NCLT Delhi: Setting Aside of NPA Classification by DRT Does Not Affect Insolvency Proceedings Under IBC
Pranav B Prem
The National Company Law Tribunal (NCLT), New Delhi Bench, comprising Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Dr. Sanjeev Ranjan (Technical Member), has held that an order passed by the Debt Recovery Tribunal (DRT) setting aside the classification of an account as a Non-Performing Asset (NPA) does not negate the existence of a financial debt or the occurrence of default under the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal emphasized that these two factors—existence of a financial debt and occurrence of default—are the primary criteria for admitting a Section 7 application under the IBC.
In the case at hand, M/s Encore Asset Reconstruction Company Private Limited, the Financial Creditor, had taken assignment of a loan initially granted by City Union Bank to M/s New Tech Imports Private Limited, the Corporate Debtor. The sanctioned loan facility, which was modified and revived from time to time, totaled ₹23.85 crores. The Corporate Debtor defaulted in repayment, prompting the Financial Creditor to issue a loan recall notice dated 25.06.2021, demanding payment of ₹24.35 crores along with further interest and penalties. Due to continued defaults, the Corporate Debtor’s account was classified as NPA on 09.05.2021. A statutory notice under Section 13(2) of the SARFAESI Act was issued on 16.07.2021.
Despite repeated demands and acknowledgments by the Corporate Debtor of its liability—through balance confirmations and entries in its audited financial statements—the dues remained unpaid. Consequently, the Financial Creditor filed a petition under Section 7 of the IBC seeking initiation of Corporate Insolvency Resolution Process (CIRP).
In response, the Corporate Debtor argued that the classification of the account as NPA on 09.05.2021 could not be considered the date of default. It relied on judicial precedents including Laxmi Pat Surana v. Union Bank of India [(2021) 8 SCC 481] ] to contend that a default under the Code occurs when a debt becomes due and is not paid, not upon NPA classification. The Corporate Debtor also contended that the DRT had, in S.A. No. 628 of 2023, set aside the NPA classification, terming it inconsistent with RBI guidelines and the bank’s own communications. It was submitted that such a finding by the DRT negated the validity of the Financial Creditor’s claim under the IBC.
The Tribunal rejected these arguments, observing that classification of an account as NPA, though often indicative of default, does not automatically amount to a conclusive default under the IBC. It cited the NCLAT decision in Edelweiss Asset Reconstruction Company Ltd. v. Perfect Engine Components Pvt. Ltd [2022 SCC OnLine NCLAT 1622] to reaffirm that adjudication under the IBC must be based on independent assessment of financial debt and non-payment.
Significantly, the Tribunal noted that the existence of financial debt and the fact of default had been adequately established through loan documents, balance confirmations, bank statements, and the Corporate Debtor’s own admissions. It held that even partial non-payment constitutes a “default” under the IBC, as clarified by the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank [(2023) 8 SCC 387].
Addressing the impact of the DRT order, the Tribunal held that the IBC, by virtue of Section 238, has overriding effect over all other laws, including the SARFAESI Act. The DRT's decision, being limited to procedural lapses in NPA classification, did not adjudicate on the existence of debt or default. The NCLAT’s ruling in Shri M.K. Dhir & Ors. v. Punjab National Bank & Anr [Company Appeal (AT) (INS) No. 453 of 2021] was relied upon to reinforce this principle.
Finding that all statutory requirements were met—including existence of financial debt, occurrence of default, and procedural compliance—the Tribunal admitted the Section 7 application. It initiated CIRP against the Corporate Debtor and imposed a moratorium in terms of Section 14 of the IBC. Mr. Rishabh Chand Lodha was appointed as the Interim Resolution Professional. In conclusion, the NCLT held that the DRT’s setting aside of NPA classification does not extinguish the Financial Creditor’s right to seek initiation of CIRP under the IBC, once the existence of financial debt and default is independently established.
Appearance
For Applicant: Mr. Sudhir Makkar, Senior Advocate, Ms. Sanya Lamba, Adv.
For Respondent: Mr. Anuj Mirdha, Mr. Krish Kalra, Ms. Rashi Arora, Advs.
Cause Title: M/s Encore Asset Reconstruction Company Private Limited V. M/s New Tech Imports Private Limited
Case No: CP (IB) No. 823 (ND)/ 2022
Coram: Shri Manni Sankariah Shanmuga Sundaram [Hon’ble Member (Judicial)], Dr. Sanjeev Ranjan [Hon’ble Member (Technical)]
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