2025 (11) TMI 1559 - AT - IBC

Section 7 IBC: Financial debt and default proven; contractual disputes irrelevant, CIRP to continue against corporate debtor

NCLAT upheld admission of a Section 7 IBC petition against the Corporate Debtor and dismissed the appeal. It held that a valid financial debt existed ... Admission of insolvency petition filed under Section 7 of the IBC - no default exists - case of contrived default (default is contrived by NHAI and the lenders) - termination of the concession agreement terminated STPL’s liabilities, thereby barring insolvency proceedings - error in admitting the petition without investigating disputes between parties. Whether a debt and default exist within the meaning of the IBC so as to warrant admission of the petition? - HELD THAT:- The loan agreement is an agreement between Union Bank of India-FC and CD-STPL and the CD has repayment obligations towards Union Bank of India. Since there was a default, Union Bank of India moved NCLT for initiation of Section 7 proceedings. There are no legal infirmity in the action of Union Bank of India. Any disputes which the CD-STPL was having qua NHAI are irrelevant for the Section 7 proceedings before NCLT - the argument of the appellant that the loan agreement should not be seen in isolation and the transactions have to be seen in a consolidated manner is rejected. Appellant has raised a related argument that the “default is contrived” by the conduct of the respondents namely NHAI and financial creditors and it is a malicious and fraudulent initiation of CIR proceedings against the corporate debtor. It therefore claims that the adjudicating authority should have gone into the “causation of the default” and just not the “existence of default”. The appellant claims that the default has been created by persistent default has occurred due to the conduct NHAI and also lenders. The judicial precedents are very clear in this regard. It is noted that the Adjudicating Authority is not entitled to examine the reason for commission of financial default under Section 7 of the Code, when the requirement of ‘debt’ and ‘default’ have clearly been established. In Suresh Reddy [2023 (5) TMI 570 - SUPREME COURT] it was held that 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. Even the non- payment of a part of debt when it becomes due and payable will amount to default on the part of a corporate debtor. In such a case, an order of admission under Section 7 IBC must follow. If NCLT finds that there is a debt, but it has not become due and payable the application under Section 7 can be rejected. Otherwise, there is no ground available to reject application. It is thus found that not only the Code but the above judgments support the case of the financial creditor and thus the claim of the appellant that the Adjudicating Authority should have gone into the causation of default cannot be accepted. The adjudicating authority cannot enter into the contractual context and so called “induced default”, which falls outside the domain of the insolvency proceedings and needs to be settled between the Appellant and the NHAI at an appropriate forum. Adjudicating authority has to only verify existence of debt and default and not probe into disputes - there are no infirmity at the level of adjudicating authority on this count. Impact of the termination of the concession agreement on STPL’s insolvency liability - HELD THAT:- The disputes between the Corporate Debtor and NHAI under the Concession Agreement and certain lenders not disbursing their commitment are contractual disputes which have no bearing on the Corporate Debtor’s obligations to the Respondent No. 1-UBI under the Loan Agreement between the Corporate Debtor and the Respondent No. 1. It is found that the Respondent No. 1 had in its capacity as a lender, has not committed any breach of contract i.e. the Common Loan Agreement and had disbursed the loans according to the terms of the Common Loan Agreement. The existence of ‘debt’ and ‘default’ has been established in the present case. The contention of the Appellant that the NCLT’s reliance on the record of default as per the NeSL to establish default on part of the Corporate Debtor is insufficient to justify the admission of the Corporate Debtor under CIRP, is baseless - further, it is settled that ‘when the record of Information Utility shows debt in default, the Adjudicating Authority or Appellate Authority are not required to further examine the record maintained by the Information Utility, especially when the record is deemed authenticated and no dispute or refutation has been done by the corporate debtor earlier’ It is thus found that the contention of the Appellant that the NCLT’s reliance on the record of default as per the NeSL to establish default on part of the Corporate Debtor is insufficient to justify the admission of the Corporate Debtor under CIRP, is baseless. Therefore, all such documentary proofs of default and cannot be wished away and above contentions of the Appellants are rejected. In the above backdrop, there are no infirmity in the conclusions of the AA on bases the records of the information utility and the financial statements of the CD, when apart from these documents so much evidence is on record. Thus, while noting that all the pre-requisites of the petition under Section 7 were satisfied in the present case, the Adjudicating Authority has rightly admitted the Section 7 Petition vide the Impugned Order - the present case is a fit case for admission as there is a clear existence of 'debt' and 'default' The dispute sought to be relied upon by the Corporate Debtor is inter-se the Corporate Debtor and the NHAI and it would not have any impact on the Section 7 Petition filed by the Respondent No. 1 in exercise of its statutory right. Further assuming that the termination is given effect to, the quantum of the termination payment and when such payment will be received by the corporate Debtor is a mere contingency which cannot come in way of admission of the present petition. Even assuming that certain amount is payable by the NHAI to the Corporate Debtor, the exact quantum of such amount cannot possibly be ascertained at this stage. The appeal is filed with mala fide intention to derail CIRP lacks merit. It is found that these are