Introduction

The case of Bijay Murmuria v. Karnataka Bank Limited was adjudicated by the National Company Law Tribunal (NCLT), Kolkata Bench, on April 24, 2023. This interlocutory application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) primarily dealt with the procedural propriety and legality of debt assignment by a financial creditor during the Corporate Insolvency Resolution Process (CIRP). The parties involved were Bijay Murmuria, acting as the Resolution Professional (RP), representing the Committee of Creditors (CoC), and Karnataka Bank Limited, along with Asset Reconstruction Company (India) Limited (ARCIL), as respondents.

Summary of the Judgment

The applicant, Bijay Murmuria, sought directions to manage the disbursal of funds post the approval of the Resolution Plan, specifically requesting the withholding of payments to Karnataka Bank Limited until the current application was resolved. The crux of the application revolved around the assignment of debt from Karnataka Bank to ARCIL during the implementation phase of the Resolution Plan. The respondents contended that such assignments are permissible under the SARFAESI Act, 2002, and do not require prior approval from the NCLT. After a thorough examination of the arguments and relevant statutes, the NCLT dismissed the applicant's case, upholding the respondents' position.

Analysis

Precedents Cited

The judgment extensively referenced Section 5 of the SARFAESI Act, 2002, which governs the acquisition of financial assets by asset reconstruction companies (ARCs). Additionally, the tribunal drew upon the precedent set in Siti Networks Ltd. v. Assets Care and Reconstruction Enterprises Ltd. & Anr., which clarified the legality of debt assignments during ongoing proceedings under the IBC.

In the cited case, the National Company Law Appellate Tribunal (NCLAT) affirmed that ARCs can continue legal proceedings post-assignment without requiring explicit leave from the NCLT, provided the assignment aligns with the provisions of the SARFAESI Act.

Legal Reasoning

The primary legal contention was whether Karnataka Bank Limited, as a financial creditor, could assign its debt to ARCIL without needing prior approval from the NCLT during the CIRP. The RP argued that such actions could disrupt the Resolution Plan's implementation and create confusion in disbursements.

The NCLT, however, interpreted Section 5 of the SARFAESI Act, which explicitly permits the acquisition of financial assets by ARCs. The tribunal emphasized that once the debt is legally assigned, the assignee (ARCIL) inherits all rights and obligations related to that debt. The NCLT also highlighted that there is no prohibition within the IBC or associated regulations against such assignments, as long as they comply with statutory provisions.

Moreover, referencing the Siti Networks Ltd. case, the tribunal reinforced that the continuation of legal proceedings by the assignee is supported by statutory law, thereby negating the necessity for NCLT intervention in granting leave for such assignments.

Impact

This judgment sets a significant precedent affirming the autonomy of financial creditors to assign their debts to ARCs without seeking prior approval from the NCLT during ongoing CIRP. It clarifies that such assignments, when in accordance with the SARFAESI Act, do not disrupt the Resolution Plan's execution nor require additional judicial oversight.

Future CIRP proceedings can thus proceed with greater certainty regarding debt assignments, streamlining the process for financial creditors and ARCs. It also alleviates the concerns of RPs and CoCs about potential disruptions due to debt reassignments, fostering a more predictable insolvency resolution environment.

Complex Concepts Simplified

Corporate Insolvency Resolution Process (CIRP)

CIRP is a structured process under the IBC aimed at resolving the insolvency of a corporate debtor. It involves the formulation of a Resolution Plan by potential buyers or investors to revive the company.

Resolution Professional (RP)

An RP is appointed to manage the CIRP, oversee the process, and implement the Resolution Plan. The RP acts as an intermediary between the corporate debtor and the creditors.

Asset Reconstruction Company (ARC)

An ARC is a specialized financial institution that acquires non-performing assets (NPAs) from banks or financial institutions. ARCs play a pivotal role in the financial ecosystem by rehabilitating distressed assets.

SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act provides the framework for ARCs to acquire financial assets from banks and financial institutions, enabling the enforcement of security interests.

Section 5 of the SARFAESI Act, 2002

This section outlines the procedures and conditions under which ARCs can acquire financial assets, including the transfer of rights and obligations related to the acquired assets.

Conclusion

The Bijay Murmuria v. Karnataka Bank Limited judgment serves as a pivotal reference point in the realm of insolvency law, particularly concerning the assignment of debts by financial creditors during CIRP. By upholding the legality of such assignments under the SARFAESI Act without necessitating prior NCLT approval, the NCLT has provided clarity and assurance to financial institutions and ARCs. This decision not only facilitates smoother operations within the IBC framework but also reinforces the statutory provisions governing asset reconstruction, thereby contributing to a more efficient and transparent insolvency resolution mechanism in India.