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2025 (4) TMI 1412 - AT - IBCAdmission of section 7 application - initiation of CIRP against Corporate Debtor - existence of debt and default by the Corporate Debtor or not - HELD THAT - The Adjudicating Authority in the impugned order has recorded a categorical finding of existence of debt and default . The Adjudicating Authority also noted in its order that settlement proposal submitted by the CD was rejected by the Financial Creditors - The proceedings in this Appeal also indicate that there has been acknowledgment and acceptance of debt and default and the amount deposited before this Tribunal by the Appellant is also towards the acknowledgment and acceptance of debt and default. There being admitted debt and default there are no error in the order of Adjudicating Authority initiating the CIRP. The Hon ble Supreme Court in GLAS Trust Company LLC vs. BYJU Raveendran Ors. 2024 (10) TMI 1185 - SUPREME COURT (LB) has laid down the law that for withdrawal of CIRP the appropriate course open for the parties to initiate proceedings under Section 12A with Regulation 30A. Thus for withdrawal of the proceedings appropriate measures have to be taken under Section 12A and Regulation 30A of the CIRP Regulations before the Adjudicating Authority. By interim order passed by this Tribunal on 18.10.2024 the Committee of Creditors (CoC) could not be constituted by the IRP. In the facts of the present case the CoC needs to be constituted to find out the claim of the Financial Creditors and to permit the Financial Creditors and other claimants to file their claims and the IRP to collate the claims. Any proposal submitted by the Appellant may also include the payment of amount of Rs.369.11 crores deposited in this Tribunal for payment to the Lenders can be placed by the IRP/ RP before the CoC to obtain the decision. The Members of the CoC at that stage needs to take a decision with requisite vote share as to whether withdrawal of the proceedings is to be done or not. In the facts of the present case we are of the view that the amount deposited in this Tribunal of Rs.369.11 crores may await the decision of Adjudicating Authority. In event the CoC does not accept the settlement proposal of the Appellant liberty granted to the Appellant to file an Application for withdrawal of the amount deposited in this Tribunal. Conclusion - i) The Adjudicating Authority s order admitting the Section 7 Application and initiating CIRP is upheld. ii) The CIRP shall proceed with constitution of the CoC and consideration of claims. iii) The Appellant may submit a settlement proposal to the CoC including the deposited amount for consideration under Section 12A and Regulation 30A. The order passed by Adjudicating Authority dated 15.10.2024 admitting Section 7 Application filed by the Financial Creditors is upheld - appeal dispose doff.
1. ISSUES PRESENTED and CONSIDERED
- Whether the Adjudicating Authority was correct in admitting the Section 7 Application filed by the Financial Creditors against the Corporate Debtor and initiating the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). - Whether the admitted debt and default by the Corporate Debtor exist as per the evidence and legal framework. - Whether the Appellant's claim of depositing the entire principal amount and disputing the calculation of interest, particularly penal interest, has any bearing on the continuation of CIRP. - The applicability of RBI guidelines on penal interest and whether the Banks' charging of interest on interest violates these guidelines. - Whether the Section 7 proceedings are being used as a recovery mechanism contrary to the object of IBC. - The procedural and substantive requirements for withdrawal of CIRP under Section 12A of the IBC and Regulation 30A of the CIRP Regulations. - The role of the Committee of Creditors (CoC) in considering settlement proposals and the effect of such proposals on the continuation or withdrawal of CIRP. 2. ISSUE-WISE DETAILED ANALYSIS Admissibility of Section 7 Application and Existence of Debt and Default The legal framework governing this issue is Section 7 of the IBC, which permits Financial Creditors to file an application for initiation of CIRP upon default by the Corporate Debtor. The Adjudicating Authority had admitted the Section 7 Application after recording a categorical finding of existence of debt and default. This was supported by documentary evidence including the Facility Agreement, Demand Notices, and a foreign decree passed by the Queen's Bench, UK, confirming the debt amount. The Adjudicating Authority also noted the rejection of settlement proposals by the Financial Creditors, which was interpreted as an acknowledgment of debt and default by the Corporate Debtor. The Court's reasoning emphasized that the admitted debt and default are fundamental prerequisites for admission under Section 7. The Tribunal upheld the Adjudicating Authority's findings, observing that the Appellant's own conduct, including deposit of substantial sums and acknowledgment of debt, corroborates the existence of default. The Tribunal rejected the Appellant's contention that the Section 7 proceedings are barred by limitation, as this was already considered and decided against the Appellant. Competing arguments centered on the Appellant's claim that the amount deposited should satisfy the entire debt and that the