Loan Assignment in Violation of RBI Directions Nullifies Section 7 IBC Plea, Rules NCLAT
- REEDLAW
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REEDLAW Legal News Network reports: In a significant pronouncement, the National Company Law Appellate Tribunal (NCLAT) ruled that a Section 7 application under the Insolvency and Bankruptcy Code (IBC) cannot be maintained if it is founded on a loan assignment executed in contravention of Reserve Bank of India (RBI) guidelines. The Tribunal clarified that such an assignment lacks legal validity, thereby nullifying the financial creditor’s claim and rendering the insolvency proceedings untenable.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Barun Mitra, while adjudicating a batch of two Company Appeals along with a connected Interlocutory Application, categorically held that a Section 7 IBC petition cannot be sustained when the underlying loan assignment violates RBI directions. Such contravention undermines the legitimacy of the claimed financial debt, thereby disqualifying the applicant from initiating insolvency proceedings under the Code.
The National Company Law Appellate Tribunal (NCLAT) heard two appeals challenging the order dated 28.07.2023 of the NCLT, Mumbai Bench, which had admitted a Section 7 application filed by the Respondent against the Corporate Debtor-Shaila Clubs and Resorts Pvt. Ltd. The Section 7 petition was based on an alleged assignment of the Corporate Debtor’s loan account from Vasantdada Shetkari Sahakari Bank (Cooperative Bank) to the Respondent, recorded in the Minutes of Order dated 20.10.2022 before the Bombay High Court, and the consequential order dated 21.10.2022.
The appellants contended that the Respondent had no authority to obtain an assignment of the debt, as it was merely a party to a Conducting Agreement for running business from the Club premises and was not an eligible transferee under the RBI (Transfer of Loan Exposure) Directions, 2021. It was argued that the One-Time Settlement (OTS) and assignment purportedly entered into between the Cooperative Bank and Savannah Lifestyle were unlawful. The Cooperative Bank had, in fact, withdrawn the OTS on 18.11.2022 and returned the amount of ₹87.92 lakhs received from Savannah Lifestyle. Both the Cooperative Bank and the suspended director of the Corporate Debtor filed review petitions before the Bombay High Court, which, on 11.03.2025, recalled its earlier order dated 21.10.2022 and set aside the Minutes of Order dated 20.10.2022, holding that the compromise and assignment were unlawful and contrary to RBI guidelines. The Supreme Court subsequently dismissed Savannah Lifestyle’s Special Leave Petition challenging the High Court’s order, making the recall final and binding.
The Respondent, however, argued that it had paid ₹2.5 crores on behalf of the Corporate Debtor and that such payment constituted a financial debt, entitling it to maintain the Section 7 application independently of the disputed assignment. It asserted that under Section 7 of the Insolvency and Bankruptcy Code, 2016, a person disbursing money on behalf of the corporate debtor qualifies as a financial creditor.
NCLAT examined the pleadings and noted that the foundation of the Section 7 application was the claimed assignment based on the High Court’s order and Minutes of Order, both of which now stood recalled. It also observed that the Cooperative Bank had informed the Respondent of the cancellation of OTS, returned the money, and contested the validity of the assignment in its intervention application before NCLT. The Appellate Tribunal relied on the findings of the Bombay High Court, which held that the transfer of Shaila Clubs’ loan account to the Respondent was expressly prohibited under RBI guidelines, frustrated the regulatory objective, and adversely affected the Corporate Debtor’s rights.
Holding that the very basis of Savannah Lifestyle’s claim as a financial creditor was extinguished, and that it could not maintain a Section 7 application on the strength of an unlawful transaction, NCLAT set aside the impugned order of admission dated 28.07.2023. The Tribunal concluded that the initiation of CIRP in such circumstances was unsustainable in law.
Mr. Arun Kathpalia Sr. Advocate, with Mr. Ruby Singh Ahuja, Mr. Devang Kumar, Mr. Jappanpreet Hora, Ms. Diksha Gupta and Ms. Varsha, Advocates, represented the Appellant in Company Appeal (AT) (Insolvency) No. 1201 of 2023 & I.A. No. 5907 of 2024.
Mr Abhijeet Sinha, Sr. Advocate, with Mr. Rahul Gaikwad, Mr. Shivaji Masal and Mr. Govind, Advocates, represented the Appellant in Company Appeal (AT) (Ins) No. 1213 of 2023.
Mr. Sandeep Bajaj, Mr. Vipul Gai, Ms. Saumya, and Mr. Mayank Biyani, Advocate, appeared for the Respondents.
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