2025 (7) TMI 417 - AT - IBC

Admission of section 7 application - commission of default by Corporate Debtor - legally enforceable financial debt - financial debt - debt due and payable or not - time limitation - exercise of discretion under Section 7(5)(a) of the IBC. Whether a legally enforceable financial debt was due and payable by the Corporate Debtor on the date of filing of the Section 7 application in light of the One-Time Settlement (OTS) executed with the guarantors? - HELD THAT - The Appellant s contention that the debt was discharged because the guarantors paid a higher amount than the OTS value is legally unsustainable. The Bank never issued a No Dues Certificate to the Corporate Debtor nor did it issue any letter waiving its claims against the borrower - Moreover the Bank continued to treat the loan as unpaid in its internal records and filed a civil recovery suit on 05.06.2018 seeking Rs.4, 47, 46, 912.48 from the Corporate Debtor after adjusting the amounts received from the guarantors. This suit was pending when the Section 7 application was filed. The Bank also initiated SARFAESI proceedings against the Corporate Debtor s factory unit at SIDCO Industrial Area Bari Brahmana which had not been released under the OTS. These actions further reinforce that the debt had not been considered settled against the Corporate Debtor. In the present case there is no document showing that the Bank agreed to waive its claims against the Corporate Debtor rather the documents confirm the contrary that the bank specifically stated that the liability of Corporate Debtor for balance payment remains. The Bank continued to treat the debt as unpaid by the borrower and even filed a suit and initiated SARFAESI action against its assets. The Corporate Debtor submitted fresh settlement proposals even after the so-called discharge. Thus a legally enforceable financial debt existed as on 07.01.2019 and the same was due and payable by the Corporate Debtor. The OTS with the guarantors did not amount to full and final satisfaction of the loan vis- -vis the Corporate Debtor - the issue is decided in affirmative. Whether the application filed by the Bank under Section 7 of the IBC was within the limitation period? - HELD THAT - The application was filed within 2 years and 9 months and is therefore squarely within the three- year period under Article 137 of the Limitation Act 1963 - The Appellant has not placed on record any document showing that the Bank issued a No Dues Certificate or closed the loan account. On the contrary the record reflects that the Corporate Debtor was still seeking restructuring and settlement as late as 2022. The application under Section of the Code was filed within limitation and it complied with all procedural requirements. Whether the Adjudicating Authority rightly exercised its discretion under Section 7(5)(a) of the IBC in admitting the application? - HELD THAT - Section 7(5)(a) of the IBC provides that the Adjudicating Authority may admit an application if default is established. The issue is whether the Adjudicating Authority should have refused admission in view of the ongoing government contracts and claimed viability of the Corporate Debtor. The facts of Vidarbha 2022 (7) TMI 581 - SUPREME COURT are very different from the present case. In Vidarbha the corporate debtor had defaulted on his debt obligations but they had substantial receivables from Power Companies which were already crystalised and due shortly. The amount receivable was more than enough to meet the liabilities of the Corporate Debtor. The company was a going concern and in view of crystalised recoveries the Hon ble Supreme Court held that in such cases where the Corporate Debtor is solvent and only facing short-term liquidity crisis such corporate debtors should not be brought into the CIRP. In this case the Appellant has claimed ongoing works to the tune of Rs. 38 crores for various works being executed by the corporate debtor. However he could not produce any document which shows that a certain amount of bills has been approved for payment to corporate debtor. Merely showing ongoing contracts does not bring the present case under the purview of Vidarbha - there is no infirmity in the impugned order of NCLT. This issue is also decided in affirmative. The order of Adjudicating Authority is affirmed - appeal dismissed.

Summary

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

i. Whether a legally enforceable financial debt was due and payable by the Corporate Debtor on the date of filing of the Section 7 application, particularly in light of the One-Time Settlement (OTS) executed with the guarantors?

ii. Whether the application filed by the Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was within the prescribed limitation period?

iii. Whether the Adjudicating Authority rightly exercised its discretion under Section 7(5)(a) of the IBC in admitting the insolvency application, considering the Corporate Debtor's ongoing government contracts and claimed viability?

Issue-wise Detailed Analysis

Issue 1: Existence of a Legally Enforceable Financial Debt Despite OTS with Guarantors

The legal framework requires that for initiation of insolvency proceedings under Section 7 of the IBC, the financial creditor must establish the existence of a financial debt due from the Corporate Debtor and that a default has occurred. The Appellant contended that the debt was fully discharged through an OTS with the guarantors, who paid over Rs.11.30 Crores, exceeding the settled amount of Rs.10 Crores, and that the Bank had released the guarantors' mortgaged properties accordingly.

