Assignment of Debt Under Section 7 of the Insolvency and Bankruptcy Code (IBC): An Analysis of Manavta Tradelink Pvt. Ltd. vs. Manikaran Vincom Pvt. Ltd.

Introduction

The insolvency regime in India has undergone a transformative journey since the enactment of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC” or “the Code”). Among the various mechanisms provided under the Code, Section 7 empowers financial creditors to initiate Corporate Insolvency Resolution Process (CIRP) against defaulting corporate debtors. A critical question that has emerged in the practical application of this provision concerns the requirement of registration when a financial debt is assigned or transferred from one creditor to another. The National Company Law Tribunal, Kolkata Bench, addressed this significant issue in the case of Manavta Tradelink Pvt. Ltd. vs. Manikaran Vincom Pvt. Ltd.[1], delivered on October 30, 2023.

This judgment holds particular importance for assignees and transferees of financial debts who seek to invoke the insolvency resolution mechanism. The Tribunal clarified that registration of debt assignment under Section 7 IBC is not a mandatory prerequisite for initiating CIRP proceedings. This article examines the legal framework governing debt assignment, the specific facts and holdings of the Manavta Tradelink case, and the broader implications for insolvency practice in India.

The Legal Framework: Section 7 of the IBC and Assignment of Debt

Understanding Financial Creditors Under the IBC

The IBC defines a financial creditor under Section 5(7) as any person to whom a financial debt is owed, including those to whom such debt has been legally assigned or transferred. This definition recognizes assignees and transferees as legitimate financial creditors with the right to initiate insolvency proceedings under Section 7 of the IBC, including cases arising from debt assignments. The legislative intent behind this provision was to ensure that the transfer of debt does not dilute the creditor’s rights under the Code.

Financial debt, as defined under Section 5(8) of the IBC, refers to debt disbursed against consideration for the time value of money. This includes loans, borrowings, bonds, debentures, and other financial instruments where the essence of the transaction is money lent or advanced. The distinction between financial creditors and operational creditors is fundamental to the Code’s architecture, as financial creditors exercise significant control over the insolvency resolution process through the Committee of Creditors.

Section 7: Initiation of CIRP by Financial Creditors

Section 7 of the IBC empowers financial creditors to file applications before the National Company Law Tribunal (NCLT) for initiating CIRP when a default has occurred. The procedural requirements for such applications are detailed in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Rule 4 of these Rules specifically addresses applications by financial creditors, including those who have acquired debt through assignment or transfer.

Rule 4(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, states: “Where the applicant under sub-rule (1) is an assignee or transferee of a financial contract, the application shall be accompanied with a copy of the assignment or transfer agreement and other relevant documentation to demonstrate the assignment or transfer.”[2] This rule requires the submission of assignment documentation but does not mandate registration of such assignment as a precondition for filing the application. In other words, an assignee can initiate proceedings through debt assignment under Section 7 IBC as long as the necessary documentation is submitted.

The landmark Supreme Court judgment in Innoventive Industries Limited v. ICICI Bank Limited[3] established that once the adjudicating authority is satisfied that a default has occurred and the application is complete, it must admit the application unless there are valid grounds for rejection. The Court emphasized that the scope of inquiry under Section 7 is limited, and the adjudicating authority should not embark upon a detailed examination of disputes that can be resolved during the CIRP.

Manavta Tradelink Pvt. Ltd. vs. Manikaran Vincom Pvt. Ltd.: Case Analysis

Factual Matrix

application was registered as Company Petition (IB) No. 80/KB/2023. The facts revealed that an unsecured loan of Rs. 1.40 crores was originally extended by SSA Hire Purchase Pvt. Ltd. to the corporate debtor and was later assigned to Manavta Tradelink Pvt. Ltd., enabling the assignee to initiate proceedings under Section 7 of the IBC.

The corporate debtor had defaulted on the payment of the total outstanding amount of Rs. 2.72 crores as of December 25, 2022, with interest accruing at 12% per annum until the date of repayment. The date of default was claimed to be March 31, 2021. The loan agreement was duly accepted and agreed upon by the corporate debtor, and the loan was disbursed with the issuance of receipt and promissory notes by the corporate debtor.

