2025 (6) TMI 28 - AT - IBC

Bank wins appeal dismissal as Section 7 insolvency application properly admitted despite debtor's restructuring claims

Alok Gaur, Suspended Board of Director of Jaypee Cement Corporation Ltd. Versus State Bank of India & Anr

Alok Gaur, Suspended Board of Director of Jaypee Cement Corporation Ltd. Versus State Bank of India & Anr - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:(i) Whether the Section 7 Application filed by the Financial Creditor (SBI) against the Corporate Debtor (JCCL) is barred by limitation or is maintainable within the prescribed time frame;(ii) Whether there exists a debt and default on the part of the Corporate Debtor (JCCL) to meet the criteria for admission of the Section 7 Application under the Insolvency and Bankruptcy Code ('IBC');(iii) Whether the debt of JCCL stood extinguished or discharged by virtue of the Comprehensive Reorganization and Restructuring Plan ('CRRP') and the Master Restructuring Agreement ('MRA') dated 31.10.2017, including the contention of novation under Section 62 of the Indian Contract Act, 1872;(iv) Whether the failure to create security interest as stipulated under Clause 5.8 of the MRA affects the validity and enforceability of the debt and the restructuring agreement;(v) Whether initiation of Corporate Insolvency Resolution Process ('CIRP') against the holding company (JAL) precludes initiation of CIRP against the subsidiary (JCCL) for the same debt;(vi) The legal effect of failure of the restructuring scheme and the implications on the outstanding debt of JCCL;(vii) The applicability and interpretation of novation principles under Section 62 of the Indian Contract Act, 1872 in the context of restructuring agreements and debt transfer between JCCL and JAL.2. ISSUE-WISE DETAILED ANALYSISIssue (i): Maintainability of Section 7 Application and LimitationThe Adjudicating Authority held that the Section 7 Application was filed within the limitation period. This finding was not challenged before the Tribunal and hence was accepted as correct. The date of default was recorded as 03.03.2016 as per the NESL certificate authenticated in 2022. The application was filed in 2023, which was held to be within the prescribed limitation period under the IBC framework.Issue (ii): Existence of Debt and Default on the part of JCCLThe Tribunal examined the existence of debt and default, which are sine qua non for admission of a Section 7 Application. The Financial Creditor (SBI) relied on the NESL certificate and letters of acknowledgment issued by JCCL and JAL between 2020 and 2022, admitting the liability and default. The Adjudicating Authority found that despite the restructuring attempts, the debt of JCCL remained unpaid and defaulted.The Tribunal noted that the restructuring plan was composite, involving both JAL and JCCL, and the failure of restructuring resulted in revival of the original debt and default. The Tribunal rejected the contention that initiation of CIRP against the holding company (JAL) precluded initiation of insolvency proceedings against the subsidiary (JCCL).Issue (iii): Effect of CRRP and MRA dated 31.10.2017 on Debt and Novation ClaimThe Appellant contended that the CRRP and the MRA executed on 31.10.2017 constituted a novation of the original debt, transferring all liabilities of JCCL to JAL, thereby extinguishing JCCL's debt and default. Reliance was placed on Section 62 of the Indian Contract Act, 1872, which provides that substitution of a new contract discharges the original contract.The Tribunal analyzed the MRA and found that JCCL was not a party to the MRA, which was executed between JAL and the lenders. The Tribunal referred to established legal principles that novation requires the same parties to agree to substitute the contract. Since JCCL was not a party to the MRA, the condition for novation was not satisfied.The Tribunal also examined the precedent of the Supreme Court in United Bank of India vs. Ramdas Mahadeo Prashad, where it was held that novation requires compliance with the terms of the new contract, and non-compliance negates novation. The Tribunal found that the conditions of the MRA were not fulfilled, and the restructuring failed, thereby negating any claim of novation.Issue (iv): Failure to Create Security Interest under Clause 5.8 of the MRAThe Adjudicating Authority and the Tribunal noted that Clause 5.8 of the MRA mandated creation of security interest as a condition precedent for the MRA's effectiveness. The evidence showed that the security interest was not fully created and was put on hold as per JLF minutes dated 15.10.2018, due to ongoing litigation and regulatory interventions.The failure to create security interest was held to be fatal to the implementation of the MRA. The Tribunal observed that without creation of security, the MRA could not be enforced, and the restructuring plan was rendered ineffective. This supported the conclusion that the debt and default of JCCL remained extant.Issue (v): Effect of Initiation of CIRP against