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TMI Blog2024 (10) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... d of litigation. In the first round of litigation, this Court vide its order dated 14.11.2022 set aside the order of admission dated 05.03.2020 and remanded the case back to the Adjudicating Authority to record cogent reasons in respect of admission of the application filed under Section 7 of the Code. 3. In the impugned order, the Adjudicating Authority has reproduced the order passed by this Court and thereafter it has noticed the additional affidavit dated 17.05.2023 filed by the Financial Creditor which is in para 4 of the impugned order and is reproduced as under:- "4. In the context, the Financial Creditor vide its additional affidavit filed on 17.05.2023 has given its submissions onto those objections raised by Corporate Debtor. The relevant part thereof are reproduced here as under: - (i) That the main objection raised by the Corporate Debtor with regard to "classification of credit facility of Respondent being not in compliance of circular issued by Reserve Bank of India dated 07.02.2018 (Annexure R/3 Page 517) and therefore classification of credit facility of Corporate Debtor as NPA is not only bad in law, but also terming default based on wrong classification is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39512/-] Rs 1320491/-. And as it would be amply clear from the statement of account of the Term Loan Account No. 881070210000008 that the aforesaid overdue amount and payments from the borrower due between September 1, 2017 and January 31, 2018 were not paid by the Corporate Debtor within 180 days from their respective original due dates as required by the RBI circular. That the last repayment in the said account was of Rs. 1000/- on 03.11.2017. Therefore, it is most humbly submitted that there is an existence of default in the sense that the debt is due. Default has been defined under Section 3 (12) in very wide terms as meaning non- payment of even part thereof or an instalment amount, as the debt is a liability and obligation on the part of Corporate Debtor towards Financial Creditor. The Code gets triggered the moment default is of Rs. One Crore or more. A copy of statement of Term Loan Account No. 881070210000008 is filed herewith and marked as Annexure A/3. (iii) That with regard to the non- disclosure of the subsequent reclassification of the account of CD as "Operational Account", it is submitted that the Financial Creditor never re-classified the account as "Standard" fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount together with incidental expenses, cost charges, etc. within stipulated time under Section 13 (2) of the SARFAESI Act, 2002. The said notice is produced at Annexure I, page 475 along with the Application (relevant page 478). (iv) The Corporate Debtor had on several occasions, during the pendency of this petition, offered various Settlement Proposal and the Applicant Financial Creditor has always showed its support to that effect. However, the last OTS proposal also failed on account of noncompliance of the terms and conditions of the Settlement Scheme. The Letter of rejection addressed by the Applicant dated 07.10.2019, is produced at Annexure R-16, page 544, by the respondent Corporate Debtor itself. (v) The total outstanding amount due and payable by the Corporate Debtor is to the tune of Rs. 11,57,89,697/- as on the date of filing the Application under Section 7 of IBC 2016 plus further interest. That the outstanding debts have not been repaid till date and the same are due and payable. That with an intent of framing of a comprehensive resolution plan post-initiation of corporate insolvency resolution process, the present application under Section 7 of the Code is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against her with the Board or Indian Institute of Insolvency Professionals of ICSI. A copy of the order dated 24.03.2023 of this Hon'ble Tribunal allowing IA/89(MP)2023 is filed herewith and marked as Annexure A-4. (xi) In conclusion, it is most humbly submitted that there is an existence of default in the sense that the debt is due. Default has been defined under Section 3(12) in very wide terms as meaning non-payment of even part thereof or an instalment amount, as the debt is a liability and obligation on the part the Corporate Debtor towards Financial Creditor. The Code gets triggered the moment default is of Rs. One Crore or more. It is reiterated that the Application is complete in all respect as per the Rules and in such form and manner as prescribed in the Rules " 5. The Court has also noticed that the submissions made by the CD are in Para 9 which read as under:- "9. While arguing the case, learned counsel for the Corporate Debtor made following submissions: (i) The applicant has failed to produce or placed any document/evidence on record which goes to show that the respondent's account was declared NPA on 30.09.2017. (ii) Entire case setup by the Financial Credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oraneously recommended for extension of credit to the tune of Rs. 966.68 lacs (subsequently revised to Rs. 955.42 lacs). Thus, the Bank cannot now submit to the contrary to claim that the account was contemporaneously also declared NPA as on 30.09.2017. (vi) Notably, under the same ZLCC meeting minutes, the Bank has artificially sought to reduce the credit limits of the Corporate Debtor's account and such unilateral actions on the part of the Bank cannot form the basis of default on the part of the Corporate Debtor for the purposes of the IBC. (vii) The following aspects/admissions on the part of the Bank are clearly made out from the aforementioned communication dated 16.10.2017, ZLCC recommendation dated 13.09.2017 and the memorandum dated 05.08.2017: (a) The Respondent had duly paid all the previous three term loans. (b) Conduct of the Respondent's account is satisfactory. (c) There are no contingent liabilities in the last financial year as per the audited report as on 31.03.2017 and further, there are no adverse