(First published on Linkedin)
In a recent order by the NCLT, the principle that what cannot be done directly, cannot be done indirectly, was indirectly upheld. This legal maxim is a guardrail ensuring that the intent and spirit of the law are preserved, preventing clever maneuvering that could otherwise undermine legal prohibitions, whether it’s in the assignment of rights, regulatory fetters, or tax avoidance.
Background:
In this case, an entity attempted to gain membership in the Committee of Creditors (CoC) by acquiring a debt from another party that was barred from participating in the CoC due to its related party status with the corporate debtor. The core issue was whether the assignee could step into the shoes of the assignor without carrying the assignor’s disqualifications. The NCLT held that the assignment of debt does not cleanse the debt of its original disqualifications; the assignee cannot gain any better rights than those held by the assignor.
Key Broader Takeaways:
1. Assignee’s Rights vs. Assignor’s Rights: An assignee holds no better right or title than the assignor. This is particularly evident in insolvency proceedings where a related party, disqualified from participating in the CoC, cannot bypass this disqualification by simply assigning the debt to another party. The assignee inherits the assignor’s limitations and disqualifications, maintaining the integrity of the process.
2. FEMA and Capital Account Transactions: Drawing a parallel to FEMA regulations, capital account transactions that are directly prohibited cannot be indirectly achieved through alternative arrangements, by entering into series of steps which are individually permitted, but as a whole, are prohibited.
3. Tax Avoidance and GAAR: Drawing an analogy in the realm of taxation, GAAR or SAAR or JAAR targets not only arrangements resulting in explicit tax avoidance but also any arrangements that indirectly achieve the same result – again the concept of “series of steps”, valid in form, but not in substance, overall, underlines this principles.
3. Stamp Duty and Transaction Structuring: The principle also applies to stamp duty – when multiple transactions are combined into one instrument to reduce stamp duty, the duty will still be calculated on the multiple legs of the transaction. This prevents any indirect reduction in statutory dues through strategic transaction structuring.
4. Statutory Liabilities and Assignments: Statutory liabilities cannot be assigned to another party unless there is a merger, demerger, or business transfer. This ensures that the responsibility for statutory dues remains with the entity to which they are originally attached, preventing any indirect transfer of liabilities that could otherwise lead to avoidance.