Holding Company (JAL) on Proceedings against Subsidiary (JCCL)The Appellant argued that since CIRP had commenced against JAL, which had undertaken to discharge JCCL's liabilities, no separate insolvency proceedings could be initiated against JCCL. The Tribunal rejected this argument, holding that JAL and JCCL are distinct legal entities. The failure of the restructuring plan and the rejection of the scheme of arrangement under Sections 230-232 of the Companies Act, 2013, meant that the debt of JCCL was not extinguished.The Tribunal further held that the Financial Creditor could invoke securities given by JCCL and initiate proceedings independently. The insolvency of the holding company did not preclude insolvency proceedings against the subsidiary for its own outstanding debt.Issue (vi): Legal Effect of Failure of Restructuring SchemeThe Tribunal noted that the Composite Scheme of Debt Realignment Plan divided the debts of JAL and JCCL into three buckets, with various restructuring mechanisms including asset divestment, debt transfer, and creation of SPVs. However, the scheme failed due to non-implementation of key conditions, regulatory orders, and rejection by the NCLT and the Tribunal.The failure of the restructuring plan revived the original debt and default obligations of JCCL. The Tribunal emphasized that the debt did not evaporate due to the failure of the scheme, and the Financial Creditor was entitled to initiate insolvency proceedings under Section 7 of the IBC.Issue (vii): Applicability of Section 62 of the Indian Contract Act, 1872The Tribunal examined the applicability of Section 62 which deals with novation, rescission, and alteration of contract. It reiterated that novation requires substitution of the original contract by a new contract with the consent of the parties involved.Since JCCL was not a party to the MRA and the MRA was never implemented due to failure to create security, the Tribunal held that the conditions for novation were not met. The Tribunal relied on Supreme Court precedents to conclude that non-fulfillment of conditions of the new contract negates novation and the original debt remains enforceable.3. SIGNIFICANT HOLDINGS'We are not satisfied with the submissions made by the Ld. Sr. Counsel representing the Corporate Debtor on the point of transfer of debt of the Corporate Debtor to JAL, in view of the fact that creation of a security interest was a sine qua non in terms of clause 5.8 of the aforesaid MRA.''The factum of the security interest having not been created is clearly visible from the meeting of JLF held on 15.10.2018... The creation of security was not fully implemented, and therefore creation of the security in terms of MRA was put on hold until a way forward could be ascertained with respect to the CIRP application.''The bringing into the said restructuring proposal was necessitated only in view of the fact that the earlier MRA dated 31.10.2017 could never see the light of the day in so far as the Applicant/ Financial Creditor is concerned... Even this restructuring proposal of 2023 also could not materialize and could never take off.''With respect to Bucket 2B, scheme under Section 230-232 of the Companies Act was proposed by JAL and SPV, which scheme admittedly has finally been rejected by NCLT on 03.06.2024... The debt of Bucket 2B, thus, admittedly has not been resolved and it is outstanding.''The debt which was owned by JCCL to the Lenders, shall not be evaporated and the mere fact that JAL has taken the liability to discharge the debts of JCCL, does not in any manner shall prohibit the Lenders to take proceedings under Section 7 against JCCL, whose debts are in default, due to failure of restructuring proposal.''The restructuring was a mechanism to discharge the entire debt of JAL and JCCL. Admittedly, restructuring has failed and neither the debt of JAL, nor the debt of JCCL have been discharged.''Section 62 of the Indian Contract Act... The basic principle behind the concept of novation is the substitution of a contract by a new one only through the consent of both the parties to the same... The MRA dated 31.10.2017 was not executed between the parties, since JCCL was not the party to the Agreement.''The Adjudicating Authority after considering all the relevant facts and circumstances, has come to the conclusion that debt and default on the part of the CD - JCCL is proved. When the debt and default is proved, the admission of Section 7 Application against JCCL, cannot be faulted.'The Tribunal concluded that the Section 7 Application filed by SBI against JCCL was maintainable and rightly admitted by the Adjudicating Authority. The debt and default on the part of JCCL were established, the restructuring plan and MRA failed due to non-implementation of essential conditions, including creation of security interest, and the claim of novation was rejected. The insolvency proceedings against the holding company did not preclude separate proceedings against the subsidiary. The appeal was dismissed with no order as to costs.