2025 (6) TMI 605 - AT - IBC

Admission of section 7 application - Indian Bank had only 2.47% share in the lending - case of appellant is that when 90% of the Lenders were in favour of assignment of the debt the Indian Bank ought not to have been permitted to prosecute its Application under Section 7 - HELD THAT - The present is a case where the fact that CD has failed to discharge its debt liability is not even disputed. The Adjudicating Authority has returned a finding that default in payment is not even disputed which finding has been returned in paragraph-9 of the order. The present is a case where there are sufficient materials to indicate that debt and default is an admitted fact. Furthermore the fact is that the Appellant during the pendency of the Appeal has been relying on several debt resolution proposals including the debt resolution proposal dated 19.02.2025 and 05.04.2025 which have been brought on record by the Appellant by additional affidavits. The debt resolution proposal has been given to NARCL who has now been assigned the debt of all Members of the Consortium including the Indian Bank. The communication dated 15.03.2025 indicate that reasons have been given in the communication why the settlement proposal could not be considered favourably. The first reason given is that it lacks tied-up funding sources; and secondly it is contingent on the receipt of insurance claim which is long pending and funds from unidentified investor. The Promoters upfront payment offer is of Rs.5 crores. The NARCL who is now assignee of the entire debt of all the Consortium Members including the Indian Bank having not accepted the settlement proposal submitted by the Appellant in the facts of the present case the resolution of the CD has to take place in accordance with the IBC. Conclusion - The fact that Indian Bank has 2.47% proportion in the lending in no manner preclude the Indian Bank to take its measures as per facility document. There are no error in the order of the Adjudicating Authority admitting Section 7 Application. In result the Appeal is dismissed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether a member of a consortium of lenders holding a minor share (2.47%) can independently initiate insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") against the Corporate Debtor, despite an in-principle decision by 90% of the consortium members to transfer the debt to the National Asset Reconstruction Company Limited ("NARCL") for recovery.

2. Whether the admission of the Section 7 application by the Adjudicating Authority was justified given the ongoing efforts for debt restructuring and the assignment of debt to NARCL.

3. Whether the settlement proposals submitted by the Corporate Debtor during the pendency of the appeal warranted reconsideration or stayed the insolvency proceedings.

4. The extent of discretion and independence of consortium members in pursuing recovery measures under their respective bank policies despite collective decisions.

5. The applicability and effect of debt assignment to NARCL on the continuation of insolvency proceedings initiated prior to such assignment.

Issue 1: Legitimacy of Section 7 Initiation by a Minority Consortium Member

Legal Framework and Precedents: Section 7 of the IBC empowers a financial creditor to initiate Corporate Insolvency Resolution Process (CIRP) against a defaulting corporate debtor. The IBC and related regulations do not restrict any financial creditor's right to initiate proceedings based on their own debt exposure. The principle of independent rights of lenders within a consortium is recognized, subject to the terms of the consortium agreement and applicable law.

Court's Interpretation and Reasoning: The Tribunal noted that the Indian Bank, though holding only 2.47% share in the consortium, was independently entitled to initiate recovery measures including filing of Section 7 application. The Joint Lenders Meeting ("JLM") minutes dated 29.01.2024 expressly recorded that all banks acknowledged their independent rights to pursue recovery measures as per their own bank policies. The fact that 90% of lenders had agreed in-principle to transfer the debt to NARCL did not preclude the Indian Bank from initiating insolvency proceedings, especially since the Section 7 application was filed prior to the JLM decision.

Key Evidence and Findings: The JLM minutes were crucial, showing unanimous in-principle mandate to transfer the account to NARCL but also explicit recognition of independent recovery rights. The Section 7 application was filed before the consortium's collective decision to transfer the debt. The Adjudicating Authority found default undisputed and no transfer to NARCL had occurred at the time of admission.

Application of Law to Facts: The Tribunal applied the principle that each financial creditor retains independent rights to initiate insolvency proceedings and that a collective in-principle decision does not bind individual members from exercising statutory rights. The timing of the application and the absence of actual transfer of debt at the time of admission were decisive.

Treatment of Competing Arguments: The appellant argued that majority consensus to transfer to NARCL should bar Indian Bank's Section 7 application. The Tribunal rejected this, emphasizing statutory rights and independent recovery policies. The Indian Bank and NARCL argued the application was valid and timely, which the Tribunal accepted.

Conclusion: The Tribunal held that Indian Bank was entitled to initiate Section 7 proceedings despite holding a minority share and the consortium's in-principle decision to transfer the debt to NARCL.

Issue 2: Justification for Admission of Section 7 Application Amidst Debt Restructuring Efforts and Debt Assignment

Legal Framework and Precedents: The IBC mandates admission of a Section 7 application where default is established and no valid defense is raised. The objective is to facilitate resolution, not liquidation, and the Code encourages settlement but does not bar admission on account of ongoing negotiations. Assignment of debt under the SARFAESI Act or other mechanisms does not automatically stay insolvency proceedings unless otherwise provided.

Court's Interpretation and Reasoning: The Tribunal observed that the Adjudicating Authority had correctly admitted the Section 7 application because the default was undisputed and the debt had not been transferred to NARCL at the time of admission. The Tribunal noted that the assignment of debt to NARCL occurred later, on 30.12.2024, post admission. The ongoing restructuring efforts and proposals did not negate the fact of default or the statutory entitlement of the creditor to seek CIRP.

Key Evidence and Findings: The undisputed default as per loan statements, demand notices, and classification as NPA was established. The assignment to NARCL was subsequent to the admission. The appellant's restructuring proposals were submitted during the pendency of the appeal but were not accepted by NARCL.

