Introduction

Under the Insolvency and Bankruptcy Code, 2016 (as amended) (“Code”), a creditor to whom a financial debt has been legally assigned or transferred to is entitled to file an application seeking initiation of corporate insolvency resolution process (“CIRP”) against a corporate debtor.

The Code specifically includes assignees of debt within the definition of a financial creditor[1] and an operational creditor[2].

While the debt in question may have been assigned to the creditor by executing an assignment agreement, corporate debtors have resorted to the defence that a creditor seeking initiation of CIRP based on an unregistered assignment agreement cannot be considered as a ‘financial creditor’ or an ‘operational creditor’ to whom the debt has been legally assigned or transferred to. This is on account of the assignment agreement not being registered as required under Section 17 of the Indian Registration Act, 1908 (“Registration Act”). The argument made is that such an unregistered assignment agreement is not a legal instrument effecting assignment of debt in accordance with Section 49 of the Registration Act. The question therefore is whether the Adjudicating Authority can delve into the issue of maintainability of an application seeking initiation of CIRP based on an unregistered assignment agreement?

Jurisdiction of the Adjudicating Authority vis-à-vis registration requirements

In a recent decision[3], the Hon’ble National Company Law Tribunal, Principal Bench, New Delhi was faced with the question as to whether an application under Section 7 of the Code was maintainable when the assignment agreement executed in favour of the financial creditor was unregistered. In this case, M/s Action Ispat & Power Pvt. Ltd. (“Borrower‟) had availed various credit facilities from a 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 Code was filed by CFM against the Corporate Debtor.

The Corporate Debtor opposed initiation of CIRP, inter alia on the grounds that:

    • The assignment agreement was not legally enforceable as it was not registered under Section 17 of the 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 Code.
    • The claim of CFM already stood admitted in the CIRP of the Borrower.

Pertinently, in the aforesaid decision, it was, inter alia argued by CFM that Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (as amended) (“SARFAESI Act”) particularly exempts stamp duty as per Section 8F of the Indian Stamp Act, 1899 (“Stamp Act”). Therefore, the assignment agreement was legally enforceable, and CFM was a ‘financial creditor’ under Section 5(7) of the Code.

While rejecting the contentions raised by the Corporate Debtor, the Adjudicating Authority initiated CIRP and held as follows:

    • Proceedings under the Code are summary in nature and the Adjudicating Authority cannot delve into the details regarding the requirement or exemption of registration of an assignment agreement.
    • Assignment of debt is recognised as a valid mode of transfer of rights under the Code and hence, the assignee of such debt would be a ‘financial creditor’ under Section 5(7) of the Code.
    • While observing that proceedings under the Code are summary in nature, the Adjudicating Authority also relied on the decision passed by the Appellate Tribunal in Lalan Kumar Singh v. Phoenix ARC (P) Ltd.[4], wherein it was observed that the declaration of an assignment agreement as illegal is essentially a civil proceeding.

While rejecting the contention of the Corporate Debtor qua an unregistered assignment agreement, the Adjudicating Authority had also concluded that Section 5(1) of the SARFAESI Act empowers a bank to assign loan to an asset reconstruction company (“ARC”) and Section 5(1A) of the SARFAESI Act read with Section 8F of the Stamp Act particularly elucidates that documents executed by any bank or financial institution under Section 5(1) of the SARFAESI Act in favour of the ARC acquiring financial assets for the purposes of asset reconstruction or securitization shall be exempted from payment of stamp duty. Therefore, it rejected the contention that the assignment agreement, being an unregistered instrument, is not legally enforceable.

A similar argument and issue came up for consideration before the Appellate Tribunal in the case of Naresh Kumar Aggarwal v. CFM Asset Reconstruction Pvt. Ltd.[5] In this decision, the Appellate Tribunal relied on Section 5(1) of the SARFAESI Act which begins with a non-obstante clause (i.e., “Notwithstanding anything contained in any agreement or any other law for the time being in force…”). It noted that Section 5 of the SARFAESI Act is an enabling provision to empower the ARC to acquire financial assets in the manner provided in Section 5(1) of the SARFAESI Act. It further noted that Section 5(2) of the SARFAESI Act contains a deeming clause to provide that the ARC on such acquisition is deemed to be the lender and all the rights of such bank or financial institution shall vest in such ARC. The said decision was also challenged[6] before the Supreme Court which ultimately upheld the decision of the Appellate Tribunal.

In view thereof, as of today, the position of law that emerges is that an application seeking initiation of CIRP by an assignee of the debt based on an unregistered assignment agreement would be maintainable.

Concerns with reliance on the SARFAESI Act in ignorance of the Registration Act

The decisions, as discussed above, have firstly been passed in cases where the assignee of the debt was an ARC and may not extend to benefit other assignees of debt otherwise, especially for operational creditors. Secondly, it is pertinent to note that while Section 5(1) of the SARFAESI Act begins with a non-obstante clause clearly exempting payment of stamp duty, Section 5(2) of the SARFAESI Act, which creates a deeming fiction, does not contain a similar non-obstante clause. Based on this, can it be said that an assignment agreement which is unregistered would also ipso facto mean to create a valid and legal mode of assignment of debt? More so when the definition of a financial creditor makes specific reference to a person to whom the debt has been legally assigned or transferred to. In this scenario, it would render the provisions of the Registration Act requiring registration of such instruments otiose, which would not be limited to filing applications seeking initiation of CIRP.

Conversely, this would not be the case where a claim is being filed by an assignee of debt in the CIRP of a corporate debtor based on an unregistered assignment agreement. This has also been held by the Appellate Tribunal in Palm Products Pvt. Ltd. v. T.V.L. Narsimha Rao & Anr.[7] wherein it was noted that a claim which has been filed based on an unregistered assignment deed would not fall within the ambit of ‘claim’ and consequently, would not fall within the ambit of ‘debt’ under the Code. A similar view has been taken by the Appellate Tribunal in the case of Citi Securities & Financial Services Pvt. Ltd. v. Sudip Bhatacharya, RP of Reliance & Naval Engineering Ltd.[8]

Takeaways and Way Forward

In summation, the decisions passed in Naresh Kumar Aggarwal (supra) and M.G. Finvest (supra) are certainly pro-creditor as they reinforce the rights of an assignee of debt to initiate CIRP under the Code and reduce intervention by the Adjudicating Authority, circumscribing its jurisdiction to assessing whether there is a debt and default as per the Code only.

Nevertheless, though the Supreme Court may have implicitly upheld the argument that an application seeking CIRP based on an unregistered assignment agreement executed in favour of an ARC would be maintainable owing to the deeming fiction and exemption of payment of stamp duty provided under the SARFAESI Act, given the dynamic and evolving nature of judicial precedents under the Code, this may be the position of law, only momentarily.

Besides, the aforesaid decisions should not be treated as altering or waiving mandatory legal requirements for enforceability of an instrument and outside the purview of the Code, stamping, registration, and filing requirements are to be complied with as per applicable laws.

Authors: Ankit Sinha, Aditi Sinha,

Footnotes

[1] See Section 5(7) of the Code.

[2] See Section 5(20) of the Code.

[3] 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]

[4] Company Appeal (AT) (Insolvency) No. 485 of 2018; decided on 20th December 2018

[5] Company Appeal (AT) (Insolvency) No. 470 of 2023; decided on 16th May 2023

[6] Civil Appeal No. 4202 of 2023; decided on 3rd October 2023

[7] Company Appeal (AT) (Insolvency) No. 809 of 2020; decided on 8th March 2021

[8] Company Appeal (AT) (Ins.) No. 240 of 2022; decided on 16th September 2022

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