Crucially, the corporate debtor was intimated by the assignor (SSA Hire Purchase Pvt. Ltd.) about the assignment of debt in favor of Manavta Tradelink Pvt. Ltd. through a letter dated May 31, 2022, informing the corporate debtor that the loan, along with interest, should be paid to the assignee. The corporate debtor was in correspondence with the applicant seeking time to repay the loan with interest, thereby acknowledging the debt and the assignment.

Issues Raised by the Corporate Debtor

The primary contention raised by the corporate debtor before the NCLT was that the assignment of debt was not registered, and therefore, the financial creditor lacked the legal standing to initiate CIRP proceedings. The corporate debtor argued that in the absence of registration, the assignment was not valid for the purposes of Section 7 of the IBC. This objection formed the crux of the dispute, as it questioned the procedural validity of the assignment and, by extension, the maintainability of the CIRP application.

NCLT Kolkata’s Findings and Reasoning

The NCLT Kolkata Bench, comprising Smt. Bidisha Banerjee (Judicial Member) and Shri Arvind Devanathan (Technical Member), examined the issue comprehensively. The Tribunal made two critical observations that formed the foundation of its decision.

First, the Tribunal held that registration of assignment is not mandatory under the IBC or the Rules framed thereunder for the purpose of initiating CIRP. The legislative framework requires only that the assignment agreement and relevant documentation be submitted along with the application under Rule 4(2). There is no statutory provision that mandates registration as a precondition for the assignee to exercise rights under Section 7 of the Code.

Second, the Tribunal noted that the corporate debtor had never disputed the assignment until the CIRP application was filed. The corporate debtor had been in correspondence with the financial creditor (assignee) seeking time to repay the loan with interest. This conduct demonstrated acknowledgment and acceptance of the assignment. The Tribunal held that it would be inequitable to allow the corporate debtor to question the validity of the assignment at the stage of admission when it had previously dealt with the assignee as the legitimate creditor. This principle is rooted in the doctrine of estoppel and prevents parties from taking inconsistent positions to defeat legitimate claims.

The Tribunal also emphasized that the legality or validity of an assignment cannot be questioned by the corporate debtor when such assignment was never disputed until the initiation of insolvency proceedings. The corporate debtor’s acceptance of the assignment through its conduct barred it from raising technical objections at a later stage.

The Tribunal’s Decision

Based on these findings, the NCLT allowed the CIRP application filed under Section 7 of the IBC against Manikaran Vincom Pvt. Ltd. The Tribunal was satisfied that there was a default of financial debt, the debt exceeded the prescribed threshold limit of Rs. 1 crore (as mandated under Section 4 of the IBC read with the notification dated March 24, 2020), and the claim was not barred by limitation. The initiation of CIRP was therefore justified, and the corporate debtor was admitted into the insolvency resolution process.

Regulatory Framework Governing Assignment of Debts

Transfer of Property Act, 1882

The general law governing assignment of debts in India is found in the Transfer of Property Act, 1882. Section 130 of this Act deals with the transfer of actionable claims, which includes debts. However, the Act does not mandate compulsory registration of debt assignments in all circumstances. Registration is required only when the transfer is effected by an instrument (other than a mere endorsement), and even then, it depends on whether the debt is secured or unsecured and the value involved.

Under Section 17 of the Registration Act, 1908, registration is compulsory for certain documents, including those transferring immovable property. However, the assignment of unsecured debts, such as the one in the Manavta Tradelink case, generally does not fall within the category of documents requiring mandatory registration. The legal effect of non-registration, even where registration is desirable, is that the document cannot be admitted as evidence of the transaction, but this does not invalidate the underlying assignment itself.

The SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), provides another relevant framework, particularly for the transfer of financial assets to Asset Reconstruction Companies. Section 5(4) of the SARFAESI Act explicitly provides that any right or obligation of the transferor in respect of the financial asset shall be transferred to the transferee, and all proceedings initiated by the original creditor can be continued by the assignee.

