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JC - Legal Updates - Enforceability of an Unregistered Agreement assigning Debt beyond the jurisdiction of the Adjudicating Authority? - NCLT, Principal Bench answers

Legal Updates

30 Jan 2024

Enforceability of an Unregistered Agreement assigning Debt beyond the jurisdiction of the Adjudicating Authority? - NCLT, Principal Bench answers

Brief Overview:
 
Proceedings under the Insolvency and Bankruptcy Code, 2016 (as amended) (“IBC”) are summary in nature and the Adjudicating Authority (“AA”) cannot delve into the details regarding the requirement or exemption of registration of an assignment agreement.
 
Held by the Hon’ble National Company Law Tribunal, Principal Bench, New Delhi in the matter of CFM Asset Reconstruction Private Limited v. M.G. Finvest Private Limited [C.P. (I.B.) No. 115 (PB) of 2022; decided on 24th January 2024]
 
Technical Details:
 
M/s Action Ispat & Power Pvt. Ltd. (“Borrower‟) had availed various credit facilities from the consortium of banks including State Bank of India (“SBI”), which was guaranteed by MG Finvest Pvt. Ltd. (“Guarantor/ Corporate Debtor”). The said credit facilities were assigned by SBI in favour of CFM Asset Reconstruction Private Limited (“CFM”) under an assignment agreement. Due to default in repayment of the credit facilities, an application under Section 7 of the IBC was filed by CFM against the Corporate Debtor (“Application”).
 
The Corporate Debtor opposed the admission of the Application, inter alia on the grounds that:
 
(a)  The assignment agreement was not legally enforceable as it was not registered under Section 17 of the Registration Act, 1908 (“Registration Act”) and had become futile as per Section 49 of the Registration Act. Hence, CFM was not a ‘financial creditor’ under Section 5(7) of the IBC.
 
(b)  The claim of CFM already stood admitted in the corporate insolvency resolution process (“CIRP”) of the Borrower.
 
Findings given by the AA: 
 
1)  Assignment of debt is recognised as a valid mode of transfer of rights under the IBC and hence, the assignee of such debt would be a ‘financial creditor’ under Section 5(7) of the IBC.
 
2)  While observing that proceedings under the IBC are summary in nature, the AA also relied on the decision passed by the Appellate Tribunal in Lalan Kumar Singh v. Phoenix ARC (P) Ltd., wherein it was observed that the declaration of an assignment agreement as illegal is essentially a civil proceeding.
 
3)  On duplicity of claims, the AA relied on the decision of the Hon’ble Supreme Court in Laxmi Pat Surana v. Union Bank of India & Anr. which held that the liability of the ‘Corporate Guarantor’ is `coextensive' with that of the ‘Principal Borrower’ and that acknowledgment given by the ‘Principal Borrower’ also binds the ‘Corporate Guarantor’ (unless otherwise provided under the contract).
 
JC Key Takeaways:
 
The decision is pro-creditor as it reinforces the rights of an assignee of debt to initiate CIRP under the IBC and further underpins the right of a creditor to proceed against a guarantor, even if the claim has been admitted in the CIRP of the borrowing entity. Overall, it reduces intervention by the AA and circumscribes its jurisdiction to assessing whether there is a debt and default as per the IBC only. However, outside the purview of the IBC, stamping, registration, and filing requirements are to be complied with as per applicable laws.
 
For further details, please see:
 
 
For any queries/clarifications, please feel free to ping us and we will be happy to chat:

   Ms. Aditi Sinha (aditi.sinha@jclex.com)
●   Mr. Ankit Sinha (ankit.sinha@jclex.com)