Pendency Of Proceedings Before NCLT For Approval Of Scheme Of Arrangement Does Not Preclude Financial Creditor From Filing Petition U/S 7: NCLAT
The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) has held that the pendency of proceedings before the NCLT for approval of the scheme of arrangement does not preclude the Financial Creditor to proceed with Section 7 application. The tribunal also held that direction of RBI under Section 35AA...
The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) has held that the pendency of proceedings before the NCLT for approval of the scheme of arrangement does not preclude the Financial Creditor to proceed with Section 7 application.
The tribunal also held that direction of RBI under Section 35AA of Banking Regulation Act, 1949 for initiation of insolvency cannot be disregarded/ ignored while determining application under Section 7 of IBC.
Brief Facts
The present appeals have been filed against an order passed by the NCLT by which an application under section 7 of the code was admitted against Jaiprakash Associates Limited (JAL), corporate debtor. In these appeals, orders dismissing applications filed by the Corporate Debtor, including one seeking dismissal of the Section 7 petition, another requesting adjournment due to a restructuring proposal under consideration, and one seeking deferment of judgment are also challenged.
Additionally, the Appeals further challenge an order allowing the replacement of the proposed Interim Resolution Professional (IRP) with Mr. Bhuvan Madan. The corporate debtor was admitted into insolvency despite a Debt Realignment Plan (DRP) and a One-Time Settlement (OTS) proposal by JA.
The account of the corporate debtor was classified as Non Performing Assets in 2014. The Joined Lenders Forum approved a restructuring plan in which the debt of the corporate debtor was divided into three buckets for resolution. However, after directions of the RBI and subsequent approval by the Supreme Court to proceed under the IBC, the bank initiated insolvency proceedings.
The initiation of the initiation proceedings were challenged by the corporate debtor first before the Allahabad High Court and later before the Supreme Court. However, the insolvency proceedings could not be stopped.
Contentions:
The appellant submitted that Comprehensive Reorganisation and Restructuring Plan (CRRP) was approved on 22.06.2017, thereafter, Master Restructuring Agreement (MRA) was executed on 31.10.2017, which MRA resolved all debt. As per MRA, the previous default and the remedies were specifically waived by the Lenders. The binding nature of sanction letter dated 19.05.2017 issued by ICICI Bank and the MRA has not been questioned by the Lender at any stage.
That Sanction letter dated 19.05.2017, does not confine to only Bucket 2A rather it covers all the dues shown in all the Buckets. Sanction letter novated all the existing facilities pertaining to the erstwhile debt. The argument of the Lenders that MRA is not relevant for the purposes of Bucket 2B is misconceived.
The Appellant has also referred to the letter dated 07.12.2017 issued by the ICICI Bank, which was counter signed by SBI and IDBI to RBI stating that account of Corporate Debtor may be treated to be resolved, which letter clearly depicts the understanding of the Lenders themselves regarding resolution of entire debt.
That Any determination of default, dehors the IBC Process is not relevant nor can be basis for admitting Section 7 Application. Reliance of the Lender on the Order of the Hon'ble Supreme Court dated 09.08.2018 and letter dated 14.08.2018 by the RBI is misplaced.
That Respondent Bank in spite of restructuring document has relied on earlier facility documents. There being no revocation of the restructuring document, no reliance could have been placed by the Bank on the earlier financing documents.
That OTS Proposal having been submitted, a request was made to the Adjudicating Authority to defer the pronouncement of Order reserved on 17.05.2024, which was not acceded to and Judgment delivered when the OTS Proposal was submitted with upfront payment. Adjudicating Authority, ought to have waited for outcome of the OTS and then proceeded to admit Section 7 Application.
On the other hand, the respondents submitted that the Central Government has notified the RBI as an authority to issue necessary direction to the Banks to initiate Insolvency Resolution Process against a Corporate Debtor. The RBI having found the Corporate Debtor committing default under IBC has issued direction to the ICICI Bank on 14.08.2018 for initiating CIRP against the Corporate Debtor which direction was issued in exercise of statutory function by the RBI.
That Debt under Bucket 2B was to be transferred to an SPV of JAL i.e. Jaypee Infrastructure Development Limited vide scheme which scheme was never approved by the NCLT. The transfer of debt never took place to SPV debt which was subject matter of Bucket 2B continues to be in default in view of the scheme having never been implemented.
