NCLAT confirms Section 7 application admission against corporate debtor and guarantor for unpaid debenture obligations
NCLAT upheld admission of Section 7 application filed by financial creditor against corporate debtor and guarantor. Tribunal rejected appellant's contention that corporate debtor was not liable for payment obligations since project accounts were operated under trustee's instructions. Court held that no payments toward principal or interest were made for over five years since debenture issuance in 2016 and 2021, establishing clear financial debt and default. Tribunal emphasized that constitution of project managing committee does not diminish corporate debtor's payment obligations, citing precedent. Both appeals dismissed as lacking merit.
1. ISSUES PRESENTED and CONSIDERED
- Whether the adjudicating authority erred in admitting the Section 7 applications filed by the financial creditor against the corporate debtor and the corporate guarantor.
- Whether the existence of financial debt and default was sufficiently proved to warrant initiation of Corporate Insolvency Resolution Process (CIRP).
- Whether the appellant's contention that payments were not due from the completed and sold units but from future commercial units and new tower, and that the project accounts were controlled by the debenture trustee, absolves the corporate debtor and guarantor from liability.
- Whether the delay in project completion and issuance of occupancy certificate, and the "zero period" declared by the Town and Country Planning authority, affect the admissibility of the Section 7 application.
- Whether the constitution of a Project Managing Committee (PMC) with financial creditor members absolves the corporate debtor of repayment obligations.
- Whether the financial creditor acted with mala fide intent in initiating CIRP proceedings.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Admissibility of Section 7 Application Based on Debt and Default
Relevant Legal Framework and Precedents: The adjudicating authority's role under Section 7 of the Insolvency and Bankruptcy Code (IBC) is limited to ascertaining whether a financial debt exists and whether a default has occurred. The Supreme Court's rulings in E.S. Krishnamurthy & Ors. v. Bharathi Hi-Tech Builders Pvt. Ltd. and M. Suresh Kumar Reddy v. Canara Bank & Ors. clarify that once the existence of debt and default is established, the adjudicating authority is bound to admit the application unless the debt is not due or payable.
Court's Interpretation and Reasoning: The Tribunal noted that the principal borrower issued debentures amounting to Rs.35 crore in 2016 and a further Rs.15 crore in 2021 under separate Debenture Trust Deeds (DTDs). Despite these issuances, no payments towards principal or interest have been made from 2016 to the date of filing the application in 2023. The corporate guarantor also failed to make payments after invocation of the guarantee. The debt and default were admitted facts, undisputed before the Tribunal.
Key Evidence and Findings: The default notices issued in 2019 and 2020, dishonour of post-dated cheques due to insufficient funds, legal notices under the Negotiable Instruments Act, and admitted liability in replies to notices all established the existence of debt and default.
Application of Law to Facts: Given the admitted default and debt, the Tribunal applied the legal principles from the Supreme Court judgments mandating admission of Section 7 applications upon proof of default.
Treatment of Competing Arguments: The appellant's argument that payments were not due from the sold units but from future commercial units and new towers was rejected as it does not absolve the corporate debtor of its repayment obligation under the DTDs. The Tribunal emphasized that the liability to pay principal and interest cannot be negated on the basis of project account operations or delays in construction.
Conclusion: The Tribunal upheld the admission of Section 7 applications as the debt and default were established beyond dispute.
Issue 2: Effect of Project Completion Delays, Occupancy Certificate, and "Zero Period" on Liability
Relevant Legal Framework and Precedents: The timing of project completion or issuance of occupancy certificate does not affect the existence of financial debt or default under the IBC. The debt becomes due as per the terms of the DTD irrespective of project delays.
Court's Interpretation and Reasoning: The Tribunal observed that although the occupancy certificate was applied for in 2016 and received only in 2021, and a "zero period" was declared by the Town and Country Planning authority from November 2017 to September 2020, these facts do not relieve the corporate debtor of its repayment obligations. The Tribunal noted that the principal borrower failed to make any payment towards principal or interest for over five years.
