NCLAT Rules, Mere Execution Of Restructuring Agreement Does Not Extinguish Corporate Debtor's Liability When Restructuring Scheme Is Not Approved By NCLT
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member), has held that the mere execution of a Master Restructuring Agreement (MRA), whereby a third party undertakes to discharge the liabilities of the corporate debtor, does not extinguish the corporate debtor’s liability when the restructuring scheme fails to take effect. The Tribunal clarified that for a valid novation under Section 62 of the Indian Contract Act, all parties to the original contract must consent, and the new arrangement must be implemented in full.
The Tribunal was hearing an appeal filed by the suspended director of Jaypee Cement Corporation Ltd. (JCCL), challenging the order dated 22.07.2024 passed by the National Company Law Tribunal (NCLT), Allahabad Bench, which admitted State Bank of India’s (SBI) Section 7 application under the Insolvency and Bankruptcy Code (IBC), 2016, against JCCL.
JCCL, a wholly-owned subsidiary of Jaiprakash Associates Ltd. (JAL), had availed various credit facilities from SBI between 2012–2015. Following defaults, both JCCL and JAL were classified as NPAs effective from 08.03.2016. Subsequently, a Joint Lenders Forum (JLF) was constituted to prepare a Corrective Action Plan, and a Composite Scheme of Debt Realignment Plan (DRP) was proposed, bifurcating the debt into three buckets. Bucket 1 involved divestment of cement business assets to UltraTech Cement Ltd. (UTCL), Bucket 2A covered sustainable debt retained by JAL, and Bucket 2B consisted of unsustainable debt to be transferred to a special purpose vehicle (SPV).
While the NCLT approved the scheme relating to Bucket 1 on 02.03.2017, and the Master Implementation Agreement was executed on 31.03.2016, the broader Comprehensive Reorganization and Restructuring Plan (CRRP) was ratified only later on 18.05.2017. SBI issued a sanction letter dated 20.06.2017, and on 31.10.2017, the MRA was executed between JAL, ICICI Bank (lead bank), and other lenders. JCCL, however, was not a party to this MRA.
Despite these developments, the RBI, through letters dated 14.08.2018 and 30.08.2018, declared the restructuring process ‘null and void’ and directed lenders to initiate proceedings under the IBC. Subsequently, SBI filed a Section 7 application against JCCL for a default amounting to ₹363.77 crores, with the date of default pegged at 03.03.2016.
The appellant contended that the default dated 03.03.2016 stood waived pursuant to the MRA and the restructuring framework approved by the JLF. It was argued that the original debt stood novated, transferring liability from JCCL to its holding company, JAL, and hence, no debt remained on JCCL’s books to trigger CIRP. Reliance was placed on Section 62 of the Indian Contract Act, 1872, to argue that the MRA replaced the original agreement, and therefore, JCCL was no longer liable.
The respondent, SBI, argued that the MRA was executed only between ICICI Bank and JAL, with JCCL not being a signatory. Therefore, the necessary condition for novation—agreement between the same parties—was not fulfilled. Furthermore, the security interests required under Clause 5.8 of the MRA were not created, as acknowledged in JLF minutes dated 15.10.2018. The respondent also highlighted that JCCL had itself issued acknowledgment letters from 2020 to 2022, and NESL records confirmed JCCL’s default from 03.03.2016.
The Tribunal, after hearing the parties, observed that novation under Section 62 requires that all conditions of the substituted contract be fulfilled and that all original parties consent to the substitution. The MRA could not be considered a valid novation as JCCL was not a party to it, and the conditions stipulated under the MRA, particularly those concerning creation of security, remained unfulfilled. Citing Supreme Court precedent in United Bank of India v. Ramdas Mahadeo Prashad [(2004) 1 SCC 252], the Tribunal emphasized that when the terms of a new contract are not performed, novation cannot be presumed.
It was also held that the failure of the restructuring proposal does not erase the original debt of JCCL. The fact that JAL undertook to repay JCCL’s debt did not extinguish JCCL’s independent liability, especially when the restructuring failed. The Tribunal noted that JCCL had acknowledged the debt and provided securities to SBI. The lender never recorded a transfer of JCCL’s debt to JAL in its books, and the internal treatment of the debt in JAL’s and JCCL’s records could not bind the lender.
The Tribunal concluded that the initiation of CIRP against JAL could not bar the initiation of separate insolvency proceedings against JCCL, a distinct legal entity. It also rejected the appellant’s claim that the Section 7 application was based on a time-barred default, holding that the default date was validly recorded in the NESL certificate, authenticated in 2022. Accordingly, the NCLAT dismissed the appeal, affirming the admission of SBI’s Section 7 application against JCCL by the NCLT.
Appearance
For Appellant: Mr. Abhijeet Sinha Sr. Advocate with Mr. Abhishek Anand, Mr. Karan Kohli, Ms. Palak Kalra, Mr. Aditya Shukla and Ms. Heena Kochar, Advocates.
For Respondents: Mr. Ankur Mittal, Ms. Muskan Jain and Mr. Srijan Jain, Advocates for SBI. Mr. Rahul Gupta, Advocate for R2 a/w Ms. Deepika Bhugra Prasad- IRP in person.
Cause Title: Alok Gaur, Suspended Board of Director of Jaypee Cement Corporation Ltd. V. State Bank of India & Anr
Case No: Company Appeal (AT) (Insolvency) No.1565 of 2024 & I.A. No. 8141 of 2024
Coram: Justice Ashok Bhushan [Judicial Member], Mr. Barun Mitra [Technical Member]
