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NCLAT Rules, Viability Of Corporate Debtor Can't Be Considered While Deciding Petition U/S 7 Of IBC Once Debt & Default Are Established

NCLAT Rules, Viability Of Corporate Debtor Can't Be Considered While Deciding Petition U/S 7 Of IBC Once Debt & Default Are Established

Pranav B Prem


The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Judicial Member) and Mr. Arun Baroka (Technical Member), has held that once the existence of debt and default is established under Section 7 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority is bound to admit the application and has no discretion to consider the commercial viability of the corporate debtor. The Tribunal reaffirmed that considerations regarding whether the corporate debtor is a going concern or the possible impact on stakeholders are irrelevant at the admission stage.

 

Also Read: NCLAT Declares Transactions Fraudulent U/S 66 Of IBC Due To Corporate Debtor's Failure To Diligently Negotiate One-Sided Clause In MOU

 

The appeal was filed by Edelweiss Asset Reconstruction Company Limited (EARCL), acting as the trustee of EARC Trust SC 444, challenging the order dated 06.11.2024 passed by the National Company Law Tribunal, Ahmedabad Bench. The NCLT had dismissed EARCL’s Section 7 application for initiating the Corporate Insolvency Resolution Process (CIRP) against Takshashila Heights India Pvt. Ltd., despite evidence of debt and default, holding that the CIRP would be prejudicial to the corporate debtor’s ongoing real estate project and stakeholders.

 

ECL Finance Ltd., the original lender, had sanctioned two term loans to the corporate debtor in July 2018—₹40 crores (TL-I) and ₹30 crores (TL-II). The loan agreements were secured through a series of hypothecation deeds, personal guarantees from promoters, mortgage deeds, and other supporting documents. The corporate debtor last made a payment on 30.09.2021 and was thereafter classified as a non-performing asset (NPA) on 30.12.2021. The loans were subsequently assigned to EARCL on 09.05.2022.

 

EARCL issued a recall and guarantee invocation notice on 31.05.2022, followed by a demand notice under Section 13(2) of the SARFAESI Act on 21.07.2022. A restructuring proposal was entered into between EARCL and the corporate debtor on 23.05.2023, with a repayment schedule of ₹55 crores in eight instalments spread across two years. The corporate debtor paid the first instalment of ₹5.5 crores due on 30.06.2023 but defaulted on the second instalment by paying only ₹86 lakhs out of the ₹3 crores due on 30.09.2023. EARCL revoked the restructuring agreement on 29.12.2023.

 

Subsequently, EARCL filed a Section 7 application on 31.01.2024 claiming an outstanding amount of ₹93.54 crores. The petition was supported by financial documents, restructuring records, default acknowledgment, and communication between the parties. Despite this, the NCLT dismissed the petition, observing that the application appeared to be an attempt at recovery rather than resolution and that the corporate debtor, being a viable and operational real estate entity, should not be subjected to CIRP. The NCLT relied on the Supreme Court’s judgment in Vidarbha Industries Power Ltd. v. Axis Bank Ltd [2022 SCC OnLine SC 841] to exercise discretion in rejecting the petition.

 

The appellant argued that the NCLT had erred by applying Vidarbha, a case decided on unique facts, and had ignored binding precedents. Reference was made to the Supreme Court’s decisions in Innoventive Industries Ltd. v. ICICI Bank, M. Suresh Kumar Reddy v. Canara Bank [2023 SCC OnLine SC 608], and E.S. Krishnamurthy v. Bharath Hi Tech Builders [(2022) 3 SCC 161], where it was held that the Adjudicating Authority is required only to examine whether a financial debt exists and whether default has occurred. Once these are established, the application must be admitted.

 

Also Read: NCDRC: Delay in Notifying Insurer Not Fatal if Police Informed Promptly; Upholds ₹7.8 Lakh Compensation Against Cholamandalam Insurance

 

The Tribunal noted that the restructuring agreement had specific clauses for revocation upon default. Clause 8(iii) gave EARCL the right to revoke the arrangement if there was any payment default. The Tribunal found that the corporate debtor not only failed to make full payment of the second instalment but also failed to cure the default within the 15-day grace period stipulated under Clause 9(ii). Email communications from the corporate debtor also confirmed its inability to pay, citing lack of funds, difficulty in selling units, and non-compliance issues with civil authorities.

 

In rejecting the arguments of mala fide intent, the Tribunal held that the appellant had followed due legal process and was under no obligation to issue a No Objection Certificate (NOC) after revocation of the restructuring scheme. The request for NOC was denied by email on 26.09.2023. Further communications, including those dated March 15, 28, and 29 of 2024, evidenced continued defaults and admissions by the corporate debtor regarding its financial distress.

 

Addressing the issue of forum shopping and multiple recovery proceedings, the Tribunal held that the IBC and SARFAESI Act are separate legal mechanisms and that simultaneous proceedings under both laws do not amount to abuse. The filing of Securitisation Application No. 150 of 2024 by the corporate debtor before the DRT was also viewed as an attempt to frustrate recovery and block CIRP.

 

An intervenor, The Elegna Co-op. Housing and Commercial Society Ltd., representing unit holders, had also opposed the admission. However, the Tribunal held that the intervenor had no locus as it was not a financial or operational creditor and was not party to the transaction forming the subject matter of the Section 7 petition.

 

Despite the respondent’s claim that the project “Takshashila Elegna” was near completion, with a majority of residential units already sold, and that the debtor was a going concern with approvals in place, the Tribunal held that these factors were not relevant. The core issue remained the admitted default in repayment. The Tribunal emphasized that default of even part of the debt is sufficient ground for admitting a Section 7 application.

 

Also Read: NCLAT Rules, Mere Execution Of Restructuring Agreement Does Not Extinguish Corporate Debtor's Liability When Restructuring Scheme Is Not Approved By NCLT

 

The NCLAT also referred to its own judgment in Bank of Maharashtra v. Newtech Promoters and Developers Pvt Ltd [Company Appeal (AT)(Ins) No. 1487 of 2022] (decided on 19.10.2023), where it was held that even real estate companies with ongoing projects can be subjected to CIRP once debt and default are proven. Ultimately, the Tribunal concluded that the NCLT had incorrectly exercised discretion in rejecting the petition based on irrelevant factors such as the corporate debtor's viability. The Appellate Tribunal found that the petition met all statutory requirements under Section 7, was within limitation, and was supported by substantial material. Accordingly, the appeal was allowed, and the impugned order was set aside.

 

Appearance

For Appellant: Mr. Abhijeet Sinha, Sr. Advocate with Mr. Aditya Vashishth and Mr. Anmol Bansal, Advocates (EARCL).

For Respondent: Mr. Saurabh Kalia and Mr. Avik Sarkar, Advocates Mr. Arjun Sheth and Mr. Rajiv Chawla, Advocates for Intervenor.

 

 

Cause Title: Edelweiss Asset Reconstruction Company Limited V. Takshashila Heights India Pvt. Ltd.

Case No: Company Appeal (AT) (Insolvency) No. 2261 of 2024

Coram: Justice Ashok Bhushan [Judicial Member], Mr. Arun Baroka [Technical Member] 

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