Once Assignment Of Debt Is Declared Illegal, Assignee Loses Its Rights To File Application U/S 7 Of IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan and Mr. Barun Mitra (Technical Member) has held that when the assignment of debt from the bank to the applicant is found to be illegal and unauthorized, the very basis of filing an application under Section 7 of the IBC is knocked out, and such an applicant cannot be allowed to file the application on the basis of financial creditor's status. These two appeals have been filed against an order passed by the National Company Law Tribunal (NCLT) New Delhi by which it admitted an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Appellant submitted that the One Time Settlement (OTS) entered by the Cooperative Bank with Respondent No.1, which is recorded in the Minutes dated 20.10.2022 before the Bombay High Court in Writ Petition No.11610 of 2022 was on the strength of illegal assignment by the Cooperative Bank in favour of Respondent No.1. It was further argued that the OTS letter, which was given by the Cooperative Bank was meant for the CD and Respondent No.1 has no authority or jurisdiction to accept the OTS letter, it was only conducting business from the Club premises. It was also contended that assignment in favour of Respondent No.1 having been cancelled / set aside, there is no right left in Respondent No.1 to maintain Section 7 application. Per contra, the Respondent submitted that Respondent No.1 has made payment to the Cooperative Bank and the said payment was made on behalf of the CD, the said payment is the 'financial debt', entitling Respondent No.1 to maintain Section 7 application. It was further argued that as per Section 7, sub-section (1), Explanation, the Appellant, who has disbursed an amount of Rs.2.5 crores on behalf of the CD, being a Financial Creditor, can maintain Section 7 application for the debt of Cooperative Bank. The Tribunal observed that the claim of the Respondent that the debt was assigned by the Cooperative Bank to the Respondent was held unlawful therefore the Respondent cannot claim the status of the financial creditor of the Corporate Debtor. It further observed that the Bombay High Court after considering all aspects of the matter has recorded its finding in paragraphs 51 and 52 that transfer of loan account of Shaila Clubs in favour of Respondent No.1 was clearly unlawful and the compromise entered between the Cooperative Bank and Respondent No.1, could not have been accepted by the High Court for disposal of Writ Petition. The Bombay High Court held that the compromise itself being unlawful the seal of the High Court on such compromise must be removed. It held that “in view of the above adjudication by the Bombay High Court and recalling of its order dated 21.10.2022 passed by it, on the basis of the Minutes dated 20.10.2022, under which Minutes, Respondent No.1 has claimed the assignment of debt of the CD by the Cooperative Bank in its favour having been recalled, the very basis of Section 7 application filed by Respondent No.1 has been knocked out. There is no right left in Respondent No.1 to claim itself as Financial Creditor of the CD.” It further observed that to file an insolvency application for default of another financial creditor, the applicant must be a financial creditor itself. The Respondent No. 1 in the present case is not the financial creditor of the corporate debtor as it made no disbursement to the corporate debtor in any commercial transaction. It further observed that the amount which was deposited by the Respondent in a Writ Petition following the Bombay High Court orders was done to protect the possession of the club premises under the conducting agreement with the corporate debtor. This was done to show bona fide possession of the premises against the recovery action of the cooperative bank and therefore cannot be considered as a disbursement to the corporate debtor. It concluded that since the transactions leading to OTS between the Respondent and the Bank was declared illegal and unauthorised, the Respondent obtained no rights to file an application against the Corporate Debtor. The Respondent attempted to take possession of the Corporate Debtor based on this illegal assignment which was withdrawn by the Bank. The Bank intends to file an insolvency application against the corporate debtor under the Maharashtra Cooperative Societies Act. Accordingly, the present appeals were allowed. Case Title: Rajesh Vilasrao Patil Versus Savannah Lifestyle Pvt. Ltd. & Anr. Case Number: Company Appeal (AT) (Insolvency) No. 1201 of 2023 & I.A. No. 5907 of 2024 Judgment Date: 21/08/2025 Click Here To Read/Download Order

Once Assignment Of Debt Is Declared Illegal, Assignee Loses Its Rights To File Application U/S 7 Of IBC: NCLAT

Mohd Malik Chauhan

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