Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has ruled that a One-Time Settlement (OTS) proposal submitted by a corporate debtor and conditionally approved by one consortium member, subject to approval by others, cannot bar initiation of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

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A three-member bench comprising Justice Rakesh Kumar Jain (Chairperson), Justice Mohd. Faiz Alam Khan (Judicial Member), and Naresh Salecha (Technical Member) upheld the order of the National Company Law Tribunal (NCLT), New Delhi, admitting the insolvency application filed by Canara Bank against Goodluck Carbon Pvt. Ltd. The Tribunal observed that the existence of a pending OTS proposal or inter-creditor arrangements among consortium members cannot curtail the statutory right of a financial creditor under Section 7 of the IBC.

Background of the Case

Goodluck Carbon Pvt. Ltd., a company engaged in manufacturing, was part of a consortium loan arrangement with multiple banks led by Punjab National Bank (PNB). The company defaulted on its loan obligations, leading to the classification of its account as a Non-Performing Asset (NPA) on September 30, 2015. Following the default, the consortium banks initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for recovery of their dues.

The corporate debtor later submitted a One-Time Settlement (OTS) proposal dated May 24, 2023, offering ₹39.5 crore as a full and final settlement. The proposal was discussed in a Joint Lenders’ Meeting (JLM) on May 25, 2023, where all the consortium members decided to forward the OTS to their respective higher authorities for approval. Canara Bank approved the OTS, but only subject to approval by all consortium members. Before the remaining lenders could decide on the proposal, Canara Bank filed an application under Section 7 of the IBC before the NCLT. The NCLT admitted the petition and initiated the Corporate Insolvency Resolution Process (CIRP) against Goodluck Carbon Pvt. Ltd. Aggrieved, the suspended director of the company, Rajender Kumar Pahwa, approached the NCLAT challenging the order.

Appellant’s Contentions

The appellant contended that the OTS proposal was still under consideration by the consortium, and hence, Canara Bank’s decision to initiate insolvency proceedings was premature and arbitrary. It was submitted that the bank should have awaited the outcome of the OTS before resorting to the IBC mechanism. It was further argued that the conditional approval of the OTS by Canara Bank amounted to a binding commitment, and the bank’s subsequent decision to cancel the proposal without any justifiable reason was unlawful. The appellant also highlighted that a 5% earnest deposit had already been made towards the proposed settlement to demonstrate bona fide intent.

Relying on judicial precedents such as Ambience Pvt. Ltd. v. Punjab & Sind Bank (2024), the appellant submitted that once an OTS proposal is approved, the creditor cannot unilaterally withdraw or disregard it. The appellant therefore urged that the admission of the Section 7 application be set aside in light of the pending OTS and the bank’s alleged arbitrary conduct.

Respondent’s Submissions

Canara Bank, on the other hand, submitted that there exists no statutory restriction under the IBC that prevents a financial creditor from filing an insolvency petition merely because an OTS proposal is pending consideration. It emphasized that the conditional approval of the OTS could not be equated with its acceptance, especially since the proposal had never received the concurrence of all consortium members. The bank further argued that each member of a consortium retains an independent right to initiate proceedings under Section 7 of the IBC to recover its dues. The inter-creditor or consortium agreements are merely internal arrangements for administrative convenience and cannot restrict a creditor’s statutory remedies under the IBC.

Canara Bank also pointed out that the debtor had a history of repeated defaults and multiple failed settlement offers, which showed that there was no genuine intent to repay. It asserted that the OTS was a mere delaying tactic, and the conditions for admission under Section 7 — existence of a financial debt and default — were fully met.

Findings of the Tribunal

The NCLAT held that the decision of the consortium to forward the OTS proposal to higher authorities did not constitute acceptance of the proposal. The conditional approval by Canara Bank was not binding until all lenders had approved it, and since such approval never materialized, the OTS could not bar insolvency proceedings. The Bench further observed that inter se agreements among consortium banks are for internal coordination and do not have the effect of limiting any creditor’s independent statutory right under the IBC. It emphasized that once the existence of debt and default is established, the Adjudicating Authority has little discretion to reject a Section 7 application.“By any standards, the decision of the consortium of banks to forward the OTS proposal to their higher authorities cannot amount to its acceptance. The approval by Canara Bank was conditional and dependent upon approval by other members, which was never obtained,” the Tribunal observed.

The NCLAT clarified that the statutory rights of financial creditors under Section 7 of the IBC cannot be curtailed by internal consortium arrangements. The borrower, it held, cannot claim the benefit of an OTS as a matter of right. The Tribunal relied on the Supreme Court’s ruling in Bijnor Urban Cooperative Bank Ltd. v. Meenal Agarwal (2021), which categorically held that settlement schemes cannot be enforced as a right against lenders. The Bench also reaffirmed that pending settlement discussions or negotiations are irrelevant at the stage of admission of a Section 7 petition. Once a default has occurred, the creditor is entitled to invoke the insolvency process. “Only because the other members of the consortium have not joined the respondent in the petition, the application filed by one of the consortium members cannot be rejected if it fulfills all the conditions required for initiation of CIRP,” the Bench stated.

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Holding that Canara Bank’s decision to initiate insolvency was legally sound, the NCLAT dismissed the appeal. The Tribunal concluded that the pendency of an OTS proposal or internal approval process cannot fetter the right of a financial creditor to initiate proceedings under Section 7 of the IBC. The Bench observed that once the debt and default are proven, the NCLT must admit the petition, and the reasons for non-payment or pending settlement talks are of no consequence. Accordingly, the NCLAT upheld the admission of the Section 7 petition and the initiation of CIRP against the corporate debtor.

Appearance

For Appellant: Mr. Gaurav Mitra, Ms. Lavanya Pathak, Ms. Ankita Bajpai, Ms. Vatsala Kak & Mr. Sagar Thakkar, Advocates.

For Respondent: Mr. Abhishek Naik, Ms. Gulafsha Kureshi, Ms. Katyayani, Ms. Deepsikha Mishra, Mr. Falak Zaidi & Mr. Mojahid Karim Khan, for R-1. Mr. Santosh Kumar Root & Ms. Dharna Veragi, for R-3/ PNB.

Cause Title: Rajender Kumar Pahwa (Suspended Director Of Goodluck Carbon Private Limited) Versus Canara Bank And Ors.

Case No: Company Appeal (AT) (Insolvency) No. 1980 of 2024

Coram: Justice Rakesh Kumar Jain (Chairperson), Justice Mohd. Faiz Alam Khan (Judicial Member), Naresh Salecha (Technical Member)