2024 (10) TMI 462 - AT - IBC

Account of the Corporate Debtor was correctly declared as a Non-Performing Asset (NPA) or not - whether there was any default, since the debt is undisputed fact and has not been agitated by either of the parties? - HELD THAT - The sanction limit was Rs.20 Crores for cash credit facilities and it is significant to note that review was to be done within a year . Similarly, letter of bank/ bank guarantee also sanctioned of Rs. 7.5 Crores within overall total CC limit of Rs. 20 Crore for procurement of raw material and the same was also required to be renewed within a year. Drawing power under CC including sub limit proposed for LC/BG sub limit was not to exceed Rs. 20 Crore at any time including outstanding payment under LC/BG - the sanction letter of Respondent No. 2 specifically contained clauses for review/ renewal before expiry of one year. This review/ renewal was to be done by Bank based on Annual Audited Financial Statements and other documentary evidence to be submitted by the Corporate Debtor along with request letter which the Corporate Debtor did not furnish. It will be worthwhile to understand as to what is the need for such review/ renewal of cash credit facilities by banks at the request of the Corporate Debtor. It is noted that banks require such renewal regularly to ensure that the credit facilities and terms on which these facilities were granted, remains in sync with risk profile and credit worthiness of the Corporate Debtor so that such financial facilities remain healthy. By regular reviews, banks monitor financial performances of the borrowers, assessing that the business of the Corporate Debtor remains viable so as to meet the repayment schedule of the banks. Similarly, banks also would like to ascertain and reassess the risk profile of the Corporate Debtor which may change from time to time on several micro and macro factors including business performance by the Corporate Debtor due to technological and economical changes - the regular review/ renew of cash credit facilities is considered to be critical and vital for risk management, compliance and maintaining the account of the Corporate Debtor as standard account and failing of which such accounts are liable to be declared as an NPA with drawing power as zero . The account becomes out of order in terms of Para 2.2 of RBI Circular dated 01.07.2013 for cash credit facilities if the outstanding balance remains continuously in excess of sanction limit/ drawing power. It is a fact that the Corporate Debtor could not get its accounts reviewed/ renewed in time and also could not take action to rectify regularities pointed out that banks, as such the Respondent No. 2 was within its right in declaring the account of Corporate Debtor as NPA and initiate Section 7 application. The Adjudicating Authority has correctly passed the Impugned Order - Appeal dismissed.

Summary

Issues Involved:

1. Whether the account of the Corporate Debtor was correctly declared as a Non-Performing Asset (NPA).
2. Whether the Impugned Order admitting the Section 7 application was justified.
3. Compliance with RBI Guidelines and the terms of the sanction letter.
4. Allegations of procedural irregularities in the CIRP initiation.

Detailed Analysis:

1. Declaration of Account as NPA:

The primary issue was whether the Corporate Debtor's account was rightly classified as a Non-Performing Asset (NPA). The Appellant argued that the account was incorrectly declared as NPA since the sanctioned limit of Rs. 20 Crores was not exceeded. However, the Respondent No. 2 countered that the account was overdue due to non-payment of interest and failure to renew the credit facilities, which justified the NPA classification as per RBI Guidelines. The Tribunal found that the account was "out of order" due to non-payment of interest and non-renewal of credit facilities, which aligned with RBI's definition of an NPA.

2. Justification of the Impugned Order:

The Appellant challenged the Impugned Order, arguing that there was no default as the sanctioned limit was not exceeded. The Tribunal noted that the key issue was the occurrence of default, not merely the sanctioned limit. The Tribunal found that the Corporate Debtor failed to adhere to the terms of the sanction letter, including timely payment of interest and renewal of credit facilities. The Tribunal concluded that the conditions for initiating CIRP under Section 7 of the Insolvency and Bankruptcy Code were met, as both debt and default were established.

3. Compliance with RBI Guidelines and Sanction Letter Terms:

The Tribunal examined the compliance with RBI Guidelines and the terms of the sanction letter. The Respondent No. 2 had repeatedly communicated the need for renewal of credit facilities and compliance with the terms of the sanction letter. The Tribunal emphasized the importance of regular review and renewal of credit facilities to ensure compliance and manage risk. The Corporate Debtor's failure to renew the facilities and pay overdue interest justified the actions taken by the Respondent No. 2, including the declaration of the account as NPA.

4. Allegations of Procedural Irregularities:

The Appellant alleged procedural irregularities, including the absence of a default date in the Section 7 application. The Tribunal found that the application included detailed working of the default amount, and the absence of a specific default date did not invalidate the application. The Tribunal also noted that despite several opportunities, the Corporate Debtor failed to rectify irregularities and renew the credit facilities, leading to the initiation of CIRP.

Conclusion:

The Tribunal concluded that the Corporate Debtor's account was correctly declared as NPA due to non-payment of interest and non-renewal of credit facilities. The Impugned Order was justified as the conditions for initiating CIRP under Section 7 were met. The appeal was dismissed with no merit, and no costs were awarded.