This principle was affirmed by the National Company Law Appellate Tribunal (NCLAT) in Siti Networks Ltd. vs. Assets Care & Reconstruction Enterprise Ltd.[4], where the NCLAT held that an assignee is a financial creditor within the meaning of Section 5(7) of the IBC and has every right to continue proceedings under Section 7 initiated by the assignor. The NCLAT relied on Section 5(4) of the SARFAESI Act and Order XXII Rule 10 of the Civil Procedure Code, 1908, which recognizes the right of an assignee to continue proceedings following the devolution of rights.

IBC and Rules: Procedural Requirements

As discussed earlier, Rule 4(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, requires assignees to submit a copy of the assignment or transfer agreement along with other relevant documentation. This is a procedural requirement to establish the legitimacy of the assignment and the standing of the applicant. However, the absence of registration does not render the application non-maintainable or defeat the rights of the assignee.

The distinction between procedural requirements and substantive prerequisites is crucial. While the submission of assignment documents is procedural and necessary for the completeness of the application, registration is not a substantive requirement under the IBC framework. The Tribunal’s discretion is limited to ascertaining whether a financial debt exists, whether a default has occurred, and whether the application is complete in accordance with the prescribed format and accompanied by requisite documents.

Judicial Precedents on Financial Creditors and Assignment

Innoventive Industries Ltd. v. ICICI Bank Limited

The Supreme Court’s decision in Innoventive Industries Limited v. ICICI Bank Limited[3] is the foundational judgment on Section 7 of the IBC. The Court held that the adjudicating authority’s role at the admission stage is limited to examining whether a debt and default exist. The Court stated: “The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority.”

This judgment established that the NCLT should not undertake an elaborate inquiry into the merits of the debt or the validity of ancillary issues at the admission stage. The focus must remain on the existence of debt and default. Applying this principle to cases involving assigned debts, once the assignment documentation is submitted and the corporate debtor does not dispute the assignment, the NCLT should admit the application if other requirements are satisfied.

Vidarbha Industries Power Limited v. Axis Bank Limited

The judgment in Vidarbha Industries Power Limited v. Axis Bank Limited[5] introduced some controversy by suggesting that the NCLT has discretion to reject Section 7 applications even when debt and default are established. However, this position was subsequently clarified by the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank[6], where the Court held that Vidarbha Industries was decided on its specific facts and does not contradict the settled law laid down in Innoventive Industries.

The Supreme Court in Suresh Kumar Reddy reaffirmed that once the NCLT is satisfied about the existence of debt and default, there is hardly any discretion left to refuse admission of the application under Section 7. This principle applies equally to applications filed by assignees through debt assignment under Section 7 IBC, provided the procedural requirements under Rule 4(2) are fulfilled.

Siti Networks Ltd. vs. Assets Care & Reconstruction Enterprise Ltd.

As mentioned earlier, the NCLAT in this case held that an assignee can continue proceedings initiated by the assignor. The NCLAT emphasized that Section 5(7) of the IBC specifically includes assignees within the definition of financial creditors. The Tribunal stated: “neither the Code nor any Regulations in any manner prohibit the continuation of proceedings by an Assignee.”[4] This judgment reinforced the rights of assignees to not only initiate fresh proceedings but also to step into the shoes of the assignor in ongoing proceedings.

Implications of the Manavta Tradelink Judgment

Clarification on Registration Requirements

The Manavta Tradelink judgment provides much-needed clarity on the issue of registration of assignment for purposes of IBC proceedings. By holding that registration is not mandatory, the NCLT has removed a potential procedural hurdle that could have been exploited by corporate debtors to delay or defeat legitimate insolvency applications. This interpretation aligns with the objective of the IBC, which is to provide a time-bound resolution mechanism without allowing technical objections to derail the process.

Protection Against Estoppel

The Tribunal’s observation that the corporate debtor cannot question the validity of assignment when it had previously dealt with the assignee is an important safeguard against opportunistic litigation. Corporate debtors who acknowledge assignments through their conduct, such as corresponding with the assignee for extensions or restructuring, should not be permitted to raise technical objections at a later stage. This principle of estoppel ensures that parties cannot take inconsistent positions to their advantage.

