Acceptance Of Partial Payments Doesn't Negate Default Or Legitimacy Of Insolvency Proceedings: NCLAT

Brief Facts:

The Corporate Debtor, a company specializing in developing Special Economic Zones (SEZs) and other infrastructure projects, had a significant SEZ project at the GIDC Panoli Industrial Estate in Ankleshwar, Gujarat, in 2008. Despite completing the project by 2011 and starting operations as a Pharma SEZ, the company struggled to attract buyers. In 2013, it subleased portions of the project land to M/s. HBS City Pvt. Ltd., and in 2018, it further subleased approximately 127 acres to Mahansaria Tyres Pvt. Ltd. for automobile operations. Seeking funds for further development, the Corporate Debtor approached SREI Equipment Finance Ltd in 2017 and secured a loan of Rs. 60 Crores through an offer letter and a subsequent loan agreement, followed by an additional Rs. 6 Crores loan in 2019. However, these agreements were insufficiently stamped.

The Corporate Debtor faced several challenges, including a lack of buyers for SEZ units, illegal non-utilization charges by GIDC amounting to Rs. 43.6 Crores, and an economic slowdown that severely affected cash flow and fund availability. These issues led to the Corporate Debtor's inability to meet its repayment obligations. Later, the Financial Creditor issued a demand notice for Rs. 6.74 Crores. Subsequently, the Financial Creditor filed a petition under Section 7 of IBC.

Section 7 of IBC allows financial creditors to initiate insolvency proceedings against defaulting corporate debtors. Financial creditors can file an application directly with the NCLT if there is a default on a debt owed to them.

During the pendency of the Company Petition, the parties entered into an OTS Agreement where the Corporate Debtor committed to paying Rs. 55.60 Crores in three installments. Despite making an initial payment of Rs. 6 Crores, the Corporate Debtor could not meet the next deadline due to the COVID-19 pandemic and resultant delays. The Corporate Debtor filed an application to record the OTS Agreement and seek dismissal of the Company Petition, but the Financial Creditor did not respond. Although the Financial Creditor initially accepted a revised OTS proposal in principle, it subsequently moved to terminate the agreement.

The Financial Creditor contended that the Corporate Debtor's appeal was misguided, and argued that the Corporate Debtor has repeatedly acknowledged its debt and inability to pay. The Financial Creditor highlighted that the Corporate Debtor defaulted on both loans, totaling over Rs. 58 Crores, and failed to fulfill commitments under two OTS agreements. It argued that these admissions and defaults substantiated the existence of a valid debt exceeding the threshold for initiating insolvency proceedings.

Observations by the NCLAT:

Regarding the legality and validity of the Demand Notice and the subsequent Company Petition, the NCLAT found that these actions were in strict compliance with the provisions of the IBC. The Financial Creditor's claim of Rs. 58.38 Crores was substantiated by loan agreements and the Corporate Debtor's own admissions of their inability to repay the loans as scheduled. Even assuming the default amount was only Rs. 6.74 Crores, it held that this figure still exceeded the threshold amount of Rs. 1 Crore necessary to initiate insolvency proceedings. The NCLAT further noted the debt and default were corroborated by various documents, including the CIBIL report showing overdue amounts, statements of loan accounts, and the Corporate Debtor's balance sheet for the fiscal year 2017-18.

In assessing the Financial Creditor's conduct, the NCLAT found that the creditor acted within its rights by accepting the initial OTS payment and subsequently pursuing insolvency proceedings after the Corporate Debtor defaulted. It held that the acceptance of partial payments did not negate the default or the legitimacy of the insolvency proceedings.

The NCLAT held that the Adjudicating Authority correctly applied the provisions of the IBC in admitting the Company Petition and initiating the CIRP.

Consequently, the order of the Adjudicating Authority was upheld, and the appeal was dismissed.

Case Title: Mr. Jayesh Dani vs SREI Equipment Finance Ltd. And anr

Case Number: Company Appeal (AT) (Insolvency) No. 161 of 2024

Advocate for the Appellant: Mr. Shivek Trehan, Mr. Ishaan Kumar, Advocates

Advocate for the Respondent: Mr. Krishnendu Datta, Sr. Advocate with Mr. Siddhant Buxy, Mr. Ativ Patel, Ms. Priyanka Vora and Mr. Rahul Gupta, Advocates

Date of Judgment: 31st May, 2024

Click Here To Read/Download Order or Judgment