2024 (4) TMI 1066 - AT - Insolvency and Bankruptcy

Initiation of CIRP - NCLAT admitted the application u/s 7 - NPA - default in repayment of dues - Relevant date of default - date of default should be the date of the Loan Recall Notice or not - scope of Section 10A of IBC - HELD THAT - It is an admitted fact that the Corporate Debtor owes Rs. 46.80 crores to the financial creditor, though the Appellant has been claiming that as per the Statement Of Account (SOA) the Financial Creditor has attached incorrect and fabricated SOA. Without going into the exact amount of the debt, it is an admitted fact that the debt was Rs.46.80 crores as on the date of declaration of NPA i.e. 27.09.2019. This amount is more than the threshold of Rs.1 crore and is enough for initiating proceedings. There is no requirement to calculate and fix the exact amount of repayment. Whether the date of NPA declaration (September 27, 2019) or the date of Loan Recall Notice (August 11, 2020) constitutes the default date? - HELD THAT - In adherence to Reserve Bank of India (RBI) regulations, the classification of Non-Performing Assets (NPAs) serves as a pivotal measure for maintaining the financial health and stability of the banking sector. When a borrower defaults on loan payments for a stipulated period, typically 90 days, the loan account is rightfully classified as an NPA. This classification isn't arbitrary; it's a well-defined threshold indicating a lapse in repayment obligations - In the present case, a loan instalment due on June 30, 2019, remains unpaid. Following the regulatory protocol, on September 27, 2019, marking the 90th day of default, the loan account was rightly categorized as an NPA. This classification is not an arbitrary punishment but rather a consequence of a fundamental breach of repayment terms. Crucially, the onus lies on the borrower to rectify the default and regularize the loan account. Unfortunately, in this instance, the borrower, despite ample opportunity, failed to address the defaulted payments, thus perpetuating the default status. Such inaction cannot be condoned or overlooked - the bank is well within its rights to pursue its options for the outstanding amounts owed by the borrower. In the instant case the default was occurring 90 days prior to the NPA declaration (September 27, 2019). It is difficult to accept the argument of the Appellant that this date should not be treated as the date of default. The remedies stipulated for events of default in the Sanction Letter primarily focus on the acceleration of maturity and the enforcement of security interest, such as filing a Recovery suit before the Debt Recovery Tribunal (DRT) and enforcing security interest under the SARFAESI Act, 2002. Notably, there is no mention of resolution under the IBC. Hence, relying on events of default and their corresponding remedies outlined in the Sanction Letter does not bolster the CD's case and this line of argument cannot be relied upon - Once the CD defaulted and the loan accounts were classified as NPAs, a legal recourse was well within the Bank's statutory rights. Pursuing resolution under the IBC 2016, which serves as a specialized law governing the resolution of distressed entities, was a legitimate course of action for the Bank. The loan accounts of the Corporate Debtor were officially classified as Non-Performing Assets (NPA) on September 27, 2019, following 90 days of non-payment, thereby triggering a default event. Despite subsequent partial payments made by the borrower, the NPA status and default persisted, indicating a continuous state of default. Consistent with established judicial precedents and the specific circumstances of the case, the date of NPA classification serves as the valid Date of Default for initiating insolvency proceedings. Even after the NPA classification, the borrower remained in default. Consequently, September 27, 2019, the date of NPA classification, stands as the date of default under the Insolvency and Bankruptcy Code (IBC), superseding any subsequent events, such as the loan recall notice issued on August 18, 2020. There are no discernible flaws in the orders issued by the Adjudicating Authority; hence, they are upheld without any alteration - Appeal is dismissed.

Summary

Issues Involved:
1. Whether the Adjudicating Authority was correct in admitting the Bank's application for initiating CIRP against the Company.
2. Whether September 27, 2019 (NPA classification date) or August 18, 2020 (loan recall notice date) constitutes the "date of default" under the IBC.

Summary:

Issue 1: Admission of Bank's Application for Initiating CIRP
The Adjudicating Authority admitted the application filed by the Financial Creditor (State Bank of India) u/s 7 of the IBC against the Corporate Debtor for a default exceeding Rs. 46.80 crores. The Corporate Debtor contested this, arguing that the default occurred on August 18, 2020, after receiving the loan recall notice, falling within the period barred under Section 10A of the IBC. However, the Financial Creditor maintained that the default date was September 27, 2019, when the loan was classified as an NPA after remaining unpaid for more than 90 days.

Issue 2: Determination of "Date of Default"
The Corporate Debtor argued that the default date should be the date of the Loan Recall Notice (August 11, 2020) due to payments made between the NPA declaration and the Recall Notice. They also claimed that a cure period notice was required before the Loan Recall Notice as per the loan agreement. The Financial Creditor countered that the NPA classification date (September 27, 2019) is the default date, citing Hon'ble Supreme Court judgments (Laxmi Pat Surana v. Union Bank of India & Dena Bank v. C. Shivakumar Reddy) and emphasizing that the loan recall notice is an additional opportunity to pay, not a requirement for establishing default.

Appraisal:
The Tribunal found that the loan accounts were correctly classified as NPAs on September 27, 2019, following 90 days of non-payment, making this the valid "date of default." Despite subsequent partial payments, the NPA status and default persisted. The Tribunal noted that the Sanction Letter's cure period provisions do not apply to the resolution process under the IBC, as the letter predates the IBC. The Tribunal upheld the Adjudicating Authority's reliance on the NPA classification date instead of the recall notice date, supported by judicial precedents and the facts of the case.

Conclusion:
The Tribunal concluded that the date of NPA classification (September 27, 2019) stands as the "date of default" under the IBC, and the Adjudicating Authority's decision to admit the Bank's application for initiating CIRP against the Company was correct. The appeal was dismissed without any costs.