Banks' insistence on continuing CIRP is a recovery attempt, which is impermissible under IBC. The Banks countered by asserting that the amount deposited is insufficient and that the debt includes contractual default interest permissible under the Facility Agreement. The Tribunal held that these disputes over interest calculations and penal interest are not to be adjudicated in the admission proceedings under Section 7. Dispute Regarding Penal Interest and Interest on Interest The Appellant challenged the Banks' calculation of interest, particularly the levy of penal interest and interest on interest, contending that such charges violate RBI Guidelines dated 18.08.2023. The Appellant relied on these Guidelines to argue that penal interest should be reasonable, non-discriminatory, and not compounded, and that the Banks' practice amounts to unfair lending. The Banks refuted this by stating that the RBI Guidelines relied upon do not apply to foreign currency loans and external commercial borrowings, which are governed by contractual terms under the Facility Agreement. Clause 8.3 of the Facility Agreement explicitly permits charging default interest on the entire outstanding amount, including principal and accrued interest. The Banks emphasized that the Corporate Debtor was aware of these terms since the invocation of the guarantee. The Tribunal noted that disputes concerning the quantum and calculation of interest, including penal interest, are not issues for determination at the stage of admission of Section 7 Application. Such disputes are to be resolved during the resolution process or through appropriate mechanisms provided under the IBC. Use of Section 7 Proceedings as a Recovery Mechanism The Appellant argued that the continuation of CIRP despite deposit of the principal amount indicates misuse of Section 7 as a recovery tool, contrary to the legislative intent of IBC to provide a time-bound resolution process rather than recovery proceedings. The Banks countered that the admitted debt and default justify the initiation of CIRP and that the Appellant's offer to pay is a delay tactic. The Tribunal observed that the existence of debt and default is undisputed and that the IBC contemplates CIRP even when the debt is acknowledged or partly paid, to ensure resolution of claims and compliance with the Code's procedural requirements. Withdrawal of CIRP and Role of Committee of Creditors (CoC) The Supreme Court's decision in GLAS Trust Company LLC vs. BYJU Raveendran & Ors. clarified that withdrawal of CIRP requires compliance with Section 12A of the IBC and Regulation 30A of the CIRP Regulations. These provisions mandate that any settlement proposal for withdrawal must be approved by the CoC with at least 90% vote share. The Tribunal highlighted that the CoC had not yet been constituted due to procedural delays. It directed the Interim Resolution Professional (IRP) to constitute the CoC and place any settlement proposals submitted by the Appellant before it. The CoC is to consider such proposals, including the utilization of the Rs.369.11 crores deposited by the Appellant, and decide within 60 days whether to accept the settlement and allow withdrawal of CIRP. The Tribunal emphasized that the decision to accept or reject the settlement proposal is a commercial decision of the CoC. If the proposal is rejected or the Section 12A application is not allowed, the Appellant may apply for withdrawal of the amount deposited with interest. 3. SIGNIFICANT HOLDINGS "Considering the facts of the present case and looking at them from whichever angle, we have no hesitation to conclude that debt and default has been established." "The issue of bar of limitation has already been decided and accepted by the Corporate Debtor that the petition is within limitation." "The dispute between the parties regarding charging of penal interest and charging of interest on interest or other issues regarding computations, are not the issues, which need to be examined and decided in these proceedings." "For withdrawal of CIRP, the appropriate course open for the parties to initiate proceedings under Section 12A with Regulation 30A." "The CoC needs to be constituted to find out the claim of the Financial Creditors and to permit the Financial Creditors and other claimants to file their claims and the IRP to collate the claims." "In event the Appellant is desirous of submitting a settlement proposal for withdrawal of Section 7 Application, it is always open for the Appellant to submit a proposal before the IRP, who can place the same before the CoC. In event the CoC with 90% vote share approve the settlement, the IRP can always file an Application for withdrawal of the proceedings." "The entire process of submission of settlement proposal by the Appellant and consideration by the CoC shall be completed within 60 days from the date of this order." Final determinations: - The Adjudicating Authority's order admitting the Section 7 Application and initiating CIRP is upheld. - The CIRP shall proceed with constitution of the CoC and consideration of claims. - The Appellant may submit a settlement proposal to the CoC, including the deposited amount, for consideration under Section 12A and Regulation 30A. - If the settlement is not approved, the CIRP shall continue and the Appellant may seek refund of the deposited amount with interest.
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