NCLAT(22.11.2021) In Manmohan Singh Jain Vs. State Bank of India .[Company Appeal (AT) (CH) (INS) No. 97 of 2021] held that; -
Hon’ble Supreme Court held that the date of default is not the date of Non-Performing Assets (NPA). It is submitted that much prior to the date of Non-Performing Assets (NPA) the date of default occurred and for the purpose of determining law of limitation the actual default is to be taken into consideration for the purpose of counting the period of limitation not the Non-Performing Assets (NPA).
the Judgment of the Hon’ble Supreme Court in Surendra Trading Co. v Juggilalkamlapat Jute Mills Co., 2017 85 taxmann.com 372 SC is relevant to show that the Provisions of Section 7 (5) are directory in nature as held by the Hon’ble Supreme Court in Para 25.
that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that he right to apply under the Code accrues on the date when default occurs;
that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable;
In the present Appeal, though the first date of NPA is with respect to Axis Bank i.e. 10.02.2017. However, the RBI circulars/Directives provides filing of independent application by the Financial Creditor i.e. the SBI before the Adjudicating Authority (NCLT) under Section 7 of the IBC. Accordingly, the Applicant the 1st Respondent herein filed application under Section 7 of the IBC for initiating the CIRP against the Corporate Debtor independently taking into the date of NPA/default and the amount of debt and default.
Excerpts of the order;
# 1) The present Appeal is filed aggrieved by the Order dated 27th April 2021 passed by the Adjudicating Authority (National Company Law Tribunal, Division Bench-II, Chennai) in IBA/45/2020, whereby the Adjudicating Authority admitted the application and initiated the Corporate Insolvency Resolution Process (CIRP).
Appellant’s Submissions :-
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# 6) It is submitted that the working capital facilities availed from consortium banks, turned irregular and resultantly were declared as Non-Performing Assets (NPA) along with starting recovery proceedings against the Corporate Debtor by consortium through State Bank of India, in the capacity as authorized lead lender of consortium. Notice under Section 13(2) of SARFAESI Act, 2002 was issued by the Bank for demanding outstanding debt of consortium amounting to Rs.128,45,69,581.34 along with giving reference therein of joint consortium security documents executed jointly with the consortium by the Corporate Debtor and guarantors along with mentioning wrong date of Non-Performing Assets (NPA) as 27-11-2018, instead of correct date of NON-PERFORMING ASSETS (NPA) i.e. 10-02-2017, when account became NON-PERFORMING ASSETS (NPA) first with Axis Bank Limited as evident from the following:
# 7) The Learned Counsel for the Appellant submitted that the main grievance in the appeal is that the Respondent did not mention the date of default in the Form-1 Part IV besides various other deficiencies in the Form-1. Despite giving opportunity by the Hon’ble ‘Adjudicating Authority’, the Respondent has not inclined to cure the defect in the Form. The Hon’ble ‘Adjudicating Authority’, in its order dated 27.04.2021, observed and concluded that the application is defective, but still admitted the application and further observed that one of the Consortium of banks i.e. Axis Bank has claimed the date of default as on or before 12.11.2016.
# 8) It is submitted that the fact was intentionally suppressed by the Respondent while filing their application under Section 7 of the Insolvency and Bankruptcy Code, 2016 to revive the otherwise time barred debt. It is submitted that the Section 7(5)(a) of the Code specifically lays down that if there is a default and if the application is complete and there is no Disciplinary Proceedings pending against the proposed Resolution Professional it may, by order admit such Application by the ‘Adjudicating Authority’. However, as per Section 7 Sub Section 5(b) states that ‘default’ has not occurred or the Application under Sub Section 2 is incomplete or any Disciplinary Proceeding is pending against the proposed Resolution Professional, it may by order, reject such application. The Proviso states that, provided that the ‘Adjudicating Authority’ shall before rejecting the application under Clause (b) of Sub Section 5 give a Notice to the applicant to rectify the defect in its application within 7 days of receipt of such notice from the ‘Adjudicating Authority’.
# 11) It is submitted that the date of default is crucial to determine the date when the cause of action occurred, the Learned Counsel also relied upon the Rule 4 of the Insolvency and Bankruptcy Code (Application to ‘Adjudicating Authority’) Rules, 2016 to show that the application under Section 7 of the IBC should be in Form-1 as prescribed in the said Rules. The present Appeal is filed challenging the order of the Adjudicating Authority on the facts and laws and among other grounds stated in para 9 of the grounds of appeal.