Key Evidence and Findings: The admitted non-payment despite the extended timelines and additional financing in 2021 supported the Tribunal's conclusion that the delay in project completion was not a valid defense.
Application of Law to Facts: The Tribunal applied the principle that the existence of financial debt and default is independent of the reasons for non-payment. The debtor's inability or failure to complete the project on time does not negate the debt.
Treatment of Competing Arguments: The appellant's contention that the financial creditor's initiation of CIRP was motivated by a desire to take over the project land was dismissed as speculative and unsupported by evidence.
Conclusion: The delay in project completion and related factors do not affect the admission of the Section 7 application.
Issue 3: Control of Project Accounts by Debenture Trustee and Impact on Liability
Relevant Legal Framework and Precedents: The obligation to repay financial debt under the DTD remains with the corporate debtor regardless of the operation or control of project accounts by the debenture trustee. The Tribunal's prior judgment in a related case involving the same parties clarified that the constitution of a Project Managing Committee or control by the financial creditor does not absolve the debtor of repayment obligations.
Court's Interpretation and Reasoning: The Tribunal rejected the appellant's argument that since the debenture trustee controlled the RERA and escrow accounts, the corporate debtor was not liable for repayment. The Tribunal held that the liability to pay principal and interest arises from the debt contract and cannot be avoided by pointing to the manner of fund management.
Key Evidence and Findings: The Tribunal relied on the prior judgment in Sandeep Jain v. IDBI Trusteeship Services Ltd. & Anr., which held that the constitution of a Project Managing Committee with financial creditor members does not diminish the corporate debtor's obligation to repay.
Application of Law to Facts: The Tribunal applied the principle that operational control over project funds does not affect the contractual obligation to repay financial debt.
Treatment of Competing Arguments: The appellant's submission that no money was siphoned off by promoters and that payments were to be made only from future sales was rejected as irrelevant to the admitted default.
Conclusion: The control of project accounts by the debenture trustee does not absolve the corporate debtor from its repayment obligations under the DTD.
Issue 4: Allegation of Mala Fide Intent by Financial Creditor
Relevant Legal Framework and Precedents: The IBC mandates admission of Section 7 applications upon proof of default, regardless of the financial creditor's motives, unless there is clear evidence of mala fide intent or abuse of process.
Court's Interpretation and Reasoning: The Tribunal found no evidence to support the appellant's claim that the financial creditor initiated CIRP proceedings with a malicious intent to take over the project land. The admitted default and non-payment justified the initiation of CIRP.
Key Evidence and Findings: The consistent non-payment despite notices and invocation of guarantee, and the legal framework requiring admission upon default, negated the appellant's mala fide allegations.
Application of Law to Facts: The Tribunal applied the principle that the existence of debt and default is the determinative factor for admission, not the creditor's subjective intent.
Treatment of Competing Arguments: The appellant's argument was dismissed as speculative and unsupported by evidence.
Conclusion: No mala fide intent was found on the part of the financial creditor; admission of Section 7 applications was proper.
3. SIGNIFICANT HOLDINGS
- "The default in repayment of the obligation by obligors cannot in any manner be put on the financial creditor nor constitution of PMC in any manner affect the obligation or absolve the corporate debtor from its default for repayment of the debt."
- "In Section 7 application the Adjudicating Authority was obliged to determine whether default has occurred or whether debt was due as remained unpaid. The Hon'ble Supreme Court... held that if the adjudicating authority is of the opinion that a 'default' has occurred, it has to admit the application unless it is incomplete."
- "Once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7."
- "The liability to pay the principal and interest cannot be washed off on the ground that project accounts were to be operated by IDBI Trusteeship Services Ltd."
- The Tribunal dismissed the appeals, holding that the adjudicating authority did not err in admitting the Section 7 applications against both the principal borrower and the corporate guarantor, given the admitted debt and default.
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