Petition U/S 7 Of IBC Is Maintainable For Default Which Occurred Post Consent Decree: NCLAT

Brief Facts

This Appeal by a Suspended Director of the Corporate Debtor, KLT Automotive and Tabular Products Limited has been filed challenging the Order dated 26.09.2024 passed by the Learned Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, Court – III), by which Order, Application under Section 7 filed by the Financial Creditor, Respondent herein has been admitted.

Corporate Debtor, KLT Automotive and Tabular Products Limited availed various credit facilities from Bank of India between 2005–11. In 2011, Corporate Debtor availed financial facility from Corporation Bank (now Union Bank of India) which included working capital facilities, comprising of fund based limit and non-fund based limit aggregating to a sum of ₹61 Crores.

On 24.08.2012, Corporate Debtor, availed additional credit facility from Bank of India to the tune of ₹126 Crores. Account of Corporate Debtor was declared as NPA by Bank of India on 31.03.2015.

In the year 2021, Respondent No. 1 filed OA No. 201/2021 before the Debt Recovery Tribunal (DRT) for recovery of outstanding dues from the Corporate Debtor. A Company Petition 1207/2021 was also filed before the Adjudicating Authority by the Financial Creditor on 16.10.2021. On 29.08.2022, Financial Creditor and Corporate Debtor arrived at amicable settlement and executed Consent Terms before the DRT.

DRT by Decree issued a Consent Decree on 29.08.2022. On 10.10.2022, Adjudicating Authority disposed of the Company Petition 1207/2021 in accordance with the Consent Terms. There being breach of Consent Terms by the Corporate Debtor, Financial Creditor filed Section 7 Application seeking initiation of Corporate Insolvency Resolution Process (CIRP) in respect of the Corporate Debtor, claiming default of total amount of ₹968,20,63,285/– only as on May 15, 2023. In Section 7 Application, Notices were issued and Corporate Debtor filed its Reply to Section 7 Application.

Adjudicating Authority after hearing both the parties held that Corporate Debtor committed default which is due to the Corporate Debtor in the Order impugned finding has been returned that Corporate Debtor has proved existence of debt and default, which is excess of ₹1 Crore, hence, Corporate Debtor was admitted to Insolvency by the Order dated 26.09.2024.

Contentions

The appellant submitted that consent Decree having been passed on 29.08.2022, which was based on default committed by the Corporate Debtor during the 10A period, the Application filed by the Financial Creditor on 03.06.2023, under Section 7 is barred by Section 10A. The default which has been committed by the Corporate Debtor under 10A period cannot be cured on the strength of Consent Decree dated 29.08.2022 obtained from DRT.

Per contra, the respondent submitted that a Consent Terms was filed before the DRT by the Parties, on basis of which Consent Decree was issued on 29.08.2022 by the DRT under the Consent Term, Corporate Debtor agreed to make repayment of amount in which the Corporate Debtor failed. In Section 7 Application filed by Financial Creditor, date of default was mentioned as 29.08.2022, which was a date of Consent Decree which was not honoured by the Corporate Debtor, which default admittedly was beyond 10A period Application under Section 7 cannot be held to be barred by 10A.

That default has been committed by the Corporate Debtor also before 10A period. Accounts were declared NPA by the Lenders in 2017 & 2018, hence, the default was clearly also before the 10A period.

NCLAT's Analysis

The NCLAT, at the outset, agreed with the NCLT reliance on the Supreme Court judgment in Dena Bank Vs. C. Shivakumar Reddy and Ors. (2021) wherein it was established that a final judgment and/or decree of any Court or Tribunal or any Arbitral Award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 of the IBC.

The tribunal further noted that an Application under Section 7 was earlier filed by the Financial Creditor against the Corporate Debtor on 16.10.2021, which Section 7 Application was disposed of in terms of the Consent Term dated 29.06.2022.

The tribunal further noted that Paragraph 9 of the Consent Term clearly provided that Parties agreed that Section 7 Application which was filed in the Year 2021 and pending shall be disposed of with liberty to Financial Creditor to file a fresh Section 7 Application.

The tribunal further noted that on basis of Consent Terms dated 29.08.2022, Consent Decree was also passed by the DRT on 29.08.2022, and the Recovery Certificate was issued by the DRT. From the pleadings of Section 7 Application which is part of the record, the Section 7 Application is founded on the default on the basis of Consent Term dated 29.08.2022, which date obviously is subsequent to 10A period.

Based on the above, the tribunal while rejecting the contention that the default fell within the prohibited period under section 10A of the IBC observed that Section 7 Application having been founded on the basis of default committed after Consent Decree dated 29.08.2022 was passed, Default cannot be pegged on 10A period when Application under Section 7 is founded on the basis of Consent Decree dated 29.08.2022.

The tribunal concluded that it is not the case of the Appellant that no default was committed by the Corporate Debtor in terms of the Consent Decree dated 29.08.2022 therefore the Adjudicating Authority did not commit any error in admitting Section 7 Application filed by the Financial Creditor. The Section 7 Application was in no manner hit by Section 10A of the IBC.

Accordingly, the present appeal was dismissed.

Case Title: JUBIN KISHORE THAKKAR V. PHOENIX ARC PRIVATE LIMITED

Case Reference: Company Appeal (AT) (Insolvency) No. 1931 of 2024

Judgment Date: 06/11/2024