Corporate Debtor's attempt to interject arbitration proceedings to delay insolvency and thus are not legally tenable. Conclusion - The existence of debt and default on STPL’s part stand established with ample documentary and financial records. The allegation of a contrived default due to UBI-FC’s actions is unsupported; escrow fund usage and project suspension were within contractual rights of NHAI unrelated to insolvency proceedings. Termination of the concession agreement- being unilateral and to be decided by the Arbitrator as and when appointed- is irrelevant to the existence of default under the loan agreement warranting insolvency proceedings. The adjudicating authority, therefore, rightly admitted the insolvency petition under Section 7, adhering to the mandate of the IBC and binding judicial precedents. Moreover, RP is ensuring that CD continues as a going concern and therefore the concession agreement- the main asset of the CD- continues and it survives and in case it is resolved then new PRA will take over as the new management. There are no infirmity in the orders of the Adjudicating Authority. We hereby affirm the continuation of the Corporate Insolvency Resolution Process against Solapur Tollways Projects Limited - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a 'debt' and 'default' existed within the meaning of the IBC so as to warrant admission of a Section 7 petition. 2. Whether the Adjudicating Authority was obliged or entitled to examine the causation of default (i.e., allegations of 'contrived' or 'induced' default) at the admission stage. 3. Whether the existence of contractual arrangements among the concessioning authority, the corporate debtor and lenders (Concession Agreement, Loan Agreement, Substitution Agreement) requires reading the loan claims in a consolidated manner that precludes Section 7 admission. 4. Whether suspension of the concession, control of the escrow account by the authority, and alleged availability of escrow or termination payments operate to negate default or estop initiation of insolvency proceedings. 5. Whether termination of the concession agreement (or a claim for termination payment) extinguishes liability of the corporate debtor to financial creditors or otherwise bars CIRP. 6. Whether allegations of malicious or fraudulent initiation of insolvency proceedings (Section 65) were made out. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of 'debt' and 'default' for Section 7 admission Legal framework: Section 7 read with Sections 3(12) and 7(3)-(5) of the IBC; NCLT's duty to ascertain default from records of an information utility or other evidence within statutory timeframe; definition of 'default' as non-payment when due. Precedent treatment: The Tribunal applied the established line of authorities holding that once a debt is due and payable and default is established, the Adjudicating Authority must admit the Section 7 petition unless the application is incomplete. The approach of Innoventive and subsequent Supreme Court pronouncements (as cited in the judgment) were followed in limiting the scope of inquiry at admission to existence of debt and default. Interpretation and reasoning: The Tribunal examined multiple documentary records beyond the information utility: authenticated NeSL entry, balance sheets and auditor's report confirming defaults, statements of account, prior correspondence and restructuring/amendments evidencing repeated defaults since 2019, classification as NPA and notices of event of default and loan recall. These materials satisfied the statutory threshold that part or whole of the debt had become due and unpaid. Ratio vs. Obiter: Ratio - where documentary evidence authenticated shows debt due and unpaid, the Adjudicating Authority must admit under Section 7; it need not investigate underlying causes at admission. Observations about the sufficiency of cumulative documentary evidence (not just IU records) are explanatory of the ratio. Conclusion: The Tribunal concluded there was clear debt and default; the NCLT's admission under Section 7 was legally sustainable. Issue 2 - Whether causation of default (allegation of 'contrived' default) is examinable at admission Legal framework: Section 7(4)-(5) IBC and settled jurisprudence delimiting inquiry to existence of default, not reasons for default; Swiss Ribbons and subsequent authority principles on scope of admission proceedings. Precedent treatment: The Tribunal followed the holdings that the adjudicating authority is not empowered to probe into inter-se disputes or causation of default when debt and default are established, and that admission cannot be deferred to resolve collateral contractual or arbitral disputes. Interpretation and reasoning: The Tribunal acknowledged the appellant's factual narrative (suspension, escrow control, alleged non-disbursements) but treated these as contractual disputes between the concessioning authority and the corporate debtor. The Tribunal held such disputes lie outside the limited statutory enquiry at admission and must be resolved in appropriate fora; the existence of earlier defaults (from 2019), restructuring history and documentation undermined the proposition that default was exclusively induced post-suspension. Ratio vs. Obiter: Ratio - reasons/cause of default are not relevant for Section 7 admission where debt and default are shown. Observations that contractual remedies and arbitration remain available to the corporate debtor are obiter as explanatory guidance. Conclusion: The Adjudicating Authority correctly refused to investigate causation at admission; allegations of contrived default did not vitiate the statutory threshold for admission. Issue 3 - Whether the tripartite contractual framework requires treating the loan claim only in consolidated context (i.e., loan cannot be considered in isolation) Legal framework: Private law principle that inter-connected contracts may be construed together; but insolvency admissions proceed on statutory elements of debt/default between creditor and debtor. Precedent treatment: The Tribunal relied on authorities recognizing that contractual inter-linkages between project documents do not alter the independent repayment obligation of the borrower to a financial creditor for the purpose of Section 7 