NCLAT upholds NPA declaration after debtor fails to submit audited statements for Rs. 20 crore credit facility renewal under Section 7 IBC

NCLAT dismissed the appeal, upholding the declaration of the corporate debtor's account as NPA. The debtor had cash credit facilities of Rs. 20 crores requiring annual review/renewal based on audited financial statements, which were not submitted. The bank's sanction letter specifically required review within one year for risk assessment and credit worthiness evaluation. Since the debtor failed to comply with renewal requirements and rectify irregularities, the bank was justified in declaring the account as NPA and initiating Section 7 proceedings under IBC.

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Issues Involved:

1. Whether the account of the Corporate Debtor was correctly declared as a Non-Performing Asset (NPA).
2. Whether the Impugned Order admitting the Section 7 application was justified.
3. Compliance with RBI Guidelines and the terms of the sanction letter.
4. Allegations of procedural irregularities in the CIRP initiation.

Detailed Analysis:

1. Declaration of Account as NPA:

The primary issue was whether the Corporate Debtor's account was rightly classified as a Non-Performing Asset (NPA). The Appellant argued that the account was incorrectly declared as NPA since the sanctioned limit of Rs. 20 Crores was not exceeded. However, the Respondent No. 2 countered that the account was overdue due to non-payment of interest and failure to renew the credit facilities, which justified the NPA classification as per RBI Guidelines. The Tribunal found that the account was "out of order" due to non-payment of interest and non-renewal of credit facilities, which aligned with RBI's definition of an NPA.

2. Justification of the Impugned Order:

The Appellant challenged the Impugned Order, arguing that there was no default as the sanctioned limit was not exceeded. The Tribunal noted that the key issue was the occurrence of default, not merely the sanctioned limit. The Tribunal found that the Corporate Debtor failed to adhere to the terms of the sanction letter, including timely payment of interest and renewal of credit facilities. The Tribunal concluded that the conditions for initiating CIRP under Section 7 of the Insolvency and Bankruptcy Code were met, as both debt and default were established.

3. Compliance with RBI Guidelines and Sanction Letter Terms:

The Tribunal examined the compliance with RBI Guidelines and the terms of the sanction letter. The Respondent No. 2 had repeatedly communicated the need for renewal of credit facilities and compliance with the terms of the sanction letter. The Tribunal emphasized the importance of regular review and renewal of credit facilities to ensure compliance and manage risk. The Corporate Debtor's failure to renew the facilities and pay overdue interest justified the actions taken by the Respondent No. 2, including the declaration of the account as NPA.

4. Allegations of Procedural Irregularities:

The Appellant alleged procedural irregularities, including the absence of a default date in the Section 7 application. The Tribunal found that the application included detailed working of the default amount, and the absence of a specific default date did not invalidate the application. The Tribunal also noted that despite several opportunities, the Corporate Debtor failed to rectify irregularities and renew the credit facilities, leading to the initiation of CIRP.

Conclusion:

The Tribunal concluded that the Corporate Debtor's account was correctly declared as NPA due to non-payment of interest and non-renewal of credit facilities. The Impugned Order was justified as the conditions for initiating CIRP under Section 7 were met. The appeal was dismissed with no merit, and no costs were awarded.

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