2023 (9) TMI 1289 - AT - Insolvency and Bankruptcy

Tribunal validates Section 7 Application under Insolvency Code, dismissing appeal and affirming creditor's right.

Pradeep Madhukar More Suspended Director of Syntex Trading & Agency Private Limited Versus Central Bank of India

The Tribunal upheld the validity of the Section 7 Application under the Insolvency and Bankruptcy Code, 2016, initiated by the Central Bank of India ... CIRP - Maintainability of application u/s 7 r.w.s. 10A - default in repayment of term loan - applicability of time limitation - date of default - it is claimed that original Loan Agreement,has not to be looked into for default and default which is the basis of Section 7 Application is the default under OTR Agreement, which default took place on 31.03.2022 - HELD THAT:- Section 7 Application, thus, has been filed on the basis of default committed by the Corporate Debtor on 31.03.2022 as per OTR Agreement. Section 7 Application is thus based on event of default as per Clause 8.1 of the OTR Agreement and date of default has been clearly mentioned as 31.03.2022 under the OTR Agreement. It is also to be noted that date of NPA has been mentioned as 29.12.2020 as per Clause 48 of the Circular of the RBI dated 06.08.2020. Section 10A makes it clear that no Application shall ever be filed for initiation of Corporate Insolvency Resolution Process (“CIRP”) if the default occurred during the Section 10A period. What is prohibited was initiation of proceeding under Section 7, 9 and 10 for any default committed by the Corporate Debtor pre 10A period. When we look into Section 7 Application filed by the Corporate Debtor, the Application is not filed on a default under 10A period, rather it was filed on event of default, which has occurred under the One Time Restructuring Agreement dated 21.05.2021, which default occurred on 31.03.2022, when the Corporate Debtor failed to pay interest installments as well as principal installments, which were due by that time. In the present case, there was default committed before implementation of the Plan, as NPA was declared on 29.12.2020. Hence, in the present case, asset classification of the borrower has to be treated to be downgraded with effect from 29.12.2020. Clause 48, is thus only to be read with regard to downgrading to NPA for the relevant date and this Clause 48 is not relevant to find out event of default, which occurred under the One Time Restructuring Agreement and which is foundation of Section 7 Application. The event of default under the One Time Restructuring Agreement, which contained in Clause 8.1 as extracted above and by virtue of Claude 8.2, which contains heading “Consequences in event of default”, the lenders in its own discretion can exercise or pursue any other legal remedy or right provided in any other applicable law. Thus, when event of default under the One Time Restructuring Agreement happens, the said event of default shall form foundation of any legal action - by the One Time Restructuring Agreement an amount of Rs.51.71 Crores was granted as Fresh Funded Interest of the Term Loan, which was disbursed to the Corporate Debtor and default with regard to the said amount can be committed only when there is a default in repayment of FITL disbursement. The learned Senior Counsel for the Appellant has relied on the judgment of the Hon’ble Supreme Court in Rakesh Kymal vs. Siemens Games Renewable Power Pvt. Ltd [2021 (2) TMI 394 - SUPREME COURT] , in which case the Hon’ble Apex Court had occasion to consider Section 10A - In the above case an Application under Section 9 was filed on 11.05.2020 whereas an Ordinance No.09/2020 was Promulgated by the President of India from 05.06.2020, by which Section 10A was inserted in the Code. It was contended that the Application was filed prior to Ordinance when Section 10A was brought into force, which argument was rejected. The ratio of the judgment is well settled that with regard to a default committed under Section 10A, no Application can ever be filed for the said default. Thus, what is prohibited is initiation of proceedings for any default committed during 10A period. In the present case, Application under Section 7 was not filed for default committed during 10A period, rather the Application was specifically filed for default committed under the OTR Agreement, which is committed on 31.03.2022, which was much subsequent to 10A period. The mentioning of date 29.12.2020 as NPA in Section 7 Application was on account of Clause 48 of the RBI Circular dated 06.08.2020, which downgraded the Corporate Debtor in event of any default committed under One Time Restructuring Agreement. By mentioning NAP date, i.e., 29.12.12020, which was in obedience of the Clause 48, no benefit can be made by the Appellant by contending that Application was filed for default during the 10A period. The Application under Section 7 of the Code filed by the Central Bank of India was not for any default committed during 10A period, rather the Application was filed for default committed on 31.03.2022 under the One Time Restructuring Agreement dated 21.05.2021 and the event of default under One Time Restructuring Agreement happened only on 31.03.2022, giving right to the Financial Creditor to take recourse of Section 7 Application, which was rightly done in the facts of the present case - no error has been committed by the Adjudicating Authority, admitting Section 7 Application. Appeal dismissed. Issues Involved:1. Validity of the Section 7 Application under the Insolvency and Bankruptcy Code, 2016.2. Applicability of Section 10A of the Insolvency and Bankruptcy Code, 2016.Summary:Issue 1: Validity of the Section 7 ApplicationThe appeal was filed against the order admitting the Company Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, initiated by the Central Bank of India. The Corporate Debtor defaulted on three term loans and was declared NPA on 29.12.2020. A One Time Restructuring Proposal (OTR) was sanctioned on 21.05.2021, providing an interest moratorium of 16 months and a principal moratorium of 18 months. The Corporate Debtor defaulted under the OTR Agreement on 31.03.2022, leading to the filing of the Section 7 Application.The Tribunal noted that the Section 7 Application was based on the default under the OTR Agreement dated 21.05.2021, with the date of default being 31.03.2022. The OTR Agreement amended the original loan agreements, and any default under the OTR Agreement was considered for the Section 7 Application. The Tribunal upheld that the default under the OTR Agreement gave the Financial Creditor the right to initiate insolvency proceedings.Issue 2: Applicability of Section 10AThe appellant argued that the default dates (30.09.2020 and 29.12.2020) were within the Section 10A period, which bars initiation of insolvency proceedings for defaults occurring during the specified period due to the COVID-19 pandemic. However, the Tribunal clarified that the Section 7 Application was filed based on the default under the OTR Agreement on 31.03.2022, which is outside the Section 10A period.The Tribunal referred to Clause 48 of the RBI Circular dated 06.08.2020, which deals with asset classification post-implementation of the resolution plan. It was concluded that the downgrading of the borrower to NPA as per Clause 48 does not affect the validity of the default date under the OTR Agreement.ConclusionThe Tribunal concluded that the Section 7 Application was not barred by Section 10A, as it was based on a default that occurred after the Section 10A period. The appeal was dismissed, and the order admitting the Section 7 Application was upheld.