admission. Interpretation and reasoning: The Tribunal accepted that the Concession, Loan and Substitution Agreements are inter-related for commercial effect, and that the Substitution Agreement provides lenders substitution remedies. However, it emphasised that the Loan Agreement imposes separate, several obligations on each lender and that the financial creditor's right to seek insolvency is not negated by the existence of other contractual remedies or contingent termination payments between the concessioning authority and the corporate debtor. Ratio vs. Obiter: Ratio - presence of a tripartite/substitution arrangement does not preclude a financial creditor from proving debt/default against the corporate debtor under Section 7; contractual matrix does not convert the statutory inquiry into a full contractual adjudication. Conclusion: The loan claim could be considered independent of the wider tripartite framework for purposes of admission; NCLT's reading of loan documents and admission were appropriate. Issue 4 - Effect of suspension, escrow control and alleged availability of escrow/termination payments on default Legal framework: Contractual clauses governing suspension, escrow waterfall and termination payments are matters of contract interpretation and, where disputed, ordinarily for arbitral/contractual fora; insolvency admission focuses on payable debt. Precedent treatment: The Tribunal cited authorities rejecting the contention that escrow balances or contingent recovery prospects bar insolvency admission, particularly where debt is due and default established; prior NCLAT authority rejecting similar escrow-based defenses was applied. Interpretation and reasoning: The Tribunal analysed the factual matrix (suspension timeline, amounts, contemporaneous correspondence) and concluded that (i) the corporate debtor had defaulted on repayments earlier (2019 onwards); (ii) escrow balances were not shown to be sufficient to meet lender dues when considering suspension-period costs and obligations; (iii) contractual rights of the authority to apply escrow for remedial works during suspension could lawfully affect availability of funds; and (iv) contingent termination payments (amount and realization) could not be relied upon to defeat an immediate statutory remedy of a financial creditor. Ratio vs. Obiter: Ratio - control of escrow and alleged availability of funds or prospective termination payments do not, in themselves, negate a debt/default sufficient for Section 7 admission. Observations on factual sufficiency of escrow balances are case-specific and therefore explanatory. Conclusion: The suspension/escrow/termination payments did not negate default or bar admission; NCLT's reliance on broader financial records was justified. Issue 5 - Whether termination of the concession agreement (and claim for termination payment) extinguishes liability to financial creditors or bars CIRP Legal framework: Termination consequences are contractual and may give rise to claims (including termination payments) against the authority; insolvency law treats creditor claims and corporate debtor's liabilities under the Code independently of outcome of separate contract/arbitral proceedings. Precedent treatment: The Tribunal applied established precedent that pendency of arbitration or contingent recovery claims does not forestall initiation of insolvency proceedings by a financial creditor where debt/default is shown; authorities emphasising that the adjudicating authority is not to delay admission pending arbitration were followed. Interpretation and reasoning: The Tribunal found that the termination notice's validity and entitlement to termination payment were disputed, not finally adjudicated, and that even if termination were effective, the quantum and timing of termination payment were contingent. The Tribunal held a financial creditor cannot be compelled to await arbitration or contractual remedies and that termination (even if upheld later) does not automatically erase borrower's repayment obligations to the creditor for IBC admission purposes. Ratio vs. Obiter: Ratio - disputed termination and contingent termination payments do not bar Section 7 admission. Observations regarding non-compliance with cure periods and procedural defects in termination notice were factual findings pertinent to the case. Conclusion: Termination claim did not preclude insolvency admission; the NCLT's admission was correct notwithstanding pending disputes on termination and termination payment. Issue 6 - Allegation of malicious/fraudulent initiation (Section 65) Legal framework: Section 65 IBC requires proof of fraudulent or malicious initiation for imposition of penalties; the threshold for establishing such conduct is high and requires cogent evidence. Precedent treatment: The Tribunal followed precedent that bald allegations of mala fides are insufficient; proof is necessary and is a matter for appropriate adjudication, not presumed at admission stage. Interpretation and reasoning: The Tribunal observed there was no tangible evidence demonstrating that the financial creditor initiated proceedings fraudulently or with malicious intent; the financial creditor had contemporaneous documentation showing recurring defaults and had exercised contractual remedies. The Tribunal declined to infer malafide initiation from the mere choice of insolvency remedy over contractual recovery or from disagreement over strategic commercial choices. Ratio vs. Obiter: Ratio - allegations of malicious initiation require proof; absence of such proof means the Section 65 relief is not available. Observations about standard of proof are explanatory. Conclusion: No basis was found to invoke Section 65 against the financial creditor; allegations of malicious initiation were rejected. Overall Conclusion The Tribunal affirmed the Adjudicating Authority's admission under Section 7: debt and default were established on documentary evidence; the statutory limited inquiry at admission does not extend to probing causes of default, intertwined contractual disputes, escrow/termination claims or possible inducement; pending arbitration and contractual remedies do not bar Section 7 admission; and allegations of malicious initiation were not proved. The appeal was dismissed and CIRP continuation affirmed.