NCLAT upholds section 7 application admission despite settlement claims, rules creditor not obligated to release security before payment

NCLAT Principal Bench dismissed an appeal challenging admission of section 7 application under IBC. The corporate debtor argued that parties had reached an out-of-court settlement and alleged financial creditor misused IBC provisions as recovery forum. NCLAT held that settlement agreement clearly stated security would be released only upon full payment, and financial creditor was not obligated to provide NoC for mortgaged properties before receiving settlement amount. The adjudicating authority correctly found debt and default above Rs. 1 crore threshold was established, warranting CIRP initiation. Appeal dismissed as no infirmity found in the admission order.

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Issues Involved:

1. Admission of Section 7 application under IBC against the Corporate Debtor.
2. Alleged violation of principles of natural justice.
3. Impact of pending SARFAESI proceedings on IBC proceedings.
4. Interpretation and adherence to the Settlement Agreement.
5. Financial Creditor's obligation to issue NoC before payment of settlement amount.

Summary:

1. Admission of Section 7 application under IBC against the Corporate Debtor:

The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the order dated 20.10.2023 by the National Company Law Tribunal (NCLT), Mumbai Bench-IV, which admitted the Section 7 application filed by ICICI Bank Ltd. for initiating Corporate Insolvency Resolution Process (CIRP) against Darode Jog Realties Pvt. Ltd. The Corporate Debtor had defaulted on a term loan facility of Rs.130 crore sanctioned in August 2015. Despite settlement talks and a Settlement Agreement dated 08.02.2023, the Corporate Debtor failed to pay the agreed Rs.17 crore within the stipulated time, leading to the admission of the Section 7 application.

2. Alleged violation of principles of natural justice:

The Appellant contended that the Restoration Application was allowed without giving the Corporate Debtor an opportunity to file a reply, thus violating the principles of natural justice. However, the tribunal found that the Corporate Debtor was represented during the hearing, and the matter was reserved for orders after considering additional documents. The tribunal concluded that there was no violation of natural justice principles.

3. Impact of pending SARFAESI proceedings on IBC proceedings:

The Appellant argued that since proceedings under the SARFAESI Act, 2002 were pending, the IBC proceedings should not have been pressed. The tribunal held that the pendency of SARFAESI proceedings does not erode the statutory rights of a financial creditor to seek remedy under IBC or create any obstruction for filing an application under Section 7 of IBC.

4. Interpretation and adherence to the Settlement Agreement:

The tribunal examined the Settlement Agreement dated 08.02.2023, which acknowledged the debt of Rs.192.87 crore and stipulated a settlement amount of Rs.17 crore payable within 90 days. The agreement clearly stated that the release of security and issuance of a no-dues certificate would occur only after the receipt of the settlement amount. The tribunal found that the Corporate Debtor had breached the Settlement Agreement by not paying the settlement amount within the agreed timeframe.

5. Financial Creditor's obligation to issue NoC before payment of settlement amount:

The Appellant claimed that the Financial Creditor was obligated to issue a provisional No Objection Certificate (NoC) for mortgaged properties before the payment of the settlement amount. The tribunal found no such obligation in the Settlement Agreement and held that the Financial Creditor was not required to issue NoCs before receiving the settlement amount. The Financial Creditor's refusal to issue NoCs was consistent with the terms of the Settlement Agreement.

Conclusion:

The tribunal concluded that the Adjudicating Authority correctly admitted the Section 7 application, as the debt and default were clearly established. The appeal was dismissed with no costs, affirming the initiation of CIRP against the Corporate Debtor.

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