2025 (9) TMI 70 - AT - IBC

Appeal dismissed; Section 7 admission upheld after finding financial debt over Rs 1 crore and default as of NPA date

Rahul Kumawat Versus Bank of India & Anr.

Rahul Kumawat Versus Bank of India & Anr. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether a 'financial debt' within Section 5(8) of the Code existed from the Corporate Debtor to the Financial Creditor. 2. Whether a 'default' under Section 3(12) of the Code occurred, and whether the date of default could be the date of NPA classification (30.09.2017). 3. Whether a challenge to NPA classification (including reliance on the RBI Circular dated 07.02.2018 alleging retrospective operation) can defeat an application under Section 7. 4. Whether deposits in cash credit accounts, a bank-issued 'operational' certificate, withdrawal/return of SARFAESI process documents, or post-NPA One Time Settlement (OTS) dealings negate the existence of debt/default or the maintainability/limitation of the Section 7 application. 5. Whether the Section 7 application was within the period of limitation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of Financial Debt Legal framework: Section 5(8) defines 'financial debt' and Section 7 permits initiation of CIRP by a financial creditor on proof of financial debt and default. Precedent treatment: The Tribunal accepted established practice that loan documents, bank statements and CIBIL reports are admissible evidence to establish debt. Interpretation and reasoning: The Adjudicating Authority examined loan sanction documents, account statements and Part IV of the Section 7 application and found the claimed aggregate outstanding sum substantiated by documentary evidence. Ratio vs. Obiter: Ratio - documentary loan records and bank statements properly establish existence of financial debt for Section 7 purposes. Conclusion: Existence of financial debt of Rs. 11,57,89,697/- was established and answered in favour of the Financial Creditor. Issue 2 - Existence and date of Default; relevance of NPA classification Legal framework: Section 3(12) defines 'default' as non-payment when whole/part of debt is due and payable; Section 7 requires proof of default. NPA classification is not a statutory prerequisite to invoke Section 7. Precedent treatment: The Tribunal relied on the legal proposition (as articulated in prior higher court authority) that Section 7 focuses on 'default' and not the mere classification as NPA; date of default may be established by facts and record, though NPA declaration is often used as a convenient marker. Interpretation and reasoning: The Adjudicating Authority reviewed ZLCC minutes (which recorded specific overdue amounts as of July-September 2017), bank statements showing overdue instalments, Section 13(2) notice demanding amounts, the Corporate Debtor's restructuring request of 10.01.2018 acknowledging overdues, and OTS attempts. These materials were held to demonstrate non-payment and exceedance of sanctioned limits, establishing default by 30.09.2017. Ratio vs. Obiter: Ratio - proof of default is fact-based and may be established notwithstanding disputes about the formal NPA classification; the date of default can be fixed by documentary evidence (bank statements, communications) rather than being contingent on NPA status alone. Conclusion: Default existed in the term loan and cash credit accounts and occurred on 30.09.2017; threshold statutory amount for Section 7 was met. Issue 3 - Effect of RBI Circular dated 07.02.2018 and alleged retrospective operation Legal framework: RBI circulars govern prudential asset classification but do not alter the statutory test for 'default' under the Code; applicability of administrative circulars depends on their language and temporal scope. Precedent treatment: The Adjudicating Authority construed the circular's language ('shall continue to be classified as a standard asset ... subject to the following conditions') as prospective and conditional; it declined to treat that circular as having retrospective operation to erase an earlier default. Interpretation and reasoning: The Tribunal agreed that the circular was not in effect on 30.09.2017 and that even if a circular confers classification relief prospectively, it does not negate documentary proof of non-payment and default. The circular's conditions (registration under GST, account being standard as on 31.08.2017, payments within specified windows, and provisioning) were found unmet by the Corporate Debtor. Ratio vs. Obiter: Ratio - an RBI circular providing for modified asset classification does not retroactively extinguish a debt/default where the circular's conditions were not satisfied and where documentary evidence establishes default prior to the circular. Conclusion: The RBI circular did not apply retrospectively to eliminate the established default; it did not preclude admission under Section 7. Issue 4 - Relevance of ZLCC minutes, bank certificate (17.04.2018), cash-credit deposits, withdrawal/return of SARFAESI action, and OTS dealings Legal framework: Admissions, acknowledgments, account statements and settlement attempts are relevant to both existence of default and limitation (Section 18 Limitation Act by way of acknowledgment). Bank-issued certificates, internal minutes, and procedural choices under SARFAESI bear evidentiary weight depending on context. Precedent treatment: The Tribunal treated ZLCC minutes, the debtor's restructuring letter and OTS proposals as corroborative of default/acknowledgment; it treated the bank certificate of 'operational' account and the later letter to the Magistrate as not dispositive of default or NPA status. Interpretation and reasoning: ZLCC minutes explicitly recorded overdue amounts and a condition to recover overdues; the debtor's 10.01.2018 letter expressly acknowledged overdues and sought restructuring; OTS proposals and revocations evidenced repeated acknowledgments of liability. The 'operational' certificate was issued on request and did not reclassify account status; bank's request to return SARFAESI filing did not amount to withdrawal of the Section 13(2) notice and did not negate earlier demands. Deposits in cash credit accounts were held insufficient and no evidence showed unutilised limits adequate to service term loan obligations; the bank's appropriation practices and absence of available limits meant such deposits did not avoid default. Ratio vs. Obiter: Ratio - admissions/acknowledgments and OTS proposals constitute evidence of liability and can revive limitation where applicable; unilateral certificates or procedural non-pursuit of SARFAESI possession proceedings do not ipso facto negate indebtedness or previously established default. Conclusion: The combined weight of ZLCC minutes, debtor's restructuring letter, account statements and OTS dealings established default/acknowledgment; the bank certificate and return of SARFAESI filing did not negate default. Issue 5 - Maintainability and Limitation of the Section 7 application Legal framework: Section 7 requires proof of financial debt and default; limitation is governed by the Limitation Act and successive acknowledgments can revive limitation (Section 18 jurisprudence). Precedent treatment: The Tribunal applied the principle that acknowledgments (including OTS offers and other written admissions) can sustain maintainability by restarting limitation; Laxmi Pat Surana reasoning that Section 7 requires default (not NPA status) was applied. Interpretation and reasoning: The Adjudicating Authority held that the Section 7 application was within limitation and maintainable because the debt and default were proven, and repeated written acknowledgments/OTS offers confirmed liability within relevant periods. Ratio vs. Obiter: Ratio - where documentary evidence establishes debt and default and acknowledgments occur within limitation periods, a Section 7 application is maintainable. Conclusion: The Section 7 application was maintainable and within the period of limitation; admission was proper. OVERALL CONCLUSION The Tribunal found no error in the Adjudicating Authority's findings that financial debt and default were established as of 30.09.2017, that the RBI circular did not operate retrospectively to negate default, that corroborative documents (ZLCC minutes, restructuring letters, OTS offers and account statements) supported the Financial Creditor, and that certificate/administrative steps by the bank did not vitiate the debt/default; accordingly the Section 7 admission was upheld as maintainable and within limitation (ratio of the decision).