NCLT: Quantum of debt cannot be a ground for rejection of insolvency petition

NCLT: Quantum of debt cannot be a ground for rejection of insolvency petition

The National Company Law Tribunal (NCLT), New Delhi bench, comprising of Shri P.S.N. Prasad (Judicial member) and Shri Rahul Bhatnagar (Technical Member), while adjudicating a petition filed in M/s Intec Capital Limited Vs M/s SRD Management Company Private Limited has restated that dispute over quantum of debt cannot be a ground for rejection of insolvency petition. The Tribunal admitted the petition after observing that the petition very well meets the 1 crore threshold limit for initiating Corporate Insolvency Resolution Process (“CIRP”).

The present petition was filed by M/s Intec Capital Limited- the Applicant/Financial Creditor on 9 November, 2020. As per M/s SRD Management Company Private Limited- the Respondent/Corporate Debtor’s contention, the present petition was barred by limitation, since the debt was of 2010.

On 27 March, 2010, Financial Creditor granted two loans worth 1,57,00,000 each (3.14 crores) @ 8.5% p.a. for 24 months to Corporate Debtor for buying assets.

The Financial creditor alleged that the Corporate Debtor defaulted in payment of the installments which led to restructuring of the loans. The Corporate Debtor defaulted even after restructuring which led to invocation of the arbitration clause in the loan agreement on 21 July, 2021. However, during the pendency of the arbitration proceedings, the parties entered into a settlement agreement on 19 December, 2012.

The arbitral award was passed on 14 January, 2013 stating that the parties had reached a settlement and if the Corporate Debtor made further defaults in payments, the Financial Creditor would be entitled to a further interest on the outstanding amount from the date of default till the date of realization @ 15% p.a. and @ 20.08% p.a. respectively on the two loans. It was further submitted that the Corporate Debtor defaulted in the payments again which led to another settlement on 24 September, 2018 stating that the previous settlements shall be considered null and void ab inito and the outstanding amount shall be adjusted against the two loan accounts.

The bench noted that the sanction letters approving the loan applications were issued on 25 March, 2010. The parties had entered into a loan agreement on 27 March, 2010. Therefore, the limitation period was supposed to end on 26 March, 2013.

However, there had been several acknowledgements by Corporate Debtor, which extended the limitation period from time to time. The loan accounts had been restructured time and again at the request of the Corporate Debtor i.e., on 30 October, 2010, 19 December, 2012, and 18 January, 2013. Multiple cheques provided by the Corporate Debtor were bounced and hence, the loan accounts were declared Non-Performing Assets (NPA) on 30 May. 2015, stated the NCLT.

“Considering the date of NPA to be the date of default, the three years limitation period was supposed to end on 29 May, 2018. After the date of default i.e., 30 May, 2015, the Corporate Debtor acknowledged the Financial Debt via email in August and November 2015 and also acknowledged the same in his Balance Sheet on 5 September, 2017, which is under the extended period of limitation,” observed the NCLT.

Further the bench relied on the decision of National Company Law Appellate Tribunal (NCLAT) in Shailesh Sangani vs. Joel Cardoso and Others., (2019) which held, an acknowledgement of a debt by way of balance sheet is a valid acknowledgement and such will start a fresh period of limitation from the date of acknowledgement.

Therefore, the NCLT opined that the limitation period was supposed to end on 4 September, 2020. Further, the bench noted that a new settlement regarding repayment of financial debt was entered into between parties on 24 September, 2018. Other than that, the Corporate Debtor had made express acknowledgement of debt on 29 September, 2018, which was again within the extended period of limitation.

The NCLT highlighted that such express limitation of financial debt extended the limitation period and hence, the limitation period would end on 28 September, 2021. The present petition was filed on 9 November, 2020 and therefore, was under the period of limitation.

The NCLT observed that, “in order to ascertain the sustainability of the claim of the Financial Creditor, we need to look into the provisions of the Insolvency and Bankruptcy Code, 2016 (Code). To initiate CIRP under Section 7 of the Code, there has to be a ‘Financial debt’. As per Section 5(8)(b) of the Code, ‘Financial Debt’ includes a debt which is raised by acceptance under any credit facility. It is to be noted that in the present case, the Financial Creditor is a non-banking financial institution engaged in the business of providing credit facilities. Therefore, it would be correct to say that the debt claimed by the Financial Creditor against the Corporate Debtor would be considered as a Financial Debt.”

The bench recorded that Financial Creditor had mentioned that the amount claimed to be in default was Rs. 10,99,36,605. Such an amount was calculated after considering the original amount of the two Loan Agreements, various settlement agreements and arbitral award.

However, the Corporate Debtor disputed the claimed amount. In this regard, the NCLT referred the NCLAT judgment in Mr. Vineet Khosla Vs. M/s Edelweiss Asset Reconstruction Company Ltd. and Others., (2019) which made it clear that quantum of debt cannot be a ground for rejection of insolvency petition.

The bench pertinently mentioned that the present petition very well qualified the 1 crore threshold limit for initiating CIRP, as mentioned under Section 4 of the Code.

The NCLT found that present petition made by the Financial Creditor was complete in all respects as required by law. The Petition established that the Corporate Debtor was in default of a debt due and payable and that the default was more than the minimum amount stipulated under section 4 (1) of the Code, stipulated at the relevant point of time.

Hence, the application filed by, the Financial Creditor, under Section 7 of the Code read with rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating CIRP against, the Corporate Debtor, was admitted.