The National Company Law Appellate Tribunal (“NCLAT”) set aside an order dated December 20, 2019 (“Impugned Order”) passed by the National Company Law Tribunal (“NCLT”), by way of its judgement dated September 7, 2020 in the case of Punjab National Bank v. Mittal Corp Limited (Company Appeal (AT) (Insolvency) No. 260 of 2020). The NCLT had rejected the application filed by Punjab National Bank (“Appellant Bank”) under Section 7 (initiation of corporate insolvency resolution process (“CIRP”) by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against Mittal Corp Limited (“Respondent Company”). Aggrieved by the Impugned Order, the Appellant Bank had preferred an appeal before the NCLAT under Section 61 (appeals and appellate authority) of the IBC. The NCLAT directed the NCLT to decide on the admission of the application under Section 7 of the IBC against the Respondent Company on merits and in an expeditious manner.

Facts
The Appellant Bank was part of a Joint Lenders Forum (“JLF”) which had a total exposure of INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores) in respect of amounts due and payable by the Respondent Company, out of which, the erstwhile Oriental Bank of Commerce (now merged with the Appellant Bank) had a total exposure of approximately INR 245 crores (Indian Rupees Two Hundred and Forty-Five crores). A circular had been issued by the Reserve Bank of India (“RBI”) on February 12, 2018 (“RBI Circular”), wherein, banks were required to refer cases above INR 2,000 crores (Indian Rupees Two Thousand crores) to NCLT, if the issue was not resolved within 180 (one hundred and eighty) days of default. In Dharani Sugars and Chemical Limited v. Union of India and Others (2019) 5 SCC 480 (“Dharani Sugars”), the Supreme Court of India (“SC”) had quashed the aforesaid circular. The SC held that the said circular was ‘ultra vires’ Section 35 AA (Power of Central Government to authorize RBI for issuing directions to banking companies to initiate insolvency resolution process) of the Banking Regulation Act, 1949. The Appellant Bank had filed a Section 7 application under IBC in order to initiate CIRP against the Respondent Company. It was the Respondent Company’s contention that the Section 7 application had been filed pursuant to the RBI Circular. However, the RBI Circular could not be made applicable to it, as the total debt payable to the JLF was INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores), which is below the set threshold of INR 2,000 crores (Indian Rupees Two Thousand crores) provided under the RBI Circular. The Respondent Company argued that basis the minutes of meetings of the JLF, it was clear that the Appellant Bank had filed the Section 7 application basis the RBI Circular. By way of the Impugned Order, the NCLT had dismissed the Section 7 application on the ground that the Appellant Bank had filed the application pursuant to the RBI Circular. The Appellant Bank, had thereafter, appealed to the NCLAT.

Contentions of the Appellant Bank

The total outstanding debt payable by the Respondent Company to the erstwhile Oriental Bank of Commerce (which had now been merged with the Appellant Bank) stood approximately at INR 245 crores (Indian Rupees Two Hundred and Forty-Five crores). Further, the total outstanding amount owed by the Respondent Company to its consortium of lenders was around INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores). As such there was existence of ‘debt’ as provided under Section 3(11) (definition of debt) of the IBC. Further, the evidence on record had also established the ‘existence of default’. The JLF had decided to classify the account as ‘Special Mention Account’ in terms of the guidelines issued by the RBI. The JLF had also sanctioned a restructuring package pursuant to which a master restructuring agreement was entered into between the Appellant Bank and the Respondent Company on March 30, 2015. As the Respondent Company had failed to adhere to the financial norms, the ‘Strategic Debt Restructuring Scheme’ (“SDR”) was invoked. As per the SDR, the management change should have been accomplished within 18 (Eighteen) months from the date of reference (June 16, 2016), and the 18 (Eighteen) months had expired on December 17, 2017. On account of failure of the SDR, the Respondent Company’s account was eventually classified as a NPA with effect from June 30, 2016. Thereafter, on March 20, 2018, the Appellant Bank had filed an application under Section 7 of the IBC before the NCLT. The NCLT, however, had incorrectly placed reliance upon the decision of the SC in Dharani Sugars, as in the instant case, the Section 7 application was not filed pursuant to the RBI Circular. There was nothing in the minutes of the JLF meeting dated February 26, 2018 (as claimed by the Respondent Company) which could indicate that the Section 7 application had been filed by the Appellant Bank pursuant to the RBI Circular. It was submitted that as far as the meeting on February 26, 2018 was concerned, the JLF had only discussed the offers of prospective investors. Further, the JLF had deliberated upon the concern regarding the Bombay High Court (“BHC”) giving time only until April 06, 2018 to take a decision regarding the Respondent Company and seeking necessary directions in the company petitions.

