While Deciding Application U/S 7 Of IBC, Adjudicating Authority Is Not Required To Interfere With Terms Of Contract Between Parties: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) has held that while dealing with an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) neither the Adjudicating Authority nor the Appellate Authority is expected to interfere with the terms of the...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) has held that while dealing with an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) neither the Adjudicating Authority nor the Appellate Authority is expected to interfere with the terms of the contract entered into between the concerned parties. All that is required to be seen is whether the debt and default is proven without adjudicating on whether the rate of interest was unreasonable or inflated.
Brief Facts
The Corporate Debtor- Karni Developers & Construction Pvt. Ltd. approached the Union Bank of India for a Term Loan (“TL-1”) of Rs 15 Cr. which was sanctioned on 02.12.2005. An amount of Rs 12.92 Cr. was disbursed.
On 03.12.2013, an Assignment Agreement was signed by which the Union Bank of India assigned the TL-I along with the interest, underlying security and guarantee to Respondent No. 1-Phoenix ARC Pvt. Ltd.
On 29.04.2017, the Respondent No.1 revoked the Memorandum of Compromise of 03.12.2013 and issued a Recall Notice of the Term Loan. In the Recall Notice dated 29.04.2017, the Respondent No. 1 claimed an amount of Rs 5.05 Cr.
On 07.02.2014, a Term Loan Agreement (“TL 2”) for Term Loan of Rs 3.40 Cr. was entered between Corporate Debtor and Respondent No.1 with a rate of interest of 30% p.a. and penal interest of 36% p.a.
On 09.01.2021, the Respondent No. 1 filed Section 7 application against the Corporate Debtor for the above outstanding amount. On 22.02.2024, the Section 7 petition was allowed by the Adjudicating Authority and aggrieved by this impugned order the suspended Director of Corporate Debtor has come up in appeal.
Contentions:
The Appellant submitted that the Section 7 petition was liable to be dismissed for not mentioning the date of default in Part-IV.
It was argued that the Corporate Debtor's loan account became NPA on December 31, 2008 and even if March 31, 2016 was treated the NPA date for TL-2, the default could not be later than December 31 2015. Thus, section 7 application filed on January 1, 2021 was beyond the period of limitation.
It was also argued that the Adjudicating Authority erred in treating a non-existent letter date May 8 2017 as an acknowledgement of debt and wrongly relied on the balance sheet of the Corporate Debtor which was beyond the limitation period.
It was also argued that Respondent No. 1 being only an Asset Reconstruction Company ('ARC' in short) and not a Bank or a Financial Institution, it could not have given a loan to the Corporate Debtor.
Per contra, the Respondent submitted that there is a clear acknowledgment of the debt of the said TL-2 of 3.40 Cr. in the balance sheet of the Corporate Debtor for the FY 2019-20.
It was argued that the RBI guidelines dated April 22, 2009 allowed Securitisation and Reconstruction Companies to restructure loans for dues recovery. This issue was never raised by the Corporate Debtor before the Adjudicating Authority.
Observations:
The Tribunal noted that both parties seemed to be at ad idem that the TL-2 was an additional loan and was a separate transaction from TL-1.
After referring to multiple exchanges between the parties, it further said that the Respondent No. 1 had filed the Section 7 application in respect of a new and additional loan under TL-2 of 07.02.2014 and not for the amount due and payable in respect of TL-1 and accordingly it was held that the limitation period has to be computed from the NPA date of 31.03.2016.
The Tribunal further noted that the Adjudicating Authority has noted that since the Corporate Debtor has acknowledged their liability in their letter dated 08.05.2017 and in the Balance Sheet of the Corporate Debtor for the Financial Year 2019-20, in terms of Section 18 of the Limitation Act, 1963, a fresh period of limitation shall be computed from the date of acknowledgement.
It further observed that a Recall Notice had been issued on 29.04.2017 by the Respondent No. 1. This Recall Notice had been replied to by the Corporate Debtor on 05.05.2017 wherein the Corporate Debtor clearly admitted their debt and default and requested for postponement of the Recall Notice.
After adverting to the letters exchanged between the parties, the Tribunal observed that the Appellant has expressed its inability to pay its due as per repayment schedule and have also taken notice that their mortgaged property has been taken physical possession of by the Respondent No. 1 which is a clear acknowledgement of liability.
Based on the above, it opined that there is also a clear acknowledgment of TL-2 in the balance sheet of the Corporate Debtor for FY 2019-20. Furthermore, in view of the documents like the TL-2 Agreement, Amendment Agreements, Letters of Personal Guarantee, Memorandum relating to deposit of Title Deeds, Recall Notice dated 29.04.2017 and Section 13(2) Demand Notice under SARFAESI Act, it was held that there is sufficient evidence to prove the existence of debt and default.
It further added that It further noted that the Section 7 application was filed on January 9, 2021 which was within the period of limitation in view of the Supreme Court judgment in Suo-Motu Writ Petition (C) No. 3 of 2020 by which the period between 15.03.2020 till 28.02.2022 will stand exlcuded. Hence the application under Section 7 was clearly filed within limitation.
The Tribunal also observed that as per relevant guidelines of RBI of 22.04.2009 as placed by the Respondent No.1, there is no bar or embargo on Securitisation Companies/Reconstruction Companies” (SC/RCs) deploying their funds for undertaking the restructuring of acquired loan account with the sole purpose of realising their dues.
It further said that the Corporate Debtor also acknowledged that the TL-2 was for a commercial transaction and waived any defence available under usury or other laws relating to the charging of interest. Since deployment of loan was for restructuring of distressed accounts, it attracted higher rate of interest to neutralise high risk factor of default.
The Tribunal observed that in an application under section 7 of the Code, neither the Adjudicating nor the Appellate Authority should interfere with contractual terms. Their role is confined to examining the existence of debt and default without assessing the reasonableness of the interest rate. Therefore, a fresh plea of excessive interest at the Appellate stage cannot be entertained.
Accordingly, the present appeal was dismissed.
Case Title:Mrs. Madhubala Chauhan Suspended director of Karni Developers & Construction Company Pvt. Ltd. Versus Phoenix Arc Pvt. Ltd. and Anr.
Case Number:Company Appeal (AT) (Insolvency) No. 604 of 2024
Judgment Date: 18/03/2025
For Appellant : Mr. Ramji Srinivasan, Sr. Advocate and Mr. Abhijeet Sinha, Sr. Advocate with Mr. Syed Arsalan Abio, Mr. Prateeek Khaitan, Mr. Chatanya Sharma, Mr. Shitij Chakravarty and Mr. Udhav H. Aggarwal, Mr. Aryun Bhatia, Ms. Shefali Mundi, Advocates.
For Respondent : Mr. Amit Singh Chadha, Sr. Advocate with Mr. Suresh Dutt Dobhal, Mr. Nirmal Goenka, Mrs. Kanchan Rathuri, Advocates for R-1.
Mr. Anurag Bhatt, Mr. Lokesh Pathak, Advocates for Intervener.
