Debtor Company Willing to Pay Full Amount, Financial Creditor Objects, NCLAT Affirms Dismissal of Section 7 Petition

The National Company Law Appeals Tribunal (“NCLAT”), main bench, consisting of Judge Ashok Bhushan (President), Judge M. Satyanarayana Murthy (Judicial Member) and Mr. Barun Mitra (technical member), while ruling on an appeal filed in Reliance Commercial Finance Limited v Darode Jog Builder Pvt. ltd., affirmed the decision of the contracting authority not to admit a request under Article 7 of the IBC, despite the existence of a debt and a default. The bench granted the debtor company the opportunity to pay/settle the full amount of the default despite the financial creditor’s reluctance to enter into a settlement.

Background Facts

Reliance Commercial Finance Limited (“Appellant/Financial Creditor”) had sanctioned term loans of Rs. 19.5 Crores to Darode Jog Builder Pvt. (“Debtor Company”) on 29.07.2013. In 2017, loan accounts were declared non-performing assets. Subsequently, on 04.11.2019, the financial creditor filed a petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), requesting the initiation of a process of Corporate Insolvency Resolution (“CIRP”) against corporate debtor for default of Rs. 15,79,41,658/-.

In a hearing held on 06.07.2022, the debtor company acknowledged its liability to pay and made an offer of Rs. 12.75 Crores to be paid within 45 days. The supervisory authority ordered the financial creditor’s counsel to obtain the appropriate instructions. It was also observed that if the Settlement did not occur, the Motion would automatically be allowed at the next hearing date.

At the next court date, i.e. 11.07.2022, the debtor company said that they are willing to deposit the full amount of Rs. 15,79,41,658/- within 45 days. However, the financial creditor has expressed reluctance to settle the case. The judicial authority obtained the bank details of the financial creditor and at the same time granted the latter the freedom to file a request for restitution in the event that the said amount was not deposited within 45 days. Accordingly, the motion was dismissed.

Harmed by the Order of 11.07.2022, the Financial Creditor appealed to the NCLAT.

The appellant’s arguments

The financial creditor argued that the contracting authority erred in ruling on the petition, as it was unwilling to settle the case. Consequently, the contracting authority could not have allowed the debtor company to deposit an amount in the account of the financial creditor.

Respondent’s Considerations

The debtor company argued that the financial creditor was unwilling to settle because the full amount had not been offered before and settlement had not taken place despite several adjournments. It was argued that the debtor company has the financial capacity to deposit the full amount.

NCLAT Decision

The Chamber relied on the judgment of the Supreme Court in Vidarbha Industries Power Limited Vs. Axis Bank LimitedCivil Appeal No. 4633 of 2021, in which it was held that:

“56. The Adjudicating Authority (NCLT) and the Appeals Tribunal (NCLAT) both proceeded on the principle that an application must necessarily be considered under Article 7(5)(a) of the IBC, if a debt existed and the debtor company was in default of payment of the debt. In other words, the contracting authority (NCLT) concluded that IBC Section 7(5)(a) was mandatory. The contracting authority (NCLT) was of the view that Article 7(5)(a) did not admit of any other interpretation, with which the Appeals Tribunal (NCLAT) agreed.”

The bench observed that according to the judgment, even after debt and default are there, the contracting authority must apply its mind to assess the feasibility of initiating the CIRP.

“Where the debtor company has complied with depositing the full amount in default of the financial creditor, as permitted by the contracting authority, no purpose or opportunity survives to pursue the resolution of the debtor company’s insolvency .”

The Chamber observed that proceedings under Article 7 are for the resolution of insolvency. The contracting authority did not err in verifying whether the debtor company can comply with the deposit of the entire amount in default in the bank account of the financial creditor. It was observed that the interest of the financial creditor was fully protected, since the freedom was already given to relaunch the petition in case the total amount was not received within 45 days.

The appeal was dismissed.

Case title: Reliance Commercial Finance Limited v Darode Jog Builder Private Limited

Case no: Company Appeal (AT) (Insolvency) No. 1005 of 2022

Counsel for the Appellant: Mr. Nikhil Nayyar, Lead Counsel with Mr. Mahesh Agarwal, Ms. Himanshu Satija, Ms. Geetika Sharma, Mr. Shivam Shukla and Mr. Archit Jain, Advocates.

Counsel for the Respondent: Mr. Ramji Srinivasan, Lead Counsel with Mr. Agam H. Maloo, Mr. Abhinav Agarwal, Ms. Shruti Pandey and Mr. Kaustubh Kandpile, Advocates.

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