section 11 of IBC, the Tribunal observed that if the Section is perused, the incompetency attached is to 'initiation'. The specified person is not "entitle" to make an application. Thus, the bar under Sub-Section (a) is for making an application when the person who is a Corporate Debtor is undergoing Corporate Insolvency Resolution Process. Under Sub-Clause (b), the bar is to "making an application" by the person – Corporate Debtor having completed CIRP twelve months preceding the date of making of the application.

Apart from this, the court referred to the Insolvency and Bankruptcy Code (Amendment) Act of 2020 by which Explanation – II has been added in Section 11 and observed, "Even without relying on this clarificatory Explanation – II, in the facts of the present matter, we do not find that the Appellant can rely on Section 11(a) or (b) to find fault with the CIRP which has already been initiated." Hence the appeal stood dismissed.