# 12) It is submitted that the ‘Adjudicating Authority’ failed to appreciate in Para 37 of the Hon’ble Supreme Court Judgment in Civil Appeal No.2734 of 2020 passed in Laxmi Pat Surana v. Union Bank of India and Anr. wherein the Hon’ble Supreme Court held that the date of default is not the date of Non-Performing Assets (NPA). It is submitted that much prior to the date of Non-Performing Assets (NPA) the date of default occurred and for the purpose of determining law of limitation the actual default is to be taken into consideration for the purpose of counting the period of limitation not the Non-Performing Assets (NPA). The Application filed by the 1st Respondent herein is time barred. Further the Learned Counsel stated that the Hon’ble Adjudicating Authority failed to consider the grounds raised by the Appellant in their Counter Affidavit filed before the NCLT.
# 13) Further it is submitted that the Hon’ble Adjudicating Authority has ignored the Judgment of Shri B Prashanth Hegde v SBI & Anr. Passed by the NCLAT on 14.10.2020 in Company Appeal (AT)(Ins) No. 68 of 2019, wherein the same fact of no date of default being entered by the same bank was pointed out in the application in para 16 of the order and thereby not noting that the same nationalized bank was a deliberate non-complier of IBC Code and NCLT Rules, 2016. However, the Hon’ble Adjudicating Authority did not take into consideration even this aspect also. Further the Respondent Bank in order to discharge the onus of removing the defects which is apparent from the following finding in the ‘Impugned Order’ viz. “In spite of bringing this to the notice of the applicant and the counsel for the applicant, we do not find any reason as to why the applicant does not want to rectify the mistake in the column regarding non-mentioning of date of default.”
# 14) The Learned Counsel for the Appellant relied upon the Judgment of the Hon’ble Supreme Court in Surendra Trading Co. v Juggilalkamlapat Jute Mills Co., 2017 85 taxmann.com 372 SC and the relevant paragraph is 24, 25, 46. The Learned Counsel for the Appellant submits that Hon’ble Supreme Court held that while holding that the timelines in Section 7(5) are not mandatory, however the defect is still to be removed i.e. the application is to be complete.
# 15) Further the Learned Counsel submitted that the Hon’ble Adjudicating Authority failed to consider that in the absence of application is complete as per the mandatory clause which is most critical i.e. (date of default) without the said mandatory fulfillment of clause the application is incomplete. The mandatory of the most critical part i.e. date of default which is apparent from the following finding in the Impugned Order dated 27.04.2021 of the Hon’ble Adjudicating Authority. The relevant paras are reproduced hereat:
“7. On perusal of Part-IV of the application submitted by the Financial Creditor at Sr. No.2 pertaining to date of default etc., the following sentence appears
“Amount defaulted by Corporate Debtor is Rs.52,28,93,796/- (Rupees Fifty Two Crore Twenty Eight Lakh Ninety Three Thousand Seven Hundred and Ninety Six only) as on 30.11.2019 with further interest and other charges less recoveries, if any”.
Further in para 8 of the order which is extracted hereunder, the Hon’ble Adjudicating Authority observed as under:
“8. It appears that the said date 30.11.2019 is not the date of default but it is the date in which the said sum is due to the Financial Creditor. Except this description, date of default is not mentioned and some correction is seen to have made which has not been authenticated. Therefore, we hold that date of default is omitted from the relevant Column. . . . . . . .In spite of bringing this to the notice of the applicant and the counsel for applicant, we do not find any reason as to why the applicant does not want to rectify the mistake in this column regarding ‘date of default’. This raises a question in the mind, whether are there any collusion between the applicant and the respondent? Be that as it may, since the ‘date of default’ mentioned in the pleadings and also in the documents enclosed along with this application this Adjudicating Authority in spite of the above observation, allows this application.
# 17) It is submitted that the date of default and date of Non-Performing Assets (NPA) are entirely two different actions. The Learned Counsel for the Appellant also relied upon Section 137 of the Limitation Act, 1963 which states that the Limitation period starts from the date when the right to apply first accrues. In the present case, the date of Non-Performing Assets (NPA) was taken into consideration as ‘date of default’. The first ‘date of default’ was 12.11.2016 even before as such, the limitation for filing an application under Section 7 of Insolvency and Bankruptcy Code, 2016 has already expired in the month of November 2019, whereas the application under Section 7 was filed on 19.12.2019 i.e. after the expiry of limitation period i.e. three years. Therefore, the Section 7 application ought not to have been admitted by the Hon’ble Adjudicating Authority.
