Even if OTS offer made on a without prejudice basis, it does not dilute the acknowledgment of debt, rules NCLAT, Read Judgement

04 Feb 2024

The NCLAT, Principal Bench New Delhi observed that the EMI appropriation from the FDR cannot be treated as automatic regularization of the loan account and that this was clear evidence of debt and default.

It was opined that even if the OTS offer were made on a “without prejudice” basis, it does not dilute the acknowledgment of debt. Further, the OTS proposals, which undisputedly fall within the three- year period from the date of default, clearly provided for a fresh period of limitation of three years. Therefore, application was not time barred.

It was noted that in the present case, the default was committed by the Corporate Debtor prior to commencement of Section 10A period. The default having been committed before the bar of Section 10A came into play, the Corporate Debtor was clearly not entitled to claim that the Section 7 application was not maintainable.

Brief Facts:

The present appeal has been filed by the suspended director of the Corporate Debtor under Section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) against the order vide which Section 7 application of the PNB Housing (Financial creditor) was admitted.

Brief Background:

The Corporate Debtor had availed loan from the Financial Creditor and mortgaged its immovable property. The loan account of the Corporate Debtor was classified as Non- Performing Asset (NPA).

The Financial Creditor issued a notice under Section 13(2) of the SARFAESI Act, 2002and later on took possession of the mortgaged property of the Corporate Debtor.

Thereafter, section 7 application under the IBC was filed by the Financial Creditor seeking initiation of CIRP against the Corporate Debtor. The application was admitted by NCLT, hence the present appeal.

Contentions of the Appellant:

It was argued that in terms of IBC, no default was committed. The EMIs were being paid on time and despite factory caught fire, the Corporate Debtor continued to discharge obligations in terms of loan document.

It was further argued, that the basis of IBC application was the classification of the account as NPA and it was in 2019, therefore the application was barred by limitation.

It was contended that the Financial Creditor (Respondent No. 1) concealed the issue of arbitration notice which categorically indicated existence of dispute. Hence, the Section 7 application was hit by Section 5(6) of the IBC.

It was argued that there was no default since the EMI amounts had been liquidated by appropriation from FDR.

Contentions of Respondent No.1:

It was contended that date of default had shifted since the Corporate Debtor had sent letters to the Financial Creditor for one-time restructuring and OTS proposals thereafter. Therefore, the application was not barred by limitation.

Observations of the Tribunal:

It was observed that the EMI appropriation from the FDR cannot be treated as automatic regularization of the loan account and that this was clear evidence of debt and default.

The decision of the Tribunal:

Based on the aforementioned reasons, it was held that the order of the NCLT was correct and accordingly, appeal was dismissed.

Case Title: Narendrabhai v. PNB Housing Finance Ltd. & Anr.

Case No.: Company Appeal (AT)(Insolvency) No. 1461 of 2023

Coram: Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Mmeber), Arun Baroka (Technical Mmeber)

Advocates for Appellant: Adv. Mr. Abhijeet Sinha

Advocates for Respondents: Adv. Mr. Naman Singh Bagga