This was also deliberated upon in the subsequent meeting on March 13, 2018. In the meetings, the Appellant Bank was only considering the interests of unsecured creditors, when it had proposed filing of the Section 7 application. The Appellant Bank had in fact, filed the Section 7 application only in respect of debts owed by the Respondent Company to the Appellant Bank and not on behalf of the JLF. Furthermore, the Respondent Company never raised a plea before the NCLT that the Section 7 application had been filed pursuant to the RBI Circular. Therefore, the NCLT had incorrectly relied on this point. As per the RBI Circular, the timelines for large accounts to be referred under the IBC was with respect to accounts with an aggregate exposure of INR 2,000 crores (Indian Rupees Two Thousand crores) and above on or after March 1, 2018 (reference date). However, with respect to other accounts with aggregate exposure of the lenders below INR 2,000 crores (Indian Rupees Two Thousand crores) and above INR 100 crores (Indian Rupees One Hundred crores), the RBI intended to announce, over a two-year period, reference date for implementing the resolution plan to ensure calibrated, time bound resolution of all such accounts in default. It was further submitted that the last offer was received on February 22, 2018, that is, after the issuance of the RBI Circular. It was reiterated that the Section 7 application was not made pursuant to the RBI Circular.

Contentions of the Respondent Company

It was submitted that the RBI Circular had been declared as non-est in the eyes of law in Dharani Sugars. The JLF had approved the restructuring package on March 30, 2015 and a two – year moratorium had been given for payment of term loan instalments. The Respondent Company however incurred losses and had cash flow problems, which was discussed in the JLF meeting held on June 04, 2016. Meanwhile, the JLF had also acquired 51% (fifty-one per cent) stake through conversion of debt. Thereafter, three investors had approached the JLF and submitted their offers. As far as the meeting on February 26, 2018 was concerned, the JLF had considered the offers of these proposed investors and examined the same pursuant to the RBI Circular. In the JLF meeting held on March 13, 2018, the finalization of the offers of change of management was deferred. The lead bank of the JLF had also informed that the BHC had deferred the matter to April 06, 2018 as a last chance and as the finalization of the resolution plan before April 6, 2018 was difficult, the JLF had then taken a decision to file the Section 7 application under the IBC. Therefore, it was clear that the Appellant Bank had initiated the said proceedings pursuant to the RBI Circular. Despite the mandate under the revised framework as per the RBI Circular, no resolution plan had been put in place by the Appellant Bank. Even after the expiry of the period of 18 (eighteen) months from the date of reference, the JLF continued to look for potential investors to take over their 51% (fifty-one per cent) stake, when in fact, the last offer was received on February 22, 2018, subsequent to the RBI Circular. A perusal of the RBI Circular would also make it evident that the RBI Circular was not applicable in cases where a restructuring scheme had been implemented.

Issues

• Whether the application filed by the Appellant Bank under Section 7 of the IBC was maintainable.
• Whether the aforesaid application was filed pursuant to the RBI Circular.
• Whether the ratio of Dharani Sugars was applicable to this case.