Appraisal/Analysis
# 42) In this regard, this ‘Tribunal’ would like to emphasize that the Financial Creditor has filed sufficient proof of documents as evidence showing the date of default committed by the Corporate Debtor and the Adjudicating Authority has taken into consideration the same and admitted the Application. Even as per Clause 8 of Part V in Form 1 the Form prescribes the list of other documents to be enclosed/attached along with the application in order to prove the existence of financial debt, the amount and date of default. As discussed above, the Financial Creditor enclosed documents showing the date of default and existence of debt by producing the documents which have not been disputed by the Corporate Debtor. Even the OA filed by the Consortium of Banks before the DRT expressly show the date of default shown by the Financial Creditor. Therefore, this ‘Tribunal’ is of the view that the Financial Creditor has shown the date of NPA by providing the documents which is an evidence admissible in law.
# 43) In this regard, the Judgment of the Hon’ble Supreme Court in Surendra Trading Co. v Juggilalkamlapat Jute Mills Co., 2017 85 taxmann.com 372 SC is relevant to show that the Provisions of Section 7 (5) are directory in nature as held by the Hon’ble Supreme Court in Para 25.
# 44) The next contention of the Learned Counsel for the Appellant is that there is a consortium banks and as per the said consortium, the first date of default and date of Non-Performing Assets (NPA) is of the Axis Bank i.e. the date of NPA is 10.02.2017. As per the RBI Framework for revival and rehabilitation of Micro, Small and Medium Enterprises (MSME) dated 17th March 2016, as per Clause 2.1 the identification by Banks or Creditors regarding a loan account of MSME terms comes into a NPA, the Banks or the Creditors should identify incipient stress in the account by creating three sub categories and the special mention account (SMA) category as given in the table below.
On the basis of the above, it is submitted that before declaring NPA if there is a continuous default for more than 90 days the Banks/Financial Creditors may declare the Corporate Debtor’s account as NPA. Therefore, the Learned Counsel for the Appellant submitted that the date of NPA cannot be taken into consideration for the purpose of default as defined in Section 3(12). Section 3(12) defines date of default means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the Corporate Debtor, as the case may be. The Learned Counsel for the Appellant heavily relied upon the Judgment of the Hon’ble Supreme Court in the matter of Laxmi Pat Surana v Union Bank of India and Anr. reported in 2021 SCC online SC 267. The Hon’ble Supreme Court after analyzing the earlier decisions of the Hon’ble Supreme Court summed up the position in the following words at para 37
“32. When Section 238-A of the Code is read with the above noted consistent decisions of this Court in Innoventive Industries, Jignesh Shah, Vashdeo R Bhojwani, Guarav Hargovindhbai Dave and Sagar Sharma respectively, the following basics undoubtedly come to the fore:
1) that the Code is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation;
2) that CIRP is not intended to be adversarial to the Corporate debtor but is aimed at protecting the interests of the corporate debtor;
3) that intention of the Code is not to give a new lease of life to debts which are time-barred;
4) that the period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years form the date when right to apply accrues;
5) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that he right to apply under the Code accrues on the date when default occurs;
6) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable; and
7) that if default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and
8) an application under section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.”
# 46) This ‘Tribunal’ is bound by the decisions of the Hon’ble Supreme Court being the Law of the Land and also with respect to the above settled position of law with regard to applicability of law of limitation to the Provisions of the Code particularly with respect to default as defined in Section 3(12) and the provisions of Section 7(5) (a) and (b) of IBC as held by the Hon’ble Supreme Court in the above decision. The Bone of Contention of the Learned Counsel for the Appellant is that the first default of Consortium of Bank i.e. Axis Bank is to be taken into consideration for the purpose of triggering CIRP against the Corporate Debtor.