Application of Law to Facts: The Tribunal applied the statutory mandate that admission is mandatory upon proof of default and did not find any legal bar to admission due to pending restructuring discussions or future assignment. The fact that the appellant was submitting proposals during the appeal was noted but did not affect the validity of admission.

Treatment of Competing Arguments: The appellant contended that the admission was premature and contrary to the spirit of resolution under IBC, given the majority lenders' consensus on NARCL transfer and restructuring proposals. The Tribunal acknowledged the intent of IBC but held that statutory provisions and timing of events prevailed.

Conclusion: The admission of the Section 7 application was justified and in accordance with law despite ongoing restructuring efforts and subsequent debt assignment.

Issue 3: Consideration of Settlement Proposals During Pendency of Appeal

Legal Framework and Precedents: The IBC and judicial precedents emphasize resolution and encourage settlement proposals. However, acceptance of such proposals lies within the discretion of the creditor or assignee. The Supreme Court in recent rulings has clarified that settlement proposals must be bona fide and backed by credible funding sources.

Court's Interpretation and Reasoning: The Tribunal examined the proposals dated 19.02.2025 and 05.04.2025 submitted by the appellant. It noted that the proposals were contingent upon uncertain insurance claims and unidentified investors, with limited upfront payment from promoters. The communication from the India Debt Resolution Company Ltd. (IDRCL) on behalf of NARCL dated 15.03.2025 provided reasons for non-acceptance, notably lack of tied-up funding and contingent elements.

Key Evidence and Findings: The proposals and rejection communication were on record. The Tribunal found that NARCL had adequately considered the proposals and the reasons for rejection were valid and not arbitrary. The appellant's enhanced upfront payment in the revised proposal was still insufficient to inspire confidence.

Application of Law to Facts: The Tribunal applied the principle that acceptance of settlement proposals is a commercial decision of the creditor or assignee and must be based on credible, reliable funding. The appellant's proposals failed to meet this threshold.

Treatment of Competing Arguments: The appellant argued that the proposals offered amounts exceeding the assigned debt and should be accepted in the spirit of resolution. The Tribunal balanced this against the credibility and feasibility of the proposals and the discretion of NARCL.

Conclusion: The Tribunal held that the rejection of the settlement proposals was justified and did not warrant interference or stay of insolvency proceedings.

Issue 4: Independent Rights of Consortium Members to Pursue Recovery Measures

Legal Framework and Precedents: Consortium agreements typically govern collective decisions but do not eliminate individual lender rights unless expressly restricted. The IBC and banking regulations recognize that each lender may pursue recovery independently, subject to contractual terms.

Court's Interpretation and Reasoning: The Tribunal emphasized the JLM minutes which explicitly recognized the independence of each bank to follow its recovery policy. This was a key factor in upholding the Indian Bank's right to file Section 7 application despite consortium consensus.

Key Evidence and Findings: The JLM minutes and correspondence showed awareness and acceptance of independent recovery rights. The Indian Bank's decision to proceed with Section 7 was consistent with this understanding.

Application of Law to Facts: The Tribunal applied the principle of independent creditor rights and contractual autonomy within consortium arrangements.

Treatment of Competing Arguments: The appellant's reliance on consortium majority decisions was rejected in light of the express recognition of independent rights.

Conclusion: The independent right of Indian Bank to initiate insolvency proceedings was upheld.

Issue 5: Effect of Debt Assignment to NARCL on Insolvency Proceedings

Legal Framework and Precedents: Assignment of debt under SARFAESI or other laws transfers rights to the assignee but does not automatically stay or nullify ongoing insolvency proceedings unless specifically provided. The assignee steps into the shoes of the assignor with respect to the debt.

Court's Interpretation and Reasoning: The Tribunal noted that assignment to NARCL occurred after admission of the Section 7 application. NARCL, as assignee, was entitled to continue the proceedings and consider settlement proposals. The rejection of proposals by NARCL was within its rights. The Tribunal found no legal infirmity in continuing the insolvency process post assignment.

Key Evidence and Findings: Assignment documentation, correspondence, and NARCL's communication with the appellant were on record. The appellant's withdrawal of litigation regarding credit rating further indicated acceptance of the debt status.

Application of Law to Facts: The Tribunal applied the principle that assignment does not vitiate admitted insolvency proceedings and that the assignee's commercial decisions are binding.

Treatment of Competing Arguments: The appellant sought to rely on assignment to NARCL to stay proceedings and compel acceptance of proposals. The Tribunal rejected this, emphasizing statutory framework and commercial discretion.

Conclusion: The assignment to NARCL did not affect the validity of the admitted Section 7 application or the continuation of insolvency proceedings.

Significant Holdings and Core Principles Established:

"The fact that Indian Bank has 2.47% proportion in the lending, in no manner preclude the Indian Bank to take its measures as per facility document."

"All Lenders have their independent rights to take such measures as per their Bank's policy regarding realisation of their debt and the fact that Consortium Members in-principle has decided to transfer the account to NARCL, in no manner can hamper the proceedings under Section 7 initiated by the Indian Bank."

"The fact that the CD has failed to discharge its debt liability is not even disputed."

"NARCL has adequately considered the proposal and the communication on behalf of the NARCL dated 15.03.2025, does not suffer from any infirmity, so as to issue any further directions with regard to settlement."

"The resolution of the CD has to take place in accordance with the IBC."

"We do not find any error in the order of the Adjudicating Authority admitting Section 7 Application."

The Tribunal's final determination was to dismiss the appeal, vacate the interim order, and dispose of all interlocutory applications, holding that the Section 7 application was rightly admitted, the Indian Bank was entitled to initiate proceedings independently, the assignment to NARCL did not affect the proceedings, and the settlement proposals submitted by the appellant were not acceptable to NARCL and did not warrant any interference.