Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) has held that once an assignment of debt from a bank to an applicant is declared illegal and unauthorized, the very foundation for filing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) collapses. Consequently, such an applicant cannot claim the status of a financial creditor to maintain the proceedings.

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The appeals before the NCLAT were filed by Rajesh Vilasrao Patil, Suspended Director of Shaila Clubs and Resorts Pvt. Ltd. (Corporate Debtor), and by Vasantdada Shetkari Sahakari Bank Ltd. (the Cooperative Bank), challenging the order dated 28.07.2023 of the National Company Law Tribunal (NCLT), Mumbai Bench, which had admitted a Section 7 application filed by Savannah Lifestyle Pvt. Ltd. (Respondent No.1).

Background of the Dispute
The Corporate Debtor had availed financial facilities from a consortium of banks including the Cooperative Bank in 2005, securing them through a mortgage. Following defaults, a Recovery Certificate of over Rs. 5.11 crores was issued in 2012, and possession proceedings of the Club premises were initiated by the Cooperative Bank.

Meanwhile, Savannah Lifestyle Pvt. Ltd. entered into a Conducting Agreement in 2007 with the Corporate Debtor to operate business from the Club premises. During pendency of recovery proceedings, Savannah sought to resist the Bank’s possession efforts by filing writ petitions before the Bombay High Court, depositing sums of Rs. 50 lakhs and Rs. 2 crores to show its bona fides.

In June 2022, the Cooperative Bank issued a One Time Settlement (OTS) proposal to the Corporate Debtor. Savannah, however, requested the Bank to assign the Corporate Debtor’s loan in its favour. On 20.10.2022, Minutes of Settlement were recorded before the Bombay High Court in Writ Petition No. 11610 of 2022, under which the Bank purportedly assigned the loan account and securities of the Corporate Debtor to Savannah. The writ petition was disposed of the next day on the basis of this compromise.

Soon after, the Suspended Director of the Corporate Debtor objected, and the Cooperative Bank itself withdrew the OTS on 18.11.2022, returning the sum of Rs. 87.92 lakhs paid by Savannah. The Bank also sought review of the Bombay High Court’s order dated 21.10.2022. Despite this, Savannah filed an application under Section 7 of the IBC before the NCLT, relying solely on the assignment recorded in the Minutes of Settlement. The NCLT admitted the petition, prompting the present appeals.

Arguments
The Appellants argued that under the RBI’s Transfer of Loan Exposures Directions, 2021, a cooperative bank cannot assign debts to private entities such as Savannah, rendering the assignment illegal. Since the Bank had already withdrawn the OTS and returned the money, Savannah had no right to claim itself as a financial creditor.

On the other hand, Savannah contended that it had paid amounts on behalf of the Corporate Debtor, which constituted ‘financial debt’ under Section 7, entitling it to maintain the application. It also relied on the Explanation to Section 7(1), claiming that default to another financial creditor could form the basis of its application.

Findings of NCLAT
The Tribunal noted that Savannah’s Section 7 application was founded exclusively on the assignment of the Corporate Debtor’s loan account in its favour, as recorded in the Minutes dated 20.10.2022. With the Bombay High Court, in its detailed judgment dated 11.03.2025, having recalled its earlier order and held that the transfer of Shaila Clubs’ loan account in favour of Savannah was “clearly unlawful” and contrary to RBI directives, the foundation of Savannah’s claim stood demolished.

The NCLAT observed 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.” The Tribunal further held that Savannah was not a financial creditor of the Corporate Debtor in its own right, since the amounts deposited by it were only to protect its possession of the premises under the Conducting Agreement and could not be treated as disbursements for the time value of money.

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Holding that the assignment itself was unlawful and withdrawn, and that Savannah lacked independent status as a financial creditor, the NCLAT allowed both appeals. The impugned NCLT order dated 28.07.2023 admitting Savannah’s Section 7 application was set aside, and the Section 7 petition filed by Savannah was dismissed. Pending applications were also disposed of, with parties left to bear their own costs.

Appearance

For Appellant: Mr. Arun Kathpalia Sr. Advocate with Mr. Ruby Singh Ahuja, Mr. Devang Kumar, Mr. Jappanpreet Hora, Ms. Diksha Gupta and Ms. Varsha, Advocates.

For Respondents: Mr. Sandeep Bajaj, Mr. Vipul Gai and Ms. Saumya, Advocates. Mr. Mayank Biyani, Advocate.

Cause Title: Rajesh Vilasrao Patil V. Savannah Lifestyle Pvt. Ltd. & Anr.

Case No: Company Appeal (AT) (Insolvency) No. 1201 of 2023 & I.A. No. 5907 of 2024

Coram: Justice Ashok Bhushan [Chairperson], Barun Mitra [Technical Member]