Findings:-
# 47) This ‘Tribunal’ deal with the issues as raised by the Learned Counsel for the Appellant, the facts of the present case and law applicable to it. In the present Appeal, though the first date of NPA is with respect to Axis Bank i.e. 10.02.2017. However, the RBI circulars/Directives provides filing of independent application by the Financial Creditor i.e. the SBI before the Adjudicating Authority (NCLT) under Section 7 of the IBC. Accordingly, the Applicant the 1st Respondent herein filed application under Section 7 of the IBC for initiating the CIRP against the Corporate Debtor independently taking into the date of NPA/default and the amount of debt and default. There is no dispute with regard to the existence of debt and default committed by the Corporate Debtor. However, there is only an objection raised with respect to omission to mention the date of default in Part IV of Form 1 filed before the Adjudicating Authority. It is evident from the records that the date of NPA of the SBI is 27.11.2018 and the application filed by the Financial Creditor on 19.12.2019 even if the 90 days period prior to NPA is taken into consideration for the purpose of deciding default as per the Judgment of the Hon’ble Supreme Court in Re Laxmi Pat Surana, the application is within the period of limitation. Further, this ‘Tribunal’ hold that omission to mention date of default in Col.2 Part IV in Form 1 is not fatal to the application. As we are of the view that as per Col.8 of Part V in Form 1 regarding particulars of Financial Debt documents, records and evidence of default to be attached, the Financial Creditor has shown sufficient documentary evidence to establish the date of NPA i.e. 27.11.2018 and the Adjudicating Authority has taken note of the same and admitted the application. This ‘Tribunal’ do not find any illegality in admitting the application.
# 48) This ‘Tribunal’ have also perused the agreement dated 05.02.2010 of the consortium banks. In Page 72 Volume I of Respondent Typed set Papers Article I Para 4 states that “The rights signed application of each of the said Banks are several and failure of any one or more than of the said banks to perform its or their application in respect of the said banks does not relieve or absolve the other members of the Bank consortium of the borrower of their or its received applications. Further in Article 5 at Page 92 Sub Clause 3 it is stated that the Borrower hereby agrees to pay to each of the said banks as may be directed by the said banks, all of us, charges and expenses (actually incurred as between attorney and claim) incurred by the said banks or any of them for the preservation protection and perfection of the security agreed to be created and/or for admitted to actual realization or enforcement thereof”.
# 49) In this regard, the Learned Counsel for the Appellant vehemently contended that as per the master circular (prudential arms of income recognition, asset classification and provision pertaining to advances Clause 2.1 specifies Non-Performing Assets (NPA) Clause 2.1.2 of Non-Performing Assets (NPA) is a loan or an advance where
(i) Interest or instalment of principal remained overdue for a period of more than 90 days in respect of term loan.
To say actual default to be taken into consideration 90 days prior to date of NPA.
# 50) Further, this ‘Tribunal’ are of the view that debt of Axis Bank is irrelevant as the application filed by the Respondent No.1, SBI is in respect of its debt under the Working Capital Consortium for a sum of Rs.52.28 Crores and the said arrangement entitles each of the case independently enforced its rights arising therefrom, this ‘Tribunal’ also seen the acknowledgement given by the Corporate Debtor dated 16.08.2018 whereby the Corporate Debtor clearly admitted as under in page 534 of Vol.3 Respondent’s Type Set of Papers:
“We do hereby acknowledge for the purpose of Section 18 of the Limitation Act, 1963 and in order to preclude any question being raised on limitation regarding our liability to your Bank and the Member Banks for the payment of the outstanding amounts in respect of the present as well as future indebtedness and liabilities under the said action credited amounts or other amounts together with interest, compound interest, additional interest, liquidated damages, cost, charges, expenses and other money in terms of the said Working Capital Consortium Agreement, our liability shall remain in full force that of related securities, agreements and obligations as mentioned therein.”
# 51) In view of the above acknowledgement dated 16.08.2018 given by the Corporate Debtor the period of limitation also can be extended under Section 18 of the Limitation Act, 1963 and the Hon’ble Supreme Court in Laxmi Pat Surana held that: “a subsequent acknowledgement to extend the limitation, being a fresh date of default of date. Even taking into consideration, the limitation period of three years from 16.08.2018, the application filed on 19.12.2019 is well within the period of limitation.
# 52) Further the Learned Counsel for the Appellant relied upon the Judgment of the Hon’ble Supreme Court in Surendra Trading Co. v Juggilalkamlapat Jute Mills Co., 2017 85 taxmann.com 372 SC to show that the timelines under Section 7(5) of the Insolvency and Bankruptcy Code are not mandatory however the defect has still to be removed. As stated above, the Respondent/Financial Creditor had stated the date of default in the pleadings and in other documents which the Corporate Debtor has received and acknowledged, therefore as held supra the non-mentioning of the date of default in Col. IV is not fatal to the application and on the sole ground, the application cannot be rejected mere taking a technical impediment as held by the Hon’ble Supreme Court that ‘it is only a directory’.
Conclusions :-
# 53) For the aforesaid reasons, this Tribunal is of the firm opinion that the Appeal is devoid of merits and liable to be dismissed. Accordingly, the same is dismissed. No Orders as to Cost.
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