Encouragement to Debt Trading and Securitization

The decision is also significant for the debt trading and securitization market in India. Financial institutions frequently assign or transfer non-performing assets to Asset Reconstruction Companies or other entities. If registration were to be made mandatory, it would add time, cost, and procedural complexity to such transactions. The Manavta Tradelink judgment removes this barrier and facilitates the smoother functioning of the distressed debt market.

Harmonization with SARFAESI Framework

The judgment also harmonizes the IBC framework with the SARFAESI Act, which explicitly permits assignees to continue proceedings initiated by assignors. This consistency across different insolvency and recovery legislations is essential for a coherent legal framework and ensures that creditors have effective remedies regardless of the specific statute they invoke.

Conclusion

The judgment of the NCLT Kolkata Bench in Manavta Tradelink Pvt. Ltd. vs. Manikaran Vincom Pvt. Ltd. settles an important question regarding procedural requirements for assignees of financial debts seeking to initiate CIRP under Section 7 of the IBC. By holding that registration of debt assignment under Section 7 IBC is not mandatory and that corporate debtors cannot question assignments they had previously acknowledged, the Tribunal has advanced the objectives of the IBC, including expeditious resolution, maximization of asset value, and protection of creditor rights.

This decision is consistent with the legislative intent behind including assignees within the definition of financial creditors and aligns with the broader principle established in Innoventive Industries that the admission stage inquiry under Section 7 should be limited and focused on the existence of debt and default. The judgment also complements the SARFAESI framework and removes potential obstacles to the functioning of the distressed debt market in India. As the IBC continues to evolve through judicial interpretation, decisions like Manavta Tradelink contribute to building a robust and creditor-friendly insolvency regime that balances the interests of all stakeholders while maintaining the sanctity of time-bound resolution processes.

References

[1] Manavta Tradelink Pvt. Ltd. vs. Manikaran Vincom Pvt. Ltd., Company Petition (IB) No. 80/KB/2023, NCLT Kolkata, decided on October 30, 2023. Available at: https://www.livelaw.in/ibc-cases/nclt-kolkata-registration-of-assignment-of-debt-is-not-mandatory-for-cirp-us-7-of-ibc-241218 

[2] Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, Rule 4. Available at: https://ibbi.gov.in/webadmin/pdf/legalframwork/2019/Mar/Application_to_Adjudicating_Authority_Rules-upto%2019.03.2019_2019-03-28%2013:12:13.pdf 

[3] Innoventive Industries Limited v. ICICI Bank Limited, (2018) 1 SCC 407. Available at: https://indiankanoon.org/doc/181931435/ 

[4] Siti Networks Ltd. vs. Assets Care & Reconstruction Enterprise Ltd., Company Appeal (AT) (Ins.) No. 1449 of 2022, NCLAT, decided on December 13, 2022. Available at: https://www.indialaw.in/blog/insolvency-bankruptcy/ibc-an-assignee-is-a-financial-creditor-under-ibc-and-can-continue-continuing-proceedings-initiated-under-section-7-by-the-assignor-nclat/ 

[5] Vidarbha Industries Power Limited v. Axis Bank Limited, (2022) 8 SCC 32. Available at: https://www.azbpartners.com/bank/criteria-for-admission-of-section-7-petitions-under-the-ibc-whats-the-legal-position/ 

[6] M. Suresh Kumar Reddy v. Canara Bank, Civil Appeal No. 7121 of 2022, Supreme Court of India, decided on May 11, 2023. Available at: https://www.rassociates.in/adjudicating-authoritys-discretion-ibc-section-7-clarified/ 

[7] The Insolvency and Bankruptcy Code, 2016. Available at: https://ibbi.gov.in/ 

[8] Section 7 of the Insolvency and Bankruptcy Code, 2016 – Initiation of corporate insolvency resolution process by financial creditor. Available at: https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/ 

[9] Going to NCLT by Financial Creditor under Section 7 of the IBC, Lexology. Available at: https://www.lexology.com/library/detail.aspx?g=60a38700-55cd-4777-a8ef-d462a1dee087 

Published and Authorized by Prapti Bhatt