NCLAT held that an application under Section 7 of the IBC was valid despite the NPA status of the debtor and the bar under Section 10A.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Barun Mitra reviewed an appeal and observed that the declaration of a loan account as Non-Performing Asset (NPA) serves as a valid date of default for initiating proceedings under Section 7 of the Insolvency and Bankruptcy Code, and the application filed by the Respondent Bank was not barred by Section 10A, as default occurred both before and after the Section 10A period.
The appeal was filed by the Suspended Director of the Corporate Debtor challenging the order dated 04.06.2024 passed by the National Company Law Tribunal (NCLT) admitting an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), filed by Union Bank of India. The Corporate Debtor, 'M/s. I World Business Solutions Pvt. Ltd.', had availed credit facilities from the State Bank of India, which were subsequently transferred to the erstwhile Andhra Bank, now Union Bank of India. The bank reviewed and renewed these facilities, including cash credit and bank guarantees, multiple times. The Corporate Debtor faced financial difficulties, particularly during the COVID-19 period, and received further credit facilities, including a Guaranteed Emergency Credit Line (GECL) from the bank.
The bank declared the Corporate Debtor’s account as a Non-Performing Asset (NPA) on 31.03.2021 and issued a notice under Section 13(2) of the SARFAESI Act, 2002, informing the outstanding debt of Rs. 66.98 crores. On 24.09.2022, Union Bank of India filed an application under Section 7 of the IBC, claiming a debt default amount of Rs. 76.61 crores as of 30.06.2022. The Corporate Debtor contended that the application was barred by Section 10A of the IBC, which prohibits the initiation of insolvency proceedings during the COVID-19 pandemic period. However, the NCLT rejected this plea, upholding the date of default as 31.03.2021 and admitting the application.
The Appellant challenged the NCLT’s decision, arguing that the loan was sanctioned during the Section 10A period and that the Corporate Debtor had made regular repayments, with only the 5th EMI showing a default. The Appellant also contended that the bank had unilaterally adjusted part of the GECL and that the sanction letter issued on 25.03.2021 proved no default at that time. The bank, in response, argued that the FITL (Funded Interest Term Loan) was part of the cash credit facility, and due to continuous defaults, the entire account was classified as NPA in accordance with RBI guidelines. It was also pointed out that the Corporate Debtor's default continued after the Section 10A period, justifying the filing of the Section 7 application.
The NCLT found that the date of NPA, 31.03.2021, could be treated as the date of default, as per the Supreme Court's judgment in Laxmi Pat Surana v. Union Bank of India and Another, REEDLAW 2021 SC 03571 and Asset Reconstruction Company (India) Limited v. Bishal Jaiswal and Another, REEDLAW 2021 SC 04535. These rulings clarified that the date of NPA can serve as the default date for initiating insolvency proceedings under Section 7. The NCLT also relied on the Corporate Debtor’s acknowledgement of outstanding dues prior to the Section 10A period, further justifying the admission of the application. As a result, the appeal was dismissed, affirming the NCLT's decision to admit the Section 7 application and initiate insolvency proceedings.
Mr. Sajeve Deora, Mr. Nikhil Kohli and Miss Akshaya Ganpath, Advocates represented the Appellant.
Ms. Ekta Choudhary and Mr. Divyank Dutt Dwivedi, Advocates appeared for Respondent No.1.
Mr. Atul Bhatia, Advocate appeared for the RP.
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