Default in a Single Facility Enough to Initiate CIRP, NCLT Mumbai Upholds Independence of Debt Obligations
Default in a Single Facility Enough to Initiate CIRP, NCLT Mumbai Upholds Independence of Debt Obligations
Introduction
The National Company Law Tribunal (NCLT), Mumbai Bench, in a significant decision, clarified that default in one of several credit facilities availed by a borrower is sufficient to trigger the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal emphasized that each loan account constitutes an independent debt obligation, and default in any one such facility can independently attract the provisions of the Code.
Factual Background
HDFC Bank Limited extended multiple working capital and cash credit facilities to Shree Sant Kripa Appliances Private Limited (the corporate debtor), including ₹35 crore under a sanction letter dated December 22, 2015, and ₹65 crore under a sanction letter dated January 7, 2021. Despite periodic renewals and revisions, the corporate debtor failed to maintain repayment discipline. Consequently, the bank classified the accounts as Non-Performing Assets (NPAs).
The corporate debtor had multiple loan accounts with separate disbursements and repayment schedules. However, it argued that all facilities formed part of a composite arrangement, and that default in one account should not automatically trigger classification as NPA for the entire arrangement.
Procedural Background
Following the classification of the account as NPA, HDFC Bank filed a petition under Section 7 of the IBC before the NCLT, Mumbai Bench, seeking initiation of CIRP against the corporate debtor for non-payment of dues. The corporate debtor opposed the admission, arguing that the default determination was premature and the facilities should be treated collectively.
Issues
1. Whether default in one loan account among multiple sanctioned facilities is sufficient to trigger CIRP under Section 7 of the IBC.
2. Whether multiple credit facilities form part of a composite arrangement that requires default to be determined cumulatively.
3. Whether fresh disbursements in one facility can affect the NPA classification of another independent facility.
Contentions of the Parties
Corporate Debtor’s Submissions: The corporate debtor contended that since a fresh disbursement of ₹10.25 crore was made on January 1, 2024, its account could not have been declared NPA the very next day. It maintained that all the credit facilities were part of an integrated financial arrangement, implying that default could not be determined on an account-wise basis. It was further submitted that since the facilities were renewed and reviewed periodically, the maturity and repayment obligations were to be considered collectively.
Financial Creditor’s Submissions: The financial creditor countered that each credit facility had its own terms of sanction, maturity, and repayment schedule, and that default in one account was sufficient to establish financial default under the IBC. It argued that Section 7 of the Code only requires proof of debt and default exceeding ₹1 crore within limitation, irrespective of whether other accounts remain regular or have received fresh disbursements.
Reasoning and Analysis
The bench of Sushil Mahadeorao Kochey (Judicial Member) and Prabhat Kumar (Technical Member) observed that the corporate debtor was availing five distinct credit facilities, each with independent repayment schedules. The existence of multiple accounts did not merge the obligations into a single, composite debt.
It held that a fresh disbursement in one account cannot affect the delinquency of another account, particularly when the latter had already crossed the period of default required for NPA classification. The Bench reaffirmed that default in one facility, even when other facilities are active, is sufficient to trigger CIRP provided the debt amount satisfies the minimum threshold under Section 4 of the IBC.
By rejecting the debtor’s plea for a composite interpretation, the NCLT reinforced the principle that each credit facility carries a separate financial obligation. Once a valid default is established, the existence of other performing accounts does not negate the creditor’s right to initiate insolvency proceedings.
Implications
The decision underscores the independent nature of credit facilities and clarifies that each account represents a separate debt obligation under the IBC. It strengthens creditors’ ability to initiate CIRP upon a valid default in any single facility, even where multiple accounts or renewals exist. The decision ensures that borrowers cannot shield themselves behind the argument of composite arrangements to delay or evade insolvency proceedings, thereby fortifying the sanctity and enforceability of individual credit contracts under the IBC.
In this case the appellant was represented by Mr. Sameer Pandit a/w Mr. Aastik Agarwal, Advocates. Meanwhile the respondent was represented by Mr. Ayush J. Rajani a/w Mr. Keshav Khandelwal, Advocates.