The Tribunal examined the loan facilities availed by the Corporate Debtor-Rs.9 Crores Cash Credit and Rs.4 Crores Secured Overdraft-secured by personal guarantees and mortgages executed by two directors/guarantors. The Agreement to Sell dated 20.04.2016 between the Corporate Debtor and the guarantors, transferring immovable property to the guarantors in consideration of their undertaking to repay the loan, was noted as an internal arrangement to which the Bank was not a party.

The Bank's OTS approval letter dated 14.06.2017 and the release letter dated 05.01.2018 were critical. These documents clearly indicated that the OTS was an arrangement solely between the Bank and the guarantors. The Corporate Debtor was not a party to this settlement and was not released from its obligations. The Bank expressly reserved its right to recover any outstanding dues from the Corporate Debtor, and only the guarantors' liabilities and mortgaged properties were discharged.

The Tribunal observed that the Bank's conduct-filing a civil recovery suit against the Corporate Debtor after the OTS, initiating SARFAESI proceedings against the Corporate Debtor's mortgaged property, and the Corporate Debtor's own submission of fresh OTS proposals-demonstrated that the debt was not considered fully discharged vis-`a-vis the Corporate Debtor.

Relevant precedents were considered, including the principle that the liability of guarantors is co-extensive but not automatically extinguished upon settlement with one party. The Bank's right to proceed against the principal borrower remains intact unless explicitly waived. The Tribunal referred to authoritative decisions affirming that settlements with guarantors do not extinguish the principal borrower's liability absent express waiver.

The Tribunal concluded that a legally enforceable financial debt was due and payable by the Corporate Debtor on the date of filing the Section 7 application, and the OTS with the guarantors did not amount to full and final settlement of the loan vis-`a-vis the Corporate Debtor.

Issue 2: Limitation Period for Filing the Section 7 Application

The limitation for filing a Section 7 application is three years from the date of default, which is recognized as the date the loan account is classified as a Non-Performing Asset (NPA). The Corporate Debtor's loan accounts were classified as NPAs on 31.03.2016, making this the date of default.

The Bank filed the Section 7 application on 07.01.2019, which is within the three-year limitation period. Further, the Corporate Debtor's audited balance sheet for FY 2017-18 contained an acknowledgment of the outstanding debt, which under Section 18 of the Limitation Act, 1963, extends the limitation period by three years from the date of acknowledgment.

The Tribunal relied on Supreme Court precedents clarifying that acknowledgments in financial statements or other documents filed before the expiry of the limitation period can extend the limitation. The Appellant failed to produce any document showing closure or full settlement of the loan account.

Accordingly, the Tribunal held that the Section 7 application was filed within limitation and complied with all procedural requirements.

Issue 3: Discretion of the Adjudicating Authority under Section 7(5)(a) of the IBC

Section 7(5)(a) of the IBC grants the Adjudicating Authority discretion to admit or reject an application after establishing default. The Appellant argued that the Adjudicating Authority should have exercised discretion to reject admission because the Corporate Debtor was a going concern engaged in critical government projects worth Rs.38 Crores and capable of discharging liabilities.

The Tribunal examined the precedent of Vidarbha Industries Power Ltd. v. Axis Bank Ltd., where the Supreme Court held that insolvency proceedings should not be admitted mechanically if the Corporate Debtor is solvent and facing a short-term liquidity crisis with crystallized receivables sufficient to cover liabilities.

However, the Tribunal distinguished the present case, noting that the Appellant failed to produce any documents evidencing approved payments or receivables sufficient to meet liabilities. Merely having ongoing contracts does not establish solvency or preclude insolvency proceedings.

The Tribunal reaffirmed the principles from Innoventive Industries Ltd. v. ICICI Bank and other authorities that once default and financial debt are established, the Adjudicating Authority must admit the application unless there is a serious legal impediment or overriding public interest.

Thus, the Tribunal held that the Adjudicating Authority rightly exercised its discretion in admitting the Section 7 application.

Significant Holdings

"The OTS dated 15.06.2017 was only between the Bank and the guarantors; the Corporate Debtor was not a party to the settlement and was never released from its obligations; the Bank expressly retained its right to recover the balance amount from the Corporate Debtor."

"Settlements with guarantors do not result in waiver of claims against the principal borrower unless explicitly agreed to."

"The application under Section 7 of the IBC was filed within limitation and complied with all procedural requirements, including acknowledgment of debt extending limitation under Section 18 of the Limitation Act."

"The discretion under Section 7(5)(a) of the IBC is not unfettered; the Adjudicating Authority must consider serious legal impediments or overriding public interest before refusing admission. Mere existence of ongoing contracts or viability does not bar admission if default and debt are established."

"The Adjudicating Authority correctly admitted the insolvency application after full consideration of material on record, and the appeal challenging the admission is dismissed."