NCLAT rejects delay in debt resolution: "pending scheme of arrangement cannot be accepted", read judgment

"The mere fact that the proceeding for approval of the scheme of arrangement, which was initially approved by the lenders, remains pending from 2018 to 2024 cannot be accepted."- NCLAT

In a case regarding the insolvency proceedings of Jaiprakash Associates Limited (JAL), the NCLAT delivered a judgment that examined the validity of claims made by the Corporate Debtor in the context of ongoing restructuring efforts and defaults. The Tribunal scrutinized the debt resolution strategies, including the Master Restructuring Agreement (MRA), and the status of the Corporate Debtor’s financial obligations. The case raised questions about the applicability of restructuring agreements and the nature of defaults when such agreements were in progress.

The Corporate Debtor, a company registered on 15.11.1995, is involved in various businesses, including infrastructure development, and obtained financial facilities from ICICI Bank and other banks, with ICICI as the lead bank. The company was classified as a Special Mention Account (SMA-II) in 2014 and as a Non-Performing Asset (NPA) in 2015. A Joint Lender Forum (JLF) was formed in 2014 to address its liquidity issues, and a Debt Realignment Plan (DRP) was approved in 2016. However, restructuring efforts failed, and in 2017, the RBI directed ICICI Bank to initiate the Insolvency Resolution Process (IRP).

Despite various attempts at restructuring and multiple One-Time Settlement (OTS) proposals, the lenders rejected all proposals. In 2018, ICICI Bank filed a Section 7 application citing a default of ₹1,269.10 Crores. Legal challenges by the Corporate Debtor against the RBI’s directions were dismissed by both the Allahabad High Court and the Supreme Court. The Adjudicating Authority admitted the Section 7 petition in June 2024, and the appeals were filed against this order. The matter was heard by the Tribunal, and judgment was reserved on 04.11.2024.

The Appellant argued that the Impugned Order is flawed as there was no debt or default by the Corporate Debtor. The Corporate Restructuring and Resolution Plan (CRRP) was approved on 22.06.2017, and the Master Restructuring Agreement (MRA) executed on 31.10.2017 resolved the debt and waived prior defaults. Payments under the MRA were accepted by the lenders, and they are now barred from citing earlier defaults.

The Appellant cited letters from ICICI Bank, SBI, and IDBI indicating that the debt was resolved. It also referenced the Chitra Sharma case, which allowed RBI to initiate CIRP but did not establish the Corporate Debtor's default. The Section 7 Application overlooks the restructuring agreements, which supersede previous documents. The Appellant claimed that the lenders’ reliance on earlier agreements is invalid since no revocation notice was issued.

The Appellant asserted that the claims filed with the IRP are inflated. The Corporate Debtor, being asset-rich, is capable of resolving its debts through an OTS proposal submitted in May 2024. The Appellant challenged the rejection of the Scheme Petition and the reliance on unconfirmed reports by CIBIL and CRILIC. The Appellant also contested the SBI’s intervention, as their Section 7 petition was not entertained.

Shri Krishnendu Datta, Senior Counsel for the Financial Creditor, argued that the Section 7 application was rightly admitted, as debt and default were proven. The Appellant’s claim of no default is false, with the RBI directing ICICI Bank to initiate CIRP due to default, confirmed by the Supreme Court. The Master Restructuring Agreement (MRA) is irrelevant as it did not cover the debt in question, and the RBI had nullified it. The Corporate Debtor has repeatedly acknowledged the debt, including offering an OTS proposal.

Shri Gopal Jain, Senior Counsel for SBI, stressed that despite restructuring attempts, the Corporate Debtor remains in default. The RBI’s directives and failure of the restructuring plan supported the admission of the Section 7 application. SBI emphasized the continuation of the CIRP.

Shri Sunil Fernandes, Senior Counsel for the Resolution Professional, highlighted that claims amounting to ₹69,426 Crores have been filed, with substantial claims admitted. The delays in the CIRP are due to the pendency of these appeals, and swift resolution is necessary for effective CIRP functioning.

The Court addressed several essential issues regarding the insolvency proceedings of Jaiprakash Associates Limited (JAL). It emphasized the relevance of RBI’s directions, noting that the RBI had directed ICICI Bank on 14.08.2018 to initiate the CIRP against JAL due to default, as per the Banking Regulation (Amendment) Ordinance, 2017: "ICICI Bank is directed to initiate the Insolvency resolution process in respect of the default committed by M/s. Jaiprakash Associates Limited... under the provisions of the Insolvency and Bankruptcy Code, 2016."

The Court also referred to the Supreme Court's observation in Chitra Sharma & Ors. vs. Union of India & Ors., stating, “The facts which have emerged before the Court from the application filed by the RBI clearly indicate the financial distress of JAL and JIL.” The Court upheld the RBI’s power to direct the initiation of CIRP, stating, “RBI is allowed, in terms of its application to this Court to direct the banks to initiate corporate insolvency resolution proceedings against JAL under the IBC.”

Regarding the Appellant’s reliance on the Master Restructuring Agreement (MRA), the Court found that the debt under the MRA did not align with the six facilities mentioned in the Section 7 application. It observed, “The Master Restructuring Agreement did not cover the six facilities mentioned in the Section 7 application filed by ICICI Bank.”

The Court rejected the Corporate Debtor’s argument regarding the cessation of default due to a pending scheme of arrangement, stating: “the mere fact that the proceeding for approval of scheme of arrangement which was initially approved by the lenders remains pending from 2018 to 2024... cannot be accepted.”

The Court concluded that default was clearly established, referencing the Corporate Debtor's admission: "the Corporate Debtor has itself admitted... that due to the liquidity crunch, the Corporate Debtor wasn't able to repay its liabilities owed to the Financial Creditor." The Court dismissed the argument regarding waiver of debt under the MRA, emphasizing, “Clause 2.2 of the MRA has no applicability and the default for which Section 7 application was filed cannot be treated to be waived by the lenders.”

Thus, the Court upheld the Section 7 application for initiating the Corporate Insolvency Resolution Process (CIRP).

The Court, after considering the reasons and responses to the raised questions, concluded that no grounds were found to interfere with the impugned order dated 03.06.2024. Consequently, all the Appeals were dismissed. Additionally, IA No. 5550-5554 of 2024, filed by the State Bank of India seeking intervention, was allowed, and all other IAs were disposed of.

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