A three-member bench of the National Company Law Appellate Tribunal (NCLAT) observed that the Mumbai bench of the National Company Law Tribunal (NCLT) had dismissed plea of Punjab National Bank (erstwhile Oriental Bank of Commerce) on the basis of a circular issued by the RBI on February 12, 2018, which was not applicable in this matter.
The appellate tribunal said that the point for consideration in this matter was whether Section 7 of the Insolvency and Bankruptcy Code (IBC) is applicable and whether it is pursuant to the RBI Circular dated February 12, 2018, the appellant had initiated the said proceedings.
The National Company Law Appellate Tribunal (NCLAT) has set aside an order passed by NCLT rejecting a plea filed by Punjab National Bank to initiate insolvency proceedings against Mittal Corp and directed it to decide afresh "expeditiously".
The NCLAT order said "We set aside the Impugned Order dated December 20, 2019 and remit the case to the Adjudicating Authority (NCLT), Mumbai Bench, with a direction to decide the Admission of the Application on merits as expeditiously as practicable."
The appellate tribunal said there was no evidence suggesting that PNB had moved NCLT to initiate insolvency proceedings based on the said circular, under which it was not eligible to file as the default amount was less than Rs. 2,000 crore. "In the absence of any cogent evidence to show that the Appellant (PNB) has filed the Application only pursuant to the 'Circular' issued by Reserve Bank of India, which we hold at the outset, was not applicable to the facts of the instant case, it was not open to the Adjudicating Authority (NCLT) to reject the application on this ground. The Petition under Section 7 of the IBC is to be considered by the Adjudicating Authority on its own merits taking into consideration the records." it said.
Earlier, on December 20, 2019, the NCLT had dismissed the plea filed by the bank under Section 7 of the Insolvency and Bankruptcy Code (IBC) to initiate insolvency proceedings against Mittal Corp. This was challenged before the NCLAT by PNB.
The circular was issued by the RBI on February 12, 2018 mandating the banks to refer an account as NPA (non-performing asset) even for one day of default. Banks were to refer all such cases with over Rs. 2,000 crore loans to the NCLT, if they failed to resolve the issue within 180 days of default.
The NCLAT relied on the Dharani Sugar case in which the Supreme Court had quashed the circular on April 2, 2019 terming it to be "ultra vires". Following this, the RBI had revised the circular, offering lenders a 30-day period to label an account an NPA, along with other modifications.
Mittal Corp had contended that the plea to initiate insolvency was filed by the bank following the circular, which was not applicable as its total debt payable to the consortium of lenders was Rs. 1,077 crore, which was below Rs. 2,000 crore limit.
The Counsel for the Respondent (Mittal Corp) stated that no 'Resolution Plan' has been put in place by the Appellant (PNB), that after the expiry of the period of 18 months, JLF continued to look for potential investors to take over their 51% stake and vehemently denied that after the expiry of the HDR scheme, no new proposal was received by the JLF, as the last offer was received on 22 February 2018, subsequent to the RBI Circular. He further submitted that a perusal of the Circular makes it evident that it is not applicable in cases where a Restructuring Scheme the Joint Lenders Forum (JLF) of the company has already started the process of restructuring of debt and the lenders had acquired 51% stake through conversion of debt. They were also in discussions to offer this stake to some investors.
However, the appellate tribunal rejected it, saying the process was initiated by JLF prior to the issuance of the circular. Mittal Corp had outstanding debt and dues of Rs. 245 crore towards the erstwhile Oriental Bank of Commerce (now PNB).
The NCLAT held, "Merely because the JLF Committee discussed the various offers and also the revised Plan from 'Tri Shakti' and decided to examine the Proposals in light of the new guidelines issued by the RBI on 12 February 2018 and found that finalization of any 'Resolution Plan' prior to 06 April 2018, it cannot be construed that the decision to file the Application was initiated only pursuant to the RBI Circular. Additionally, a mere discussion in the Minutes of the Meetings cannot be construed as substantial evidence to establish that the decision to file Section 7 Application was pursuant to the RBI Circular."
Mittal Corp's total outstanding amount owed to its consortium of lenders is around Rs. 1,077 crore. After default, the JLF decided to classify the account as Special Mention Account (SMA) in terms of the guidelines issued by the RBI and sanctioned a restructuring package for the company.
A Master Restructuring Agreement was entered into between the PNB and Mittal Corp on March 30, 2015. However, it did not adhere to the financial norms, as a result of which the strategic debt restructuring (SDR) scheme was invoked and the account was declared an NPA.
The NCLAT remitted the case back to the NCLT and directed it to decide the issue on merits as expeditiously as practicable.