When Corporate Debtor's One Time Settlement Proposal Is Rejected By Financial Creditor, Application U/S 7 Of IBC Must Be Admitted Says NCLAT
Pranav B Prem
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Judicial Member) and Mr. Arun Baroka (Technical Member), held that when a One-Time Settlement (OTS) proposal submitted by the corporate debtor is rejected by the financial creditor and the debt remains unpaid, the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), must be admitted.
Background of the Case
The corporate debtor, Bareilly Highways Project Limited, was incorporated as a Special Purpose Vehicle (SPV) to execute the National Highway Project for constructing, operating, and maintaining the four-laning of the Bareilly-Sitapur section of National Highway-24 in Uttar Pradesh. State Bank of India (SBI) sanctioned financial facilities to the corporate debtor by a letter dated November 15, 2010. Subsequently, on July 26, 2017, the corporate debtor's loan account was classified as a Non-Performing Asset (NPA). On May 3, 2019, the National Highways Authority of India (NHAI) issued a termination notice to the corporate debtor. In 2020, the corporate debtor submitted a settlement proposal to the lenders, which was not accepted. SBI filed an application under Section 7 of IBC on April 15, 2023, claiming a default of ₹1409.72 crore. The date of default was mentioned as January 18, 2019.
Proceedings Before the NCLT
The National Company Law Tribunal (NCLT), New Delhi, issued a notice to the corporate debtor. In response, the corporate debtor argued that it had submitted an OTS proposal, which was rejected by the consortium of banks. After considering the submissions and evidence, the Adjudicating Authority held that both "debt" and "default" were established. Consequently, by an order dated September 23, 2024, the NCLT admitted the Section 7 application.
Contentions of the Parties
The appellant, a suspended director of the corporate debtor, argued that the company had invoked arbitration against NHAI on August 16, 2021. The corporate debtor contended that it was making sincere efforts to clear its dues through multiple OTS proposals and would be able to discharge its liabilities upon receiving funds from the arbitration proceedings.
Conversely, the respondent submitted that the corporate debtor had repeatedly failed to settle its dues despite being granted multiple opportunities. The financial creditor argued that the debt and default were undisputed and proven. The respondent further relied on the Supreme Court judgment in M. Suresh Kumar Reddy v. Canara Bank & Ors. [Civil Appeal No.7121/2022], asserting that once "debt" and "default" are established, the Adjudicating Authority must admit the Section 7 application.
NCLAT's Observations
The NCLAT, while dismissing the appeal, made several key observations:
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The Tribunal observed that there was no dispute regarding the financial facilities extended by SBI. The loan account was classified as NPA on July 26, 2017, and a recall notice was issued on January 11, 2019, demanding ₹2078.04 crore from the corporate debtor. SBI filed the Section 7 application for a default of ₹1049.72 crore.
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The Tribunal noted that the corporate debtor's OTS proposal dated August 3, 2024, was rejected by the consortium of banks. This fact was recorded by the Adjudicating Authority, which observed: "During the course of hearing, it was pointed out by the Ld. Counsel for the CD that they had given one time settlement proposal to consortium of banks and they wanted the same to be considered primarily on the plea that the arbitral proceedings against the NHAI may result in their favour and upon the same all the debts of the FC could be extinguished. The first OTS proposal was given on 03.08.2024 that was rejected by the consortium of banks."
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The NCLAT noted that the corporate debtor, through its counsel, did not seriously dispute the existence of debt and default. This admission was reflected in paragraph 16 of the NCLT's order: "Coming on the issue of debt and default, it is fairly stated across the bar by the CD that they have no serious objection to contention that the debt and default is an accepted fact."
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The Tribunal rejected the corporate debtor's argument that pending arbitration proceedings with NHAI justified delaying insolvency proceedings. The NCLAT relied on the Supreme Court's clarification in M. Suresh Kumar Reddy v. Canara Bank & Ors., which limited the applicability of Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [(2022) 8 SCC 352] to its unique factual matrix.
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The NCLAT also recorded the appellant's repeated attempts to seek adjournments for achieving a settlement, which ultimately failed. Despite being granted multiple opportunities to settle the dues, no settlement was reached.
Verdict
The NCLAT upheld the NCLT's order admitting the Section 7 application, emphasizing that once "debt" and "default" are established, the Adjudicating Authority is duty-bound to admit the insolvency application under Section 7 of the IBC. The appeal was dismissed, and the NCLAT directed the Resolution Professional (RP) to proceed with the Corporate Insolvency Resolution Process (CIRP) in accordance with the law.
Appearance:
For Appellant: Mr. Krishnendu Dutta, Sr. Advocate with Ms. Prachi Darji, Ms. Divya Verma, Ms. Ritika Gussain and Mr. Manav Goyal, Advocates.
For Respondents: Mr. Niranjan Reddy, Sr. Advocate with Ms. Smriti Churiwal, Mr. Vishesh Kalra, Mr. Jaiveer Kant and Ms. Anoushka Deo, Advocates for R-1.
For Intervenor: Mr. Arijit Prasad, Sr. Advocate with Ms. Nishtha Kaura, Advocates.
Cause Title: Nakul Bharana V. National Asset Reconstruction Company Limited and Anr.
Case No: Company Appeal (AT) (Insolvency) No. 1930 of 2024 & I.A. No. 7495 of 2024
Coram: Justice Ashok Bhushan [Chairperson], Arun Baroka [Member (Technical)]
[Read/Download order]
