2024 (10) TMI 829 - AT - IBC

Admission of section 7 application - Appellant has submitted that the Adjudicating Authority has still not dealt with the objections/contentions raised by it before it on the issue that there is no default on the part of the Appellant for which the application under Section 7 could have been admitted - HELD THAT - Once the Adjudicating Authority has taken into consideration the pleadings and evidence and the contentions raised by both the parties recording the finding only that it has looked into the documents, therefore, it has come to the conclusion that the default has been committed is not sufficient. This case requires a relook by the Adjudicating Authority on the evidence which has been brought on record to judge about two basic issues i.e. debt and default having been committed by the Appellant for the purpose of attracting Section 7 of the Code. The matter is remanded back to the Adjudicating Authority to redecide the issue after taking into consideration the contentions of both the parties by recording categoric finding on the issue which has been raised so that it may facilitate a judicial review by the Appellate Tribunal if any - Appeal allowed by way of remand.

Issues Involved:

1. Classification of the Corporate Debtor's account as Non-Performing Asset (NPA).
2. Compliance with the Reserve Bank of India (RBI) circular dated 07.02.2018.
3. Existence of debt and default for the purpose of Section 7 of the Insolvency and Bankruptcy Code (IBC).
4. Adequacy of reasoning in the Adjudicating Authority's order.

Issue-wise Detailed Analysis:

1. Classification of the Corporate Debtor's Account as NPA:

The primary contention revolves around the classification of the Corporate Debtor's account as a Non-Performing Asset (NPA) on 30.09.2017 by the Financial Creditor. The Financial Creditor argued that the account was correctly declared NPA due to persistent irregularities in repayment, in accordance with the norms existing prior to the RBI circular dated 07.02.2018. The Corporate Debtor, however, contested this classification, asserting that the account was operational and standard, with continuous credit and debit entries, even post the alleged NPA declaration date. The Debtor further argued that the Bank's actions to reduce credit limits unilaterally contributed to an artificial default situation.

2. Compliance with the RBI Circular Dated 07.02.2018:

The RBI circular provided relief for MSMEs by allowing their accounts to be classified as standard assets if certain conditions were met. The Financial Creditor maintained that the Corporate Debtor did not satisfy condition (iv) of the circular, which required overdue amounts as of 01.09.2017 and payments due between 01.09.2017 and 31.01.2018 to be cleared within 180 days. The Corporate Debtor argued that the circular should be applied retrospectively and that its account should not have been classified as NPA. The Tribunal found that the conditions of the circular were not met by the Corporate Debtor, and hence, the relief was not applicable.

3. Existence of Debt and Default for Section 7 of the IBC:

The Tribunal examined whether a debt existed and if a default had occurred, which are prerequisites for admitting an application under Section 7 of the IBC. The Financial Creditor provided evidence of outstanding debts and defaults, including loan sanction documents and notices under the SARFAESI Act. The Corporate Debtor contended that there was no default, arguing that any alleged overdue amounts could have been settled with available credits and that the Bank's failure to debit the Cash Credit accounts for servicing the Term Loan contributed to the purported default. The Tribunal concluded that the Corporate Debtor had defaulted on the payment of due debt above the threshold amount, justifying the admission of the Section 7 application.

4. Adequacy of Reasoning in the Adjudicating Authority's Order:

The Appellate Tribunal found that the Adjudicating Authority's order lacked sufficient reasoning and detailed analysis of the evidence and contentions presented by both parties. The Tribunal emphasized the necessity for detailed reasoning in judicial orders, citing the Supreme Court's precedent that "reason is the heartbeat of every conclusion." Consequently, the Tribunal set aside the impugned order and remanded the matter back to the Adjudicating Authority for a comprehensive review and recording of findings on the issues of debt and default.

Conclusion:

The appeal was allowed, and the matter was remanded to the Adjudicating Authority for reconsideration, with directions to provide detailed findings on the issues raised. The parties were directed to appear before the Adjudicating Authority on 06th May 2024, with a request for an expedited decision within two months from that date. The Tribunal clarified that it had not addressed the merits of the case, leaving them open for determination by the Adjudicating Authority.

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