NPA Tagging Irrelevant Once Default Is Established: NCLT Mumbai Admits Canara Bank’s CIRP Plea Against Galaxy Constructions
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai has held that the correctness of a bank’s Non-Performing Asset (NPA) classification is irrelevant for initiating corporate insolvency once the factual occurrence of default is established. Admitting Canara Bank’s Section 7 application against Galaxy Constructions and Contractors Private Limited, the Tribunal ruled that objections relating to alleged irregularities in NPA tagging or non-compliance with the MSME rehabilitation framework cannot defeat a creditor’s right to trigger insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC). The coram of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar emphasised that the IBC mechanism revolves around the simple question of whether repayment has been defaulted and not on the procedural validity of NPA declaration.
Also Read: NCLT Mumbai Rules, Pending Cheque-Bounce Case Not A Bar To Admitting Insolvency Plea
Canara Bank had extended multiple credit facilities worth ₹41.27 crore to Galaxy Constructions since June 2011, including cash credit, MSME CAP loans, vehicle loans and a bank guarantee. The earliest unpaid dues arose on 25 July 2017, and the loan account was later classified as NPA on 26 April 2018. As of October 2024, the bank claimed that ₹149.95 crore remained outstanding. The bank relied on post-NPA payments made in 2018 and 2019, as well as One-Time Settlement (OTS) proposals submitted by Galaxy in November 2022 and May 2023, to demonstrate acknowledgement of liability and extension of the limitation period.
Galaxy Constructions, purportedly an MSME, opposed admission and argued that the petition was barred by limitation and that the bank could not invoke IBC because it had violated the RBI’s 2015 MSME revival and rehabilitation framework by not classifying the account as a Special Mention Account or constituting a committee for stressed MSMEs. It further submitted that the alleged default was non-existent because the NPA declaration was illegal, and also contended that the payment acknowledgements relied upon by the bank were made by unauthorised persons and that OTS proposals after expiry of limitation could not revive the debt. It also argued that debt recovery through property auctions precluded the insolvency process.
The Tribunal rejected all objections. It held that once the earliest instance of non-payment is established, a valid default under Section 3(12) of the IBC stands triggered, irrespective of whether the account was properly classified as NPA under RBI instructions. It observed that non-compliance with the MSME framework, even if assumed for argument’s sake, would amount only to a procedural lapse and would not erase an admitted default. The Tribunal reiterated that the date of default under the IBC refers to the earliest unpaid instalment, not the date of NPA. It also found that Galaxy had not proved that it had established or communicated MSME status at the relevant time, and held that partial recoveries through auction did not extinguish the bank’s right to seek CIRP when unpaid debt still remained.
The Bench held that the payments made after the NPA classification and the OTS proposals constituted valid acknowledgements of liability within time, thereby extending limitation, and that the company had failed to raise any credible dispute regarding the outstanding debt. Concluding that the statutory requirements of Section 7 stood satisfied and that default was clearly established, the Tribunal admitted Canara Bank’s application, imposed a moratorium and appointed Srigini Rajat Naidu as the Interim Resolution Professional.
Appearance
For Applicant: Advocate Gajendra A. Rajput
For Respondent: Advocate Haris A Khan, Smita Durve
Cause Title: Canara Bank vs Galaxy Constructions and Contractors Private Limited
Case No: CP(IB)/301/MB/2025
Coram: Judicial Member Nilesh Sharma , Technical Member Sameer Kakar