audit remarks in the last audited report as on 31.03.2017 (d) The Respondent is enjoying FBWC CC limit of Rs. 800 lacs from the bank to meet its working ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply to Additional Affidavit] (x) It is a matter of record as submitted during the course of the hearing that as a matter of practice and banking instructions, the Term Loan Account was all throughout serviced by way of payments being made from the Cash Credit Accounts and the responsibility and power of taking the money from the cash credit account for servicing the term loan account was that of the Financial Creditor / Applicant Bank itself. [All credit entries in the Term Loan Account Statement Pg. 413 - 419 of the Section 7 Application] (xi) Specifically, an amount of Rs. 33,72,643.04/- was credited in Cash Credit Account No. 881030110000033 and Rs. 3,33,18,262.12/- in Cash Credit Account No. 890130110000135 between 01.09.2017 to 30.11.2018 [Ref. Bank Statement Account statements at Pg. 294- 412 and Pg. 420- 474 of the Section 7 Application & Page 9- 14/Reply to Additional Affidavit]. As such, while there were sufficient credit entries and deposits into the Cash Credit Accounts, the Applicant Bank of its own volition chose not to debit the said accounts for servicing of the Term Loan facility. The said deposits were more than sufficient to service any pending instalments tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate Debtor is admittedly an MSME engaged in manufacture of essential commodities and has remained a going concern with ongoing business all throughout the period since the original order admitting the Corporate Debtor to insolvency to this date. (xviii) There was no default in fact or in law and the alleged classification of the Corporate Debtor's account was contrary to the circulars issued by the Reserve Bank of India. Among the various circulars and guidelines issued from time to time on classification of MSME accounts the RBI circular dated 07.02.2018 directed schedule banks and NBFCs to provide relief for MSME borrowers registered under the GST. As per the said circular the account of the registered MSMEs were to continue to be classified as a standard asset and were not to be classified as an NPA on the basis of a 90 and 120 days' delinquency period and the respondent herein was covered by the same. Thus alleged classification of respondents account as NPA on 30.09.2017 was contrary to the circular of RBI and, therefore, it is correct to say that the respondent was not in default as on 30.09.2017. (xix) RBI's circular being beneficial in nature inasmuch as it prevents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.09.2013, it is obligatory upon the banks to report credit information including classification of account as SMA to Central Repository of Information on large Credit (CRILC). However, in the present case no such reporting had been done by the bank hence the contention of bank that the account was having overdue on 01.09.2017 is false and is an afterthought. It is further submitted that once a borrower is reported to be in default, the banks are required to undertake a prima facie review of the borrower's account within 30 days from such default ('Review Period') and the same has not been undertaken by the Applicant in the present case. (xxiii) Without prejudice to the above, even otherwise, the amounts as alleged were not "overdue". Further, without prejudice, the Corporate Debtor fulfilled all the conditions under the said circular including condition (iv) of the said circular which provides for a 6- month window to make payments. As aforementioned, sufficient credit entries came into the cash credit account during 01.09.2017 up to 31.03.2018 for servicing any amounts due as instalments under the term loan account. (xxiv) As such, but for the failure of the Bank itself, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by third parties/corporate debtors during the process of restructuring of the accounts during the contemporaneous period from November, 2017 to March, 2018 to the tune of Rs. 42 lakhs approx., which has not been returned by the Bank, and has been appropriated as such, also needs to be adjusted against the claimed dues by the Bank. (xxxiv) Seen thus, there was even otherwise no default on the part of the Corporate Debtor of the amounts due as on 30.09.2017 and any amounts/instalments alleged to be due (Rs. 13,20,491/- as claimed by the Applicant Bank in its subsequent Affidavits before this Hon'ble Tribunal along with the amount due under the ad-hoc facility) could have been easily satisfied with the aforementioned credit amounts, reversal of interest entries, third party payments retained by the Bank etc. all of which were obligations of the Applicant Bank without anything further being required to be done by the Respondent. It is settled law that "due" is not equivalent to "default" under the IBC. As such, there was no default on the part of the Respondent such as would require the invocation of the provisions of the IBC for declaration of the Respondent as insolvent. (xxxv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T regime had started, to give relief to the MSMEs whereby their accounts were to be classified as standard assets if the conditions (i to iv) as given therein were satisfied. In the context of the present respondent, the learned counsel for the applicant submitted that the condition No. (iv) which states that "The amount from the borrower overdue as on September 1, 2017 and payments from the borrower due between September 1, 2017 and January 31, 2018 are paid not later than 180 days from their respective original due dates" was not satisfied and, therefore, the benefit as per the circular dated 07.02.2018 was not available to the respondent Corporate Debtor. The learned counsel submitted that the accounts of the Corporate Debtor were correctly declared as NPA as on 30.09.2017 as per the existing norms of when the accounts became irregular over 90 days that too much prior to issuance of the said RBI circular dated 07.02.2018. In the context