The NCLAT, New Delhi expounded that once the debt becomes due and Corporate Debtor does not pay it, that’s a warning signal for the Corporate Debtor. Further, when there is sufficient evidence to prove that the debt was not repaid and a default has been committed by the Corporate Debtor, the NCLT is not required to go into the cause of the default for the purpose of an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “IBC”).
Moreover, the suit preferred by the Corporate Debtor in the High Court cannot be a ground to not consider the Section 7 application as the suit filed is a separate issue, which has to be adjudicated upon by the High Court. The decision of the Court can at best determine the default for the purpose of the suit and the same cannot be reasoned for not entertaining the Section 7 application.
Brief Facts:
The present appeals have been preferred by the Financial Creditors against the orders of the NCLT dismissing the Section 7 Applications under the IBC.
Brief Background:
- Company Appeal (AT)(Insolvency) No. 978 of 2022
The Corporate Debtor defaulted on the credit facilities availed from the State Bank of India, Punjab National Bank, and South Indian Bank. The three Banks formed a Joint Lender Forum and agreed to sanction a Restructuring Package. Thereafter, a Master Restructuring Agreement was entered into by the parties.
The credit facility of the Corporate Debtor was renewed by the State Bank of India and the debt balance was confirmed by the Corporate Debtor vide a letter. Again, the default was committed and thereafter, the account of the Corporate Debtor was declared Non-Performing Asset (“NPA”).
A civil suit was filed by the Corporate Debtor against all three banks. The State bank of India preferred a suit before the Debt Recovery Tribunal, Kolkata.
Later, a Section 7 Application was preferred by the Financial Creditor (State Bank of India) which was rejected by the NCLT. Hence, the present appeal.
- Company Appeal (AT)(Insolvency) No. 1039 of 2022
Similar to the above facts, the Corporate Debtor defaulted on the credit facility availed from the Punjab National Bank and hence, the account was declared as NPA. A Section 7 application was preferred before the NCLT, which was rejected. Hence, the present petition.
- Company Appeal (AT)(Insolvency) No. 1000 of 2022
The IDBI Bank sanctioned a loan for setting up a green field project by the Corporate Debtor. Several agreements were entered into by the parties. The Central Bureau of Investigation filed an FIR against one of the directors of the Corporate Debtor.
Thereafter, in the Joint Lenders’ Meeting, the Corporate Debtor informed the Lenders about his decision to sell the majority stake to Uttam Galva Steel Limited (“UGSL”).
The account of the Corporate Debtor was declared NPA as the loan was not repaid. A Section 7 Application was preferred by the IDBI Bank which was rejected by the NCLT. Hence, the present appeal.
Contentions of the State Bank of India:
It was argued that the ground on which NCLT rejected the application under section 7 was contributory negligence on part of the financial creditors and the same was beyond the scope of inquiry of Section 7. It was contended that the cause of default is irrelevant for purpose of Section 7.
Contentions of the Punjab National Bank:
It was contended that NCLT cannot go into the reason for default while adjudicating on Section 7 application. Further, debt and default on part of the Corporate Debtor were undisputed, hence application could not have been rejected.
Contentions of the IDBI Bank:
It was asserted that the rights and obligations of each Consortium of Lenders are independent. A Lender is only accountable for its obligations and if one Lender fails to perform the same, other Lenders cannot be held responsible.
Contentions of the Corporate Debtors:
It was argued that it was due to the non-disbursement of the sanctioned amounts that the Corporate Debtor had to face financial stress. Hence, financial creditors cannot take benefit of their wrongdoings. It was submitted that the Consortium of Banks did not release any working capital due to which the Corporate Debtor could not function and hence revenue could not be generated which could have been used for repayment.
It was further argued that the company petition was preferred by the financial creditors only to make the suit filed by the Corporate Debtor infructuous.
Observations of the Tribunal:
It was noted that the debt was restructured on account of default committed by the Corporate Debtor. Further, the Corporate Debtor did not fulfil obligations as per the Restructuring Agreement.
It was opined by the Tribunal that the non-disbursement of a certain portion of sanctioned financial amount by the financial creditors can be a ground to reject the Section 7 application.
The Bench analysed the case of Innoventive Industries Limited v. ICICI Bank and Anr. (2018 I SCC 407), which dealt with a similar issue and further examined the Restructuring Agreement between the parties. It was remarked that as per the agreement, the obligation of the Corporate Debtor was unconditional and it did not depend on the infusing of funds by the creditors, therefore, the NCLT’s order was not sustainable in the eyes of law.
The Appellate Authority expounded that once the debt becomes due and Corporate Debtor does not pay it, that’s a warning signal for the Corporate Debtor. Further, when there is sufficient evidence to prove that the debt was not repaid and a default has been committed by the Corporate Debtor, the NCLT is not required to go into the cause of the default.
Moreover, the suit preferred by the Corporate Debtor in the High Court cannot be a ground to not consider the Section 7 application as the suit filed is a separate issue, which has to be adjudicated upon by the High Court. The decision of the Court can at best determine the default for the purpose of the suit and the same cannot be reasoned for not entertaining the Section 7 application.
The decision of the Tribunal:
Based on the above-mentioned reasons, the orders of the NCLT were set aside and accordingly, the appeals were allowed.
Case Title: State Bank of India v. N.S. Engineering Projects Pvt. Ltd. with other connected matter
Coram: Justice Ashok Bhushan, Barun Mitra (Technical Member)
Case No.: Company Appeal (AT)(Insolvency) No. 978 of 2022 with other connected matter
Advocates for Appellant: Advs. Mr. Krishnan Venugopal, Mr. Sanjay Kapur, Ms. Megha Karnwal, Mr. Surya Prakash, Mr. Arjun Bhatia, Mr. Surya Prakash, Mr. Rajesh Kumar Gautam, Mr. Anant Gautum, Mr. Nipun Sharma, Mr. Vidur Ahluwalia, Mr. Sumit Sharma
Advocates for Respondents: Advs. Mr. Ramji Srinivasan, Mr. Zishan Haq, Mr. Animesh Kumar, Mr. Ram Maroo, Mr. Tanay Agarwal, Ms. Shanti Pandey, Ms. Megha Dugar
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