While Deciding Application U/S 7 Of IBC, Adjudicating Authority Is Not Required To Interfere With Terms Of Contract Between Parties, Says NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench, comprising Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member), has reaffirmed that in an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), the Adjudicating Authority and the Appellate Authority must limit their inquiry to the existence of debt and default without delving into the reasonableness of contractual terms, such as the rate of interest.
Background
The case pertained to the Corporate Debtor, Karni Developers & Construction Pvt. Ltd., which had initially availed a term loan (TL-1) of Rs. 15 Crores from the Union Bank of India, out of which Rs. 12.92 Crores was disbursed. Subsequently, the loan was assigned to Phoenix ARC Pvt. Ltd. on 03.12.2013 through an Assignment Agreement. On 07.02.2014, a second term loan (TL-2) of Rs. 3.40 Crores was sanctioned between the Corporate Debtor and Phoenix ARC Pvt. Ltd., with an interest rate of 30% per annum and a penal interest of 36% per annum. The Corporate Debtor defaulted on repayments, leading Phoenix ARC Pvt. Ltd. to file an application under Section 7 of the IBC on 09.01.2021, which was admitted by the National Company Law Tribunal (NCLT), Jaipur Bench, on 22.02.2024. The Corporate Debtor’s suspended director challenged this order before the NCLAT.
Arguments of the Appellant
Limitation Period: The Appellant contended that the Section 7 application was barred by limitation as TL-1 was classified as a Non-Performing Asset (NPA) on 31.12.2008, and even if TL-2’s NPA date (31.03.2016) was considered, the default date could not extend beyond 31.12.2015. Thus, the application filed on 09.01.2021 was beyond the three-year limitation period.
Defective Application: The Appellant argued that the application under Section 7 was liable to be dismissed for failing to mention the date of default in Part-IV.
Unreasonable Interest Rates: The Appellant contended that the interest rate of 30% and penal interest of 36% were exorbitant and should have been scrutinized by the Adjudicating Authority.
Loan Legality: It was argued that Phoenix ARC Pvt. Ltd., being an Asset Reconstruction Company (ARC) and not a financial institution, could not have extended a loan to the Corporate Debtor.
Arguments of the Respondent
Acknowledgment of Debt: The Respondent argued that the debt was acknowledged by the Corporate Debtor in its balance sheet for FY 2019-20 and in letters dated 05.05.2017 and 11.12.2017. Thus, under Section 18 of the Limitation Act, 1963, a fresh limitation period began from the date of acknowledgment.
Maintainability of Application: It was asserted that the RBI guidelines dated 22.04.2009 allowed Securitisation and Reconstruction Companies to restructure acquired loans to recover dues, and this issue was never raised before the NCLT.
Reasonableness of Interest Rates: The Respondent argued that the Corporate Debtor voluntarily agreed to the interest rates and could not now challenge the same.
Observations of the Tribunal
The Tribunal noted that TL-2 was a separate transaction from TL-1. The application under Section 7 was filed solely in respect of TL-2, and therefore, the limitation period had to be computed from the NPA date of 31.03.2016. It further noted that the Corporate Debtor had acknowledged its debt and default in letters dated 05.05.2017 and 11.12.2017. In the letter dated 05.05.2017, the Corporate Debtor stated: "We are very sorry for unable to pay the settlement amount as per agreed terms of Memorandum-of Compromise (MOC) dated 03rd December, 2013."
Similarly, in the letter dated 11.12.2017, the Corporate Debtor admitted: "You have sanctioned the term loan of Rs. 18.10 Crores by way of assignment of term loan of Union Bank of India on 03rd December, 2013 and also sanctioned term loan of Rs. 3.40 Crores on 07th February, 2014 for payment against fees and charges of Jodhpur Development Authority for approval of Plan." The Tribunal concluded that these admissions extended the limitation period.
Regarding the legality of the loan granted by an ARC, the Tribunal referred to the RBI guidelines, which state: "Restructuring of loans by Securitisation Companies/Reconstruction Companies is one of the measures allowed to be undertaken by SC/RCs for realization of their dues. As such, there is no bar on SC/RCs deploying their funds for undertaking restructuring of acquired loan account with the sole purpose of realizing their dues."
On the issue of interest rates, the Tribunal noted that the Corporate Debtor had explicitly waived any defenses under laws related to excessive interest charges, as stated in the TL-2 agreement: "The Borrower acknowledges that the New Loan provided under this Agreement is for a commercial transaction and waives any defences available under usury or other laws relating to the charging of interest."
The Tribunal held that neither the Adjudicating Authority nor the Appellate Authority should interfere with the contractual terms agreed upon by the parties. It reiterated: "While dealing with an application under section 7, the Adjudicating Authority is not required to consider the question of the dispute between the parties as long as the 'debt' and 'default' is proved." Thus, the Tribunal rejected the argument that the Adjudicating Authority should have examined whether the interest rates were unreasonable.
Advocates appearign for the parties:
For Appellant : Mr. Ramji Srinivasan, Sr. Advocate and Mr. Abhijeet Sinha, Sr. Advocate with Mr. Syed Arsalan Abio, Mr. Prateeek Khaitan, Mr. Chatanya Sharma, Mr. Shitij Chakravarty and Mr. Udhav H. Aggarwal, Mr. Aryun Bhatia, Ms. Shefali Mundi, Advocates.
For Respondent : Mr. Amit Singh Chadha, Sr. Advocate with Mr. Suresh Dutt Dobhal, Mr. Nirmal Goenka, Mrs. Kanchan Rathuri, Advocates for R-1.
Advocates for Intervener: Mr. Anurag Bhatt, Mr. Lokesh Pathak
Cause Title: Mrs. Madhubala Chauhan Suspended director of Karni Developers & Construction Company Pvt. Ltd. V. Phoenix Arc Pvt. Ltd. and Anr.
Case Number: Company Appeal (AT) (Insolvency) No. 604 of 2024
Coram: Justice Ashok Bhushan, Chairperson and Mr. Barun Mitra, Member (Technical)