Observations of the NCLAT
On February 07, 2019, the Respondent Company filed a writ petition before the SC (Mittal Corp Limited v. Reserve Bank of India and Others [WP (Civil) 169 of 2019]) and the SC, on February 13, 2019, had ordered the parties to maintain their ‘status quo’. Further, on April 02, 2019, in Dharani Sugars, the SC held that the RBI Circular was ‘ultra vires’ Section 35 AA of the Banking Regulation Act, 1949. By an order dated April 19, 2019, the above mentioned writ petition filed by the Respondent Company was disposed with the observation that the NCLT was free to consider whether insolvency proceedings were initiated prior to the RBI Circular. Even though the Appellant Bank formed part of the JLF, the Appellant Bank had filed the Section 7 application only in respect of debts owed by the Respondent Company to the Appellant Bank and not on behalf of the JLF. On a reading of the provisions of the RBI Circular it was clear that the pre-requisite for invocation of the said circular was that there should be an aggregate exposure of INR 2,000 crores (Indian Rupees Two Thousand crores), and in the instant case, the debt amount totaled to INR 1,077 crores (Indian Rupees One Thousand and Seventy-Seven crores). Whereas the total amount claimed solely by the Appellant Bank totaled approximately to INR 245 crores (Indian Rupees Two Hundred and Forty-Five crores). For accounts with an aggregate exposure of the lender below INR 2,000 crores (Indian Rupees Two Thousand crores) and at or above INR 100 crores (Indian Rupees One Hundred crores), the RBI intended to announce, over a two-year period, reference date for implementing the resolution plan to ensure time bound resolution of all accounts in default. However, the documentary evidence did not provide for any such announcement being made by RBI in respect of the subject matter. Moreover, the RBI Circular did not have any application to the present case and as a consequence Dharani Sugars could also not be made applicable. From Dharani Sugars, it was clear that the subject matter of the RBI Circular was with respect to debts greater than INR 2,000 crores (Indian Rupees Two Thousand crores). The contention of the Respondent Company that the minutes of the meeting held on February 26, 2018 read together with the minutes of the meeting held on March 13, 2018 established that the Section 7 application was not maintainable as it was pursuant to the RBI Circular, was not tenable. The RBI Circular was not applicable in the present case since the amount claimed as debt due and payable was less than INR 2,000 crores (Indian Rupees Two Thousand crores) and furthermore, the process was initiated by the JLF prior to issuance of the RBI Circular. Merely because the JLF: (a) had discussed investor offers and the revised plan submitted by one of the investors; (b) had examined all proposals in light of the RBI issued guidelines on February 12, 2018; (c) deliberated that finalization of a resolution plan before April 06, 2018, as required by the BHC, was difficult; and (d) had decided to file a Section 7 application under the IBC, it could not be concluded that the application per se was initiated because of the RBI Circular. Furthermore, a mere discussion in the meeting cannot be considered as “substantial evidence” in establishing that the Section 7 application under the IBC was filed pursuant to the RBI Circular. The BHC order reflected that the JLF was given time until April 06, 2018 to complete the process and the same was discussed in the JLF meeting held on March 13, 2018. Appreciating the concern of the BHC and taking into consideration that a time-bound resolution could not be achieved within such a short period of time, a decision was taken by the JLF to file a Section 7 application under the IBC. It is notable that the reply filed by the Respondent Company dated June 6, 2018 did not even mention that the application was filed pursuant to the RBI Circular. It was only in their additional affidavit dated September 17, 2019 that the Respondent Company had contended that the application was filed pursuant to the RBI Circular. When in fact, in their sur-rejoinder filed on July 27, 2018, it was submitted that the application was filed in violation of the RBI Circular. As the said circular itself was not applicable to the present case, the ratio in Dharani Sugars case would also not apply.

Decision of the NCLAT
The account in question was declared as NPA in December 2017, with effect from June 2016, after the expiry of 18 (Eighteen) months period under the SDR. Further, the Section 7 application under the IBC was filed before the lapse of the time-period of 180 (One Hundred and Eighty) days (as provided under the RBI Circular), for a default in existence much before the reference date, that is, March 1, 2018. In the absence of cogent evidence that the Appellant Bank had filed the Section 7 application pursuant to the RBI Circular, which at the outset was not even applicable to the facts of the instant case, the NCLT could not have rejected the application on such grounds. The NCLAT further remitted the matter to the NCLT, directing it to consider the Section 7 application on its own merits taking into consideration the records, as expeditiously as possible.

Vaish Associates Advocates View:

It is interesting to note that on two separate instances, the Respondent Company had taken two contradictory positions in respect of the said application. Whilst, in one instance it was claimed that application was filed in violation of the RBI Circular, on a different occasion, they had come to claim that the application was filed pursuant to and in implementation of the RBI Circular.

Regardless of the same, factoring in multiple considerations in respect of the RBI Circular, such as the set threshold amount of INR 2,000 crores, the 180 day time period, including conducting a very careful consideration of the discussions that transpired in the JLF meetings, the NCLAT has rightfully concluded that there was no evidence that the Section 7 application under the IBC had been filed pursuant to the RBI Circular, and therefore, the application required a fresh consideration by the NCLT.

For more information please write to Mr. Bomi Daruwala at [email protected]

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