Debt Assignment During Pending CIRP Application
Table of Contents
The Insolvency and Bankruptcy Code, 2016 (IBC) explains a time-bound mechanism to resolve the insolvency of a corporate debtor by reviving, rehabilitating, or restructuring in a time-bound manner known as the corporate insolvency resolution process (CIRP). In financial markets, debt assignment refers to the transfer of a debt obligation from one party, the assignor, to another, the assignee, who then becomes the new creditor. If a debt is assigned while an Pending CIRP Application is pending before the National Company Law Tribunal (NCLT), the assignee is entitled to continue the proceedings and enjoys the locus to file a restoration application, as there is no prohibition in the IBC against such continuation.
Understanding Debt Assignment
Debt assignment refers to the legal transfer of a debt, along with all associated rights and obligations, from an original creditor, assignor to a third party, assignee, who then becomes the new owner of the debt and can collect the outstanding amount. Under the Transfer of Property Act, 1882 (TOPA) a debt is considered a “chose in action”, and its assignment is valid if it is made by writing, under the hand of the assignor, and notice is given to the debtor, thereby transferring the legal right to the debt. The IBC legally recognizes an assignee as a creditor, with sections 5(7) and 5(20) defining a “creditor” to include an assignee, thereby granting them standing in insolvency proceedings. Once a valid assignment is made, the assignee steps in the shoes of the original creditor, inheriting all rights to enforce the debt, including the right to recover principal, interest, and pursue legal remedies as if they were the original creditor.
Debt Assignment During Pending CIRP Application
- Effect on Pending Application: There is no prohibition in the IBC or its regulations from continuing a section 7 application for CIRP after the debt has been assigned during its pendency. The assignee, having legally acquired the debt, becomes a financial creditor under section 5(7) of the IBC and acquires the right to pursue the pending application.
- Requirement of Substitution: The assignment of a debt during the Pending CIRP Application does not automatically substitute the assignee as the applicant. The assignee must file a fresh application under section 7 of the IBC to initiate proceedings, as the original application cannot be continued by the assignee without such filing. The Adjudicating Authority’s jurisprudence holds that while there is no prohibition in the IBC from continuing proceedings by an assignee, the assignee must formally apply to be substituted..
- Judicial View: The National Company Law Appellate Tribunal (NCLAT) has ruled that there is no prohibition in the IBC or its regulations against an assignee continuing proceedings after the debt has been legally assigned during the Pending CIRP Application The assignee, having stepped into the shoes of the original financial creditors, is entitled to all rights under the IBC, including the locus to maintain or pursue the application, provided the assignment is valid and the assignee is recognised as a financial creditor under section 5(7) of the IBC.
Read more : What is Form G in IBC – Invitation for Expression of Interest
Challenges in Debt Assignment During CIRP Initiation
- Debt assignment made after the initiation of CIRP may not be validly substituted into the proceedings, as the NCLT’s jurisdiction is limited to the status quo at the time of the application, and the assignee must typically file a fresh application under section 7 of IBC.
- An application seeking initiation of CIRP on an unregistered assignment agreement is maintainable, as the NCLT is not required to examine the registration status of thai agreement.
- There can be procedural delays in substituting an assignee as the financial creditor in an ongoing CIRP, as the NCLT may not permit continuation of the original application by the assignee.
Case Laws on Debt Assignment and CIRP
The Supreme Court in Kotak Mahindra Bank v. A. Balakrishnan affirmed that a holder of Recovery Certification (RC) is a financial creditor under the IBC and can initiate CIRP within 3 years of the RC’s issuance, recognising the assignment of debt from Ind Bank Housing Limited to Kotak Mahindra Bank. The court emphasized that the legal essence of a debt, including one arising from an RC, is not lost upon crystallization, and the substance of the underlying financial transaction determines the creditor’s status, not the form of the instrument. NCLAT rulings, such as Siti Networks Ltd. v. Assets Care and Reconstruction Enterprises Ltd., have consistently held that there is no prohibition in the IBC against an assignee continuing a pending CIRP application, allowing the assignee to pursue the proceedings initiated by the original creditor. This judicial approach reflects a clear emphasis on substance over form, ensuring that the intent of the IBC to facilitate recovery and preserve corporate entities is not defeated by technicalities in the assignment process.
Implications for Stakeholders
- For Financial Creditors: Financial creditors benefit from the flexibility to assign their debt during a pending CIRP application, allowing banks and financial institutions to strategically exit positions or restructure portfolios without being hindered by the insolvency process. This transfer does not grant the assignee the right to step into the shoes of the original creditor unless the assignment is complete and valid, ensuring the original creditor’s status and rights are preserved until the assignment is finalized.
- For Operational Creditors: Debt assignment is less common but legally permissible under the IBC, with the assignee required to establish the existence of a debt and a default to initiate proceedings. The Adjudicating Authority’s role is limited to verifying these core elements, and the assignment’s validity, even if unregistered, is generally upheld if it meets the criteria under the applicable laws.
- For Corporate Debtors: The assignment of a debt during the pending CIRP application does not automatically bar the financial creditor from initiating the process, the Adjudicating Authority must still assess the existence of a financial debt and the debtor’s default. Corporate debtors cannot object to the CIRP application solely on the grounds of debt assignment, as the assignment’s validity is not a barrier to the initiation of CIRP if the core conditions of debt and default are met.
Practical Considerations
The practical considerations for stakeholders due to the judicial precedents are the:
- Importance of timely intimation to NCLT about assignment.
- Ensuring proper documentation of assignment.
- Assignee’s responsibility to comply with procedural rules.
Conclusion
Debt assignment does not affect maintainability of CIRP application, as the assignee steps into the shoes of the original creditor and the proceedings can continue under the original application. The assignee enjoys the same rights and locus standi as the assignor creditor under the IBC, including the right to file restoration application. Judicial precedents support the continuity of section 7 proceedings even after the assignment, with the Adjudicating Authority not being required to delve into the registration or stamp duty details of the assignment agreement. The NCLT has held that proceedings under the IBC are summary in nature, and the validity of the assignment agreement cannot be challenged in a section 7 petition. This judicial trend reflects a pro-creditor approach, reinforcing that the assignment is a ‘financial creditor’ under section 5(7) of the IBC.
FAQs
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Can a creditor assign debt after filing a CIRP application?
Yes, a creditor can assign debt after filing a CIRP application, provided the terms of the transfer are communicated to the interim resolution professional.
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Does the assignee need to file a fresh CIRP application?
Yes, the assignee can file a fresh pending CIRP application under section 7 of the IBC, as permitted by the law, even if the original application was filed by the assignor.
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What happens if an assignment is done after NCLT admission of CIRP?
An assignment of debt after the NCLT admission of a CIRP does not change the assignee;s status from related to unrelated, and the assignee steps into the shoes of the assignor, inheriting the same rights and limitations, including the right to participate in insolvency process.
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Can the corporate debtor oppose CIRP on grounds of assignment?
The corporate debtor oppose CIRP on grounds of assignment is unregistered, but courts have generally held that such an unregistered assignment does not render the assignee ineligible to initiate CIRP, particularly if the assignment falls under the exemptions provided by the SARFAESI Act.
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Are both financial and operational creditors allowed to assign debt under IBC?
Yes, both financial and operational creditors are allowed to assign debt under IBC, as the definitions of both explicitly include persons to whom such debt has been legally assigned or transferred.
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