That the Corporate Debtor in the written submission before the Adjudicating Authority has itself admitted that the present petition under Section 7 does not pertain to Bucket 1 or Bucket 2A rather petition under Section 7 pertains to Bucket 2B debt.
That no documents were executed in relation to facility 2B, hence, default continues and sanction letter dated 19.05.2017 has no consequence with regard to default covered by Bucket 2B. The letter dated 07.12.2017 written by the ICICI Bank to the RBI that account may be considered to be resolved was not accepted by the RBI.
That the very fact that the Corporate Debtor during pendency of Section 7 application has filed application before the Adjudicating Authority stating that it has submitted an OTS proposal dated 29.05.2024 to the Financial Creditor to settle the outstanding dues and has made upfront payment of Rs.200 Crore itself indicate clear acknowledgment of debt and default by the Corporate Debtor.
Observations:
After pursuing the relevant section, the tribunal observed that there was a statutory authorisation on the RBI to issue directions to any banking company to initiate CIRP in respect of default under the provisions of the Insolvency and Bankruptcy Code, 2016. The explanation to Section 35AA provided that for the purposes of section, "default" has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.
It further added that the statutory provision of Section 35AA read with above explanation clearly contemplated exercise of statutory powers on default within the meaning of Section 3(12) of the IBC. Thus, it is a default within the meaning of IBC which is the foundation for issuing any direction by the RBI to a banking company to initiate proceedings under the IBC.
The tribunal while agreeing with the submission of the appellant observed that it is the Adjudicating Authority who has to determine the question of debt and default in Section 7 application which can be foundation or basis for passing an order of admission of Section 7 application.
However, the tribunal also observed that “looking to the statutory scheme under Section 35AA and directions issued by the RBI, we are of the view that the direction issued by the RBI which are based on foundation of default within the meaning of Section 3(12) are also relevant material while determining the question of default by the Corporate Debtor in proceeding under Section 7.”
The tribunal while referring to the pleadings of the corporate debtor and the relevant plan observed that it is found that as per Restructuring Plan approved in the JLF meeting dated 22.06.2017, the debt of Rs.11,833.55 Crores was to be transferred to SPV which was debt covered under Bucket 2B.
The tribunal also noted that it is further clear that the MRA did not cover the six facilities for which ICICI Bank filed the application under Section 7, hence, the debt under the MRA which relate to Bucket 2A which was being serviced by the Corporate Debtor is not relevant for the facilities for which Section 7 application was filed by the Financial Creditor.
It further opined that proceedings under Section 7 are proceedings of special nature contemplated in IBC for resolution of the Corporate Debtor which is in default. In Navinchandra Steels Pvt. Ltd. vs. SREI Equipment Finance Ltd.,2021 Supreme Court has held that the IBC is a special statute dealing with revival of companies which must prevail.
In light of the above ratio, the tribunal observed that “the fact that a scheme to make arrangement with creditors filed by the corporate debtor before the NCLT remains pending cannot have effect of arresting the default or to cause any impediment in proceedings under Section 7 application which has to be given precedent.”
“Scheme never came into operation nor the debt which was bifurcated in Bucket 2B came to be transferred to the SPV. The debt continued with the Corporate Debtor and default for the aforesaid debt was clearly made out.”
It further added that facilities for which Section 7 application was filed were facilities to the Corporate Debtor. The fact that under the CRRP they were bifurcated in Bucket 2B and were to be transferred to SPV does not wipe off the debt. The debt, thus, continued on the Corporate Debtor in which default was committed which shall not be treated to be arrested or suspended by pendency of scheme of arrangement before the NCLT.
The tribunal also noted that the OTS having been submitted by the Corporate Debtor offering upfront amount and the total amount, it does not lie in the mouth of the Corporate Debtor to contend that no default has been committed by the Corporate Debtor.
Finally, the tribunal observed that “the OTS proposal submitted both before the Adjudicating Authority as well as before this Tribunal on behalf of the Corporate Debtor contains the clear acknowledgment of debt and default. Hence, we are of the view that the findings returned by the Adjudicating Authority on the debt and default are based on materials on record and are affirmed by us.”
Case Title:Sunil Kumar Sharma Versus ICICI Bank Limited and Anr.
Case Number: Company Appeal (AT) (Insolvency) No. 1158 – 1162 of 2024 & IA Nos.4145-4159, 4941, 5550 & 5554 of 2024
Judgment Date: 06/11/2024