Once Debt And Default Satisfied, Petition U/S 7 Of IBC Has To Be Admitted, Vidharbha Ruling Cannot Be Applied Mechanically: NCLAT

The NCLAT New Delhi Bench of Justices Mr. Rakesh Kumar Jain, Mr. Naresh Salecha and Mr. Indevar Pandey affirmed that a petition under section 7 of the IBC cannot be rejected merely on the ground that there are chances of the amount being recovered from other proceedings which will satisfy the entire debt of the creditors. The tribunal further observed that the ratio of the Vidharbha ruling cannot be applied mechanically without satisfying itself as to whether the amount equal or more than the debt amount due to the creditors will in fact be recovered from such other proceedings.

Brief Facts

The present appeal has been filed by Canara Bank who is Appellant herein under Section 61 of the Insolvency and Bankruptcy Code, 2016 ('Code') against the Impugned Order dated 18.11.2022 passed by National Company Law Tribunal Mumbai Bench-II ('Adjudicating Authority') in CP (IB) No. 4535 (MB)/2019, whereby the Adjudicating Authority has dismissed the application filed by the appellant under Section 7 of the Code.

Contentions

The appellant submitted that the Adjudicating Authority has erred in dismissing the Section 7 application vide the Impugned Order despite the clear binding precedent laid down by the Hon'ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank and Anr, (2018) (which is an earlier decision of a coequal Branch of the Hon'ble Supreme Court) and the Adjudicating Authority was duty-bound to admit the Section 7 application.

It was further submitted that however, the Adjudicating Authority wrongly exercised its discretion on the strength of ratio of Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. (2022) in the present case where the existence of debt and Default had been established including by way of admission by the Respondent.

Per contra, the respondents submitted that the Hon'ble Supreme Court in Vidarbha Industries (Supra) judgment in Para 48 as clearly discussed earlier judgment including Innoventive (Supra). Thus, the Vidarbha Industries (Supra) was very conscious judgment and a path peaking judgment in order to support the revival of the Corporate Debtor.

It was further submitted that the initiation of CIRP would not serve any purpose of resolution or value maximization under the Code as - recovery actions that had already been taken by the Lenders outside the Code, there was nothing left to "revive" per se and initiation of CIRP despite these circumstances, it would lead to significant loss in time and loss in value.

It was further submitted that judgment in Innoventive Industries Ltd. (Supra) rendered at the time when the IBC was in nascent stage and laid down of law relating to IBC and subsequently large number of litigations have helped IBC to evolve itself and came to correct path for benefit of all stakeholders including the borrowers and the lenders along with other stakeholders.

It was further submitted that in this background Vidarbha Industries (Supra) is a path breaking judgment which allows the Corporate Debtor to flourish and continue as going concern and only the errant and unscrupulous companies are to be sent to the CIRP, which is not the case with the Respondent.

NCLAT's Analysis

The tribunal firstly adverted to the relevant documents to see whether requirements of debt and default are satisfied or not and observed that from above issues and the details given by the Respondent, we do not find any submissions regarding denial of debt and default. Similarly, we do not find any denial on the part of the Respondent regarding its acknowledgements in its financial statements.

The tribunal further while referring to the Supreme Court judgment in Innoventive Industries Ltd. v. ICICI Bank and Anr, (2018) observed that in view of above, we hold that there was outstanding debt and there was a clear default on the part of the Respondent in meeting its obligation which entitles the Appellant to take suitable remedy as per the Code and therefore, he correctly filed the Application under Section 7 of the Code.

The tribunal then moved to the second issue as to whether the NCLT was right in relying on the Vidharbha case while rejecting the application under section 7 of the IBC. The tribunak further adverted to the facts of the Vidharbha Case and observed that that from above, it is seen that there was a clear award approved by APTEL in favour of the Vidarbha Industries (Supra) of Rs. 1730 Crores pending before the Hon'ble Supreme Court of India which was much more than the amount claimed by the Financial Creditor i.e., Axis Bank of Rs. 553.28 Crores.

The court further observed that in view of this scenario, the Hon'ble Supreme Court of India held that “it was discretion of the Adjudicating Authority, since the word “may” has been used in Section 7 and thus the Adjudicating Authority should have given a chance to the Corporate Debtor to continue rather than admitting Section 7 application”

The tribunal further adverted to the facts of the present case and observed that we would also like to record the facts of the present case to examine whether the ratio of Vidarbha Industries (Supra) is applicable in the facts of the present case or otherwise.

The tribunal further noted that as per Annual Report of the Respondent for the year 2017-18, the Respondent had incurred losses of Rs. 827.41 Crores and negative networth of Rs. 6412.44 Crores (Pg 179 of appeal book). This does not infuse rosy picture regarding viability of the Respondent. We consciously note that CDR failed due to default of the Respondent in meeting its agreed obligations.

The tribunal finally answered this issue in favour of the appellant and held that in view of all above detailed analysis herein above, we are of the view that the Adjudicating Authority has not applied the ratio of Vidarbha Industries (Supra) correctly in the present case while rejecting the application of the Appellant filed under Section 7 of the Code.

The tribunal decided the third issue framed with respect debt acknowledgement in favour of the appellant while referring to multiple documents in which debt was acknowledged and subsequently default was made. The tribunal observed that In view of above, we hold that there is a clear debt and default backed by several acknowledgements by the Respondent which entitled the Appellant to file application under Section 7 of the Code before the Adjudicating Authority.

The tribunal further while answering the fourth issue with respect to not agreeing to the assignment, in favour of the appellant observed that we have also noted that the Appellant has not agreed to assign its debts to NARCL along with few other lenders and not signed ICA, against which the Respondent had approached the Hon'ble Bombay High Court in WP No. 223 of 2020, which was dismissed vide order dated 03.02.2020 .

The tribunal further perused the relevant paragraphs of the above judgment and observed that the Hon'ble Bombay High Court had also held that they cannot attribute mala-fide and arbitrariness on the part of the Appellant in these matters who are custodian of public funds and they are not expected to sacrifice its interest particularly legal rights merely because the Respondent herein desired that the Appellant herein who joins in total restructuring debt of the Corporate Debtor.

The tribunal further analysed the judgment of the Supreme Court in which the High Court judgment was challenged and observed that From above judgment of Hon'ble Supreme Court of India, we note that the Hon'ble Supreme Court of India has upheld the judgment of the Hon'ble Bombay High Court that there would be no obligation upon the bank/ financial institutions to accept settlement and each bank must make its own assessment of to accept or reject.

The tribunal further observed that the Appellant is not duty bound to agree with majority of the lenders to assign its debts to NARCL or sign the ICA which has been signed by majority (more than 90% by value) of the Lenders.

The tribunal concluded that the Appeal is allowed and the Impugned Order is set aside and the case is remanded back to the Adjudicating Authority to hear the original petition of the Appellant a fresh, taking into consideration all the facts.

Case Title: Canara Bank v. GTL Limited

Case Reference: Company Appeal (AT) (Ins) No. 69 of 2023 & I.A. No. 274, 275 of 2023

Judgment Date: 25/10/2024

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