NCLAT held that the mere pendency of arbitration or settlement proposals does not bar the admission of a Section 7 application once debt and default are established.
On 24.03.2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Member Arun Baroka, reviewed an appeal along with a connected I.A. and held that once debt and default are established, the admission of a Section 7 application under the IBC is mandatory. The mere pendency of arbitration or settlement proposals does not constitute a valid ground for rejection, as reaffirmed by the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank, REEDLAW 2023 SC 05587, and Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563.
The present appeal was filed by a suspended director of the corporate debtor challenging the order dated 23.09.2024, passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi, Principal Bench), which admitted a Section 7 application filed by the State Bank of India (SBI) against Bareilly Highways Project Ltd. The corporate debtor had been constituted as a Special Purpose Vehicle (SPV) for executing a National Highway Project for the construction, operation, and maintenance of the Bareilly-Sitapur section of National Highway-24. SBI, through a sanction letter dated 15.11.2010, had extended financial assistance to the corporate debtor, and subsequently, a facility agreement was executed on 16.12.2010, under which the corporate debtor was granted a loan aggregating to ₹1,350 crore. However, the loan account was classified as a Non-Performing Asset (NPA) on 26.07.2017.
A Section 7 application had also been filed against Era Engineering Ltd., the holding company of the corporate debtor. Meanwhile, the National Highways Authority of India (NHAI) issued a termination notice to the corporate debtor on 03.05.2019. The corporate debtor had submitted a settlement proposal to the lenders in 2020, which was not accepted. SBI proceeded to file a Section 7 application on 15.04.2023 for a default amounting to ₹1409.72 crore, with the date of default recorded as 18.01.2019. The corporate debtor, in its reply before the Adjudicating Authority, contended that a One-Time Settlement (OTS) proposal had been submitted to the consortium of banks, which was ultimately rejected. The corporate debtor had also approached the Delhi High Court through Writ Petition (Civil) No. 11150/2024, where liberty was granted to submit an OTS with the lead bank. After considering the submissions, the Adjudicating Authority concluded that debt and default had been established and admitted the Section 7 application on 23.09.2024.
Upon appeal, the appellant submitted that a revised settlement proposal amounting to ₹550 crore was submitted on 08.10.2024. Acknowledging this, the Tribunal, through an interim order dated 15.10.2024, granted time for SBI to obtain instructions regarding the proposal and directed that no further steps be taken in pursuance of the impugned order. The appeal was listed on multiple occasions, with the appellant seeking additional time to bring a settlement on record. The Tribunal, in its order dated 09.12.2024, noted that the appellant had approached lenders and that the National Asset Reconstruction Company Limited (NARCL) had emerged as a front-runner to acquire the corporate debtor's non-performing loan. However, SBI had not yet assigned the loan. The Tribunal observed that if a settlement were to take place, the appropriate recourse would be an application under Section 12A of the IBC.
By order dated 13.01.2025, substitution of NARCL was permitted following the assignment of the debt by SBI. Subsequent adjournments were sought by the appellant, with an interim order being continued until 12.03.2025. On the final hearing date, both parties submitted that no settlement had materialized. The appellant contended that the corporate debtor had invoked arbitration against NHAI and was making efforts to clear its debts through various OTS proposals. It was also argued that the resolution plan of the holding company, Era Engineering Ltd., had been approved on 11.06.2024, which could impact the corporate debtor's financial standing.
The respondent countered that the appellant had not raised any arguments disputing debt and default, which stood admitted. It was submitted that multiple opportunities had been granted to the appellant to settle dues, but no settlement had materialized, thereby justifying the admission of the Section 7 application. The respondent relied on the Hon'ble Supreme Court's judgment in M. Suresh Kumar Reddy v. Canara Bank, REEDLAW 2023 SC 05587 (Civil Appeal No. 7121/2022), reiterating that once debt and default were established, admission of a Section 7 application was mandatory.
After considering submissions and examining the record, the Tribunal found no dispute regarding the financial facilities extended by SBI. The corporate debtor's accounts had been declared NPA on 26.07.2017, and a loan recall notice had been issued on 11.01.2019, demanding ₹2078.04 crore. The Tribunal noted that even during the Section 7 proceedings, the corporate debtor had given an OTS proposal dated 03.08.2024, which was rejected by the consortium of banks. A writ petition had also been filed, wherein the Delhi High Court granted liberty to submit another OTS for consideration. However, the Adjudicating Authority recorded that the corporate debtor had no serious objections regarding the existence of debt and default, and its arguments primarily revolved around pending arbitration against NHAI. The Tribunal also referred to the Supreme Court's ruling in Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529, clarifying that the adjudicating authority had correctly admitted the Section 7 application in accordance with the principles laid down in Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563.
The Tribunal, therefore, concluded that the appellant's contentions regarding pending arbitration and OTS proposals did not negate the existence of debt and default. As a result, the appeal was dismissed, affirming the order dated 23.09.2024, which admitted the Section 7 application against the corporate debtor, Bareilly Highways Project Ltd.
Mr. Krishnendu Dutta, Sr. Advocate with Ms. Prachi Darji, Ms. Divya Verma, Ms. Ritika Gussain and Mr. Manav Goyal, Advocates, represented the Appellant.
Mr. Niranjan Reddy, Sr. Advocate with Ms. Smriti Churiwal, Mr. Vishesh Kalra, Mr. Jaiveer Kant
and Ms. Anoushka Deo, Advocates, appeared for Respondent No. 1.
Mr. Arijit Prasad, Sr. Advocate with Ms. Nishtha Kaura, Advocates, appeared for the Intervenor.
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