Assignment of a debt owed by the Corporate Debtor (CD) from the creditor to another person is allowed as per Regulation 28 of the IBBI (CIRP) Regulations, 2016. As per Regulation 28:
- In the event a creditor assigns or transfers the debt due to such creditor to any other person during the insolvency resolution process period, both parties shall provide the interim resolution professional or the resolution professional, as the case may be, the terms of such assignment or transfer and the identity of the assignee or transferee.
- The resolution professional shall notify each participant and the Adjudicating Authority of any resultant change in the committee within two days of such change.
Hence, during CIRP, debt assignment can be done.
Regulation 28 has to be read with Section 5(7) of the Insolvency and Bankruptcy Code, 2016. As per Section 5(7):
“financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;”
The above may not be interpreted to mean that assignee will become a financial creditor with a seat on the Committee of Creditor. The Code recognises that financial creditor can be related party financial creditor or non-related party financial creditor. However, the differentiation between related party and non-related party financial creditor is relevant only for the purpose of Section 21(2) First proviso which states that related party financial creditors cannot have any right of representation, participation or voting in a meeting of Committee of Creditors.
So, what the assignee will become?
If we go to regulation 28, it is clear that the Resolution Professional or Interim Resolution Professional is not having any discretion on whether the assignee will become related party financial creditor or non-related party financial creditor.
However, he has certain leeway when he is constituting the Committee of Creditors for the first time, as Section 21(2) First Proviso states that related party financial creditors shall be excluded from Committee of Creditors. As per Section 21(1), the Interim Resolution Professional (IRP) has to constitute Committee of Creditors. Hence, it is clear that certain decision-making power is given to the IRP under Section 21. He can rely on the declaration provided by the creditor or he can ask for further clarifications and then decide the status of the creditor whether related or unrelated.
However, while coming to the assignment of debt during CIRP, there are two situations in which a debt is assigned:
- Debt is assigned before Insolvency Commencement Date: In this case, the IRP has to see the status of the original creditor and also the assignee (whether any of them are related parties) making the claim. In case of Phoenix ARC Vs Spade Financial Services Pvt Ltd, the Hon’ble Supreme Court held that if the assignment was with a view to obtaining a seat in the Committee of Creditors, then the assignee would also get the status of related party.
- Debt is assigned after Insolvency Commencement Date but before making a claim before the IRP: In this case also, the IRP has to see the status of the original creditor and the assignee (whether any of them is a related party). In case any of the persons is a related party, the assignee also gets the same status thus barring him from having representation in the Committee of Creditors. At this step, the IRP has to see:
- Assignee submits the Form C in this situation.
- Whether the assignment is legal, as Section 5(7) refers to the legally assigned Hence, the IRP has to see whether the assignment agreement is properly executed. He has to see also whether there are underlying immovable properties offered as securities to the debt. In this case, the debt assignment along with underlying immovable properties as securities requires registration. Even though as per the Registration Act, a time limit of four months is given for registration of any document, it is to be kept in mind that unregistered agreement (of which registration is compulsory) can’t have any evidentiary value and liable to be rejected on this ground alone.
- Whether the consideration has passed from the assignee to the assignor. For this purpose, he can ask for the bank statement of the assignee and assignor for at least one month, covering 15 days prior and 15 days after the transaction date.
- Whether the loan agreement between the CD and the assignor-creditor refers to any prior notice to be given to the CD in case of assignment.
- Debt is assigned after Insolvency Commencement Date and by a creditor whose claim was admitted by the IRP.
- In this situation, the RP’s role is to check the legality of the assignment, passing of consideration, prior notice whether required.
- Further, he has to check whether the assignee is a related party.
- Other than this, he has no leeway under Regulation 28. He need not determine whether the assignee gets a representation in the Committee of Creditors.
- The assignor would have submitted Form C to the IRP and he would have decided whether the assignor was a related party or not. In case the IRP decided that the assignor was a related party, the assignee gets the same status. In case the assignor was a member of CoC, it is quite possible that the assignee is a related party and loses his representation in CoC.
- The assignee will not submit any Form C except an intimation to the RP regarding the assignment. The amount of debt will remain the same. In place of the name of the assignor, the assignee’s name will be noted.
- In other words, the assignee steps into the shoes of the assignor. However, the shoes cannot become bigger while the assignee steps into them. He takes the same disadvantages that the assignor has. The shoes can become smaller while the assignee steps into them, in case the assignee brings his own disadvantages.
- Recording the assignment is limited to replacing the name of the assignor with the assignee. This action of the RP cannot be questioned without questioning the RP’s original decision as per Section 21 on treatment of the debt whether related party debt or not. Once the same is not questioned, the dictum, nemo dat quad non habet
There are two cases decided by the Hon’ble NCLAT with regard to the assignment. These two cases are discussed below:
- Edelweiss Asset Reconstruction Company Vs Synergies Dooray: In this case, the assignment was before Insolvency Commencement Date. The debt changed hands twice. Once, the original lenders who were commercial banks, assigned the debt to a related party of the CD. The said related party in turn, assigned them to an unrelated party. Now the NCLAT considered that the original lender is a commercial bank and non-related party. So, the assignee also will get the same status as the original lender irrespective of the fact that the immediate assignor is a related party.
- Pankaj Yadav & other Vs SBI and Other: In this case also, the assignment was before Insolvency Commencement Date. However, the debt changed hands only once. The original lender was a related party to the CD and hence, the NCLAT held that the assignee cannot get better position than the assignor and is subject to the same disadvantages as the assignor.