NCLAT remanded the Section 7 application for fresh consideration, affirming that the commercial judgment of the Financial Creditor prevails.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Naresh Salecha and Mr. Indevar Pandey, reviewed an appeal and observed that the Adjudicating Authority had erred in rejecting the Appellant Bank's Section 7 application, as the debt and default were undisputed. The NCLAT emphasized that the commercial judgment of the Financial Creditor should not be interfered with and remanded the matter for fresh consideration.
The present appeal was filed by Appellant Bank under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the Impugned Order dated 18.11.2022 passed by the National Company Law Tribunal, Mumbai Bench-II. The Adjudicating Authority had rejected the Section 7 application against the Corporate Debtor). The Appellant, a Financial Creditor, argued that the Corporate Debtor had consistently acknowledged its debt and default, and the Adjudicating Authority erred in dismissing the application despite clear evidence of both. It asserted that the Adjudicating Authority's role was limited to ascertaining debt and default beyond the threshold limit, after which the Corporate Insolvency Resolution Process (CIRP) should be initiated.
Canara Bank highlighted its refusal to sign the Inter-Creditor Agreement (ICA) and issue a recall notice demanding repayment of approximately Rs. 534.76 crores. It contended that the earlier dismissal of its Section 7 application due to the Dharani Sugars and Chemical Limited v. Union of India and Others, REEDLAW 2019 SC 04005 judgment was not a decision on merits and, therefore, res judicata did not apply. The Appellant further contested the Adjudicating Authority’s reliance on
Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529, asserting it was fact-specific and inapplicable to the present case. It emphasized that Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 remained the binding precedent, where debt and default alone sufficed to admit a Section 7 application.
The Appellant argued that the Respondent’s defaults were repeatedly acknowledged in financial statements, books of accounts, and Information Utility reports. Despite multiple failed restructuring and one-time settlement (OTS) proposals, the Corporate Debtor’s financial health deteriorated, and it remained a loss-making entity. The Appellant asserted that CIRP was the only viable mechanism for value maximization and criticized the Impugned Order for misinterpreting the Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 ratio. Additionally, it emphasized that the ICA and other lenders’ decisions did not bind its rights as a Financial Creditor.
The Respondent defended the Impugned Order, asserting that Vidarbha Industries granted discretion to the Adjudicating Authority under Section 7(5)(a). It argued that initiating CIRP would be counterproductive, as significant recoveries had already been achieved through asset sales and other proceedings. The Respondent also contended that the majority of lenders had signed the ICA and criticized the Appellant’s insistence on insolvency despite a consensual recovery approach.
The NCLAT examined the legal issues in light of the Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 judgment and noted its inapplicability to the present case, given the absence of comparable facts. Unlike Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529, where an arbitration award favoured the Corporate Debtor, GTL Limited had consistently failed to meet its obligations, and its OTS proposals were speculative and inadequate. The Tribunal observed that the debt and default were undisputed and well-documented.
Relying on the Bombay High Court’s decision in Writ Petition No. 223 of 2020, upheld by the Hon’ble Supreme Court, the NCLAT reiterated that financial institutions retained discretion to assess and decide on matters such as settlement offers and the signing of ICAs. It held that no lender, including the Appellant, could be compelled to act against its commercial judgment. The Tribunal emphasized that the commercial wisdom of the Financial Creditor was paramount and not subject to judicial intervention, reaffirming that lenders were not duty-bound to follow majority decisions under RBI guidelines.
The NCLAT concluded that the Adjudicating Authority erred in rejecting the Section 7 application and set aside the Impugned Order. The case was remanded to the Adjudicating Authority for fresh consideration, with a direction to expedite the matter given its prolonged pendency. The appeal was allowed, with no costs, and pending applications were disposed of.
Mr. Abhijeet Sinha, Mr. Raunak Dhillon, Mr. Madhav Kanoria, Ms. Srideega Bhattarcharya, Ms. Neha Shivhare, and Ms. Isha Malik, Advocates represented the Appellant.
Mr. Abhinav Vasisht, Sr. Advocate with Mr. Rohan Rajadhyaksha, Mr. Apporva Agarwal, Mr. Prasad Lotlikar, Ms. Neha Mathen, Ms. Akshita Sachdeva and Mr. Atharv Gupta, Advocates appeared for the Respondent.
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