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

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

The National Company Law Appellate Tribunal, Principal Bench, New Delhi of Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member), and Arun Baroka (Technical Member) affirmed a ruling from NCLT Mumbai, determining that the assignment agreement initiated by the corporate debtor was a deliberate tactic aimed at creating hurdles and prolonging the Corporate Insolvency Resolution Process (CIRP).

Rolta Private Limited, the corporate debtor, filed a significant claim amounting to ₹ 634,55,43,228. Although the Resolution Professional (RP) accepted its claim, Rolta Private Limited was excluded from representation, participation, and voting rights in the Committee of Creditors (CoC) due to its status as a related party. This measure was implemented to prevent conflicts of interest and ensure impartial decision-making during the insolvency proceedings.

During this period, Rolta Private Limited entered into a Memorandum of Understanding (MoU) with Peanence Commercial Private Limited. The MoU proposed the transfer of Rolta Private Limited's acknowledged claim to Peanence Commercial Private Limited for ₹ 50 crores. This transfer was subject to approval from the RP and designated Peanence Commercial Private Limited as an unrelated secured financial creditor with full voting rights in the CoC. This initiative aimed to navigate around 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, arguing that he lacked the jurisdiction to alter the debt's nature or grant voting rights, as requested by Rolta Private Limited and Peanence Commercial Private Limited. Subsequently, they filed an application before the NCLT, Mumbai, 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 genuine 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, citing the Supreme Court's interpretation in "Phoenix ARC Private Limited vs. Spade Financial Services Limited & Ors.". They asserted that the RP misinterpreted Section 21(2) of the IBC, which governs the eligibility and disqualification of related parties in the CoC.

In contrast, the RP argued that he was bound by statutory provisions and lacked the authority to approve the assignment under the current legal framework.

The NCLT upheld the RP's position and dismissed the applications filed by Rolta Private Limited and Peanence Commercial Private Limited. It ruled that the assignment outlined in the MoU was contingent upon approvals that the RP could not grant under existing laws.

Dissatisfied with this decision, Rolta Private Limited and Peanence Commercial Private Limited appealed to the NCLAT.

The NCLAT affirmed the RP's decision to deny approval for the assignment, citing the Supreme Court's ruling 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 emphasised that excluding related parties from voting rights aims to prevent conflicts of interest and maintain impartiality in the CoC's decision-making process.

Additionally, the NCLAT scrutinised the intent behind the assignment and concluded that it appeared to be a strategic manoeuvre by Rolta Private Limited to bypass statutory restrictions on related parties. The NCLAT expressed concern that permitting such assignments could potentially distort creditor rights and unfairly influence the resolution process.

The bench stated:

"The entire exercise by Rolta Private Limited, whose claim has been admitted but is a related party excluded from the CoC, and the purported assignment to bring Peanence Commercial Private Limited into the CoC, appear to be malafide. This is evident from the email sent to the resolution professional requesting confirmation that the assignee would be deemed a non-related party to the corporate debtor, thereby gaining entry into the CoC."

Consequently, the NCLAT upheld the NCLT Mumbai's decision.