2021 (3) TMI 626 - AT - Insolvency and Bankruptcy

NCLAT rules in favor of SBI, directs NCLT to restore insolvency petition

The National Company Law Appellate Tribunal (NCLAT) allowed the appeal filed by SBI, setting aside the NCLT's order and directing the NCLT to restore the ... Constitutional validity of Sections 35- AA and 35-AB of the ‘Banking Regulations Act, 1949’ - Liability in the case of Contract of Guarantee - who is responsible, principal or the borrower - Financial Debt - initiation of CIRP - HELD THAT:- Reserve Bank of India has powers’ to issue certain directions to certain banks and Banking companies so as to see that there is proper recovery of public money or for any other such purpose. As a matter of fact, Section 3(11) definition of Insolvency & Bankruptcy Code, deals with ‘debt’ meaning a ‘liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt’ - Any sum which is due and payable by the borrower/Corporate Debtor to the Bank is a ‘Financial Debt’ within the meaning of Section 5(8) of the Code. The ‘CIRP’ is to be initiated when a default is made in regard to the payment of ‘Debt’ by the ‘Corporate Debtor’. In Law, a ‘Creditor’ is not to be restrained from filing such application in accordance with ‘Law’. The trigger for initiating ‘Insolvency Process’ is the occurrence of ‘default’ by the ‘Debtor’. In the case on hand resting upon the Gazette Notification of the Ministry of Finance dated 05.05.2017 whereby the Central Government had authorized the Reserve Bank of India to issue such directions to any banking company or banking companies which may be considered necessary to initiate insolvency resolution process in respect of default under the provisions of the Insolvency and Bankruptcy Code, 2016, the Reserve Bank of India had issued a letter dated 28.08.2017 (Annexure A- 7, Page 156 of Volume I of the Paper Book), whereby the Respondent/Company’s name was shown at Sl No 20 in the List of Accounts of the Appellant /State Bank of India. Indeed, based on the recommendations of “internal advisory committee (IAC)” constituted pursuant to the Banking Regulation (Amendment) Ordinance, 2017 12 accounts were identified for immediate reference for resolution under the I&B Code etc. Thus, by no stretch of imagination it can be said that there was no issuance of authorization by the Central Government to the Reserve Bank of India for issuance of such direction(s) to any banking company to initiate insolvency resolution process in respect of default under the I&B Code and added further, the Reserve Bank of India through letter dated 28.08.2017 issued a specific list of accounts wherein the Respondent’s name admitted. This Tribunal bearing in mind that it has allowed Comp. App. (AT) (Ins) No. 294/2020, the Comp. App(AT)(Ins) No. 295/ 2020 has become an ‘Otiose’ one, because of the fact as a concomitant effect, the 2nd order dated 10.01.2020 passed by the ‘Adjudicating Authority’ becomes a nugatory one in the eye of Law and accordingly stands disposed of - Application disposed off. Issues Involved:1. Validity of the RBI's direction to SBI under Section 35AA of the Banking Regulation Act, 1949.2. Applicability of the Supreme Court's judgment in the 'Dharani Sugars' case.3. Jurisdiction of the National Company Law Tribunal (NCLT) to review its own orders.4. Impact of the RBI's letter dated 28.08.2017 on the initiation of insolvency proceedings.5. Applicability of Section 14 of the Limitation Act, 1963.6. Liability of the corporate guarantor and the principal borrower.Detailed Analysis:1. Validity of the RBI's Direction to SBI under Section 35AA of the Banking Regulation Act, 1949:The NCLT, Cuttack Bench, in its order dated 25.06.2019, observed that the insolvency proceedings initiated by SBI against the corporate debtor were based on RBI's directions under Section 35AA of the Banking Regulation Act, 1949. The tribunal noted that the RBI's directions were not independently initiated by SBI but were based on the RBI's instructions. This was evident from the minutes of the joint lenders' meeting dated 28.11.2017, where it was decided to refer the company to NCLT as per RBI's circular dated 28.08.2017. The tribunal held that the RBI's directions without the concurrence of the Central Government, as interpreted by the Supreme Court in the 'Dharani Sugars' case, were not valid.2. Applicability of the Supreme Court's Judgment in the 'Dharani Sugars' Case:The appellant argued that the NCLT wrongly applied the 'Dharani Sugars' judgment, which struck down the RBI circular dated 12.02.2018, to the present case. The appellant contended that the proceedings under Section 7 of the Insolvency and Bankruptcy Code (IBC) were initiated before the issuance of the RBI circular dated 12.02.2018. The NCLT extended the 'Dharani Sugars' judgment to the RBI's letter dated 28.08.2017, which was not quashed by the Supreme Court. The appellant further argued that the Central Government's notification dated 05.05.2017 had already authorized the RBI to issue directions regarding specific defaults.3. Jurisdiction of the NCLT to Review its Own Orders:In its order dated 10.01.2020, the NCLT observed that there is no provision under the IBC, 2016, or the NCLT Rules to review its own orders. The tribunal dismissed the review application filed by the appellant, stating that the Supreme Court's order dated 29.07.2019 could not be interpreted as a direction to review the earlier order. The appellant argued that the NCLT acted beyond its jurisdiction by dismissing the review application on the ground of lack of jurisdiction without examining its merits, despite the liberty granted by the Supreme Court to file the review petition.4. Impact of the RBI's Letter dated 28.08.2017 on the Initiation of Insolvency Proceedings:The NCLT, in its order dated 25.06.2019, observed that the RBI's letter dated 28.08.2017 directed SBI to initiate insolvency proceedings against specific defaulters, including the corporate debtor. The tribunal held that the RBI's directions were issued without the concurrence of the Central Government, as required under Section 35AA of the Banking Regulation Act, 1949, as interpreted by the Supreme Court in the 'Dharani Sugars' case. Consequently, the tribunal allowed the interlocutory application filed by the corporate debtor and dismissed the insolvency petition filed by SBI.5. Applicability of Section 14 of the Limitation Act, 1963:The appellant argued that the time spent in legal proceedings before the Supreme Court and the NCLT should be excluded under Section 14 of the Limitation Act, 1963. The appellant contended that it pursued the review application diligently and in good faith, and the delay in filing the appeal should be condoned. The appellant relied on various judicial precedents to support its contention that the time spent in prosecuting prior proceedings should be excluded while computing the period of limitation.6. Liability of the Corporate Guarantor and the Principal Borrower:The appellant argued that the liability of the corporate guarantor is co-extensive with that of the principal borrower under Section 128 of the Indian Contract Act, 1872. The appellant contended that the insolvency proceedings against the corporate guarantor would not affect the obligation of the principal borrower to repay the debt. The appellant cited various judicial precedents to support its contention that the corporate guarantor's liability is independent and simultaneous with that of the principal borrower.Disposition:The National Company Law Appellate Tribunal (NCLAT) allowed the appeal filed by SBI, setting aside the NCLT's order dated 25.06.2019. The NCLAT directed the NCLT to restore the insolvency petition filed by SBI and proceed further in accordance with the law. The NCLAT observed that the RBI's letter dated 28.08.2017 was issued based on the Central Government's authorization dated 05.05.2017, and the NCLT's contrary view was unsustainable in law. Consequently, the NCLAT dismissed the interlocutory application filed by the corporate debtor and directed the NCLT to dispose of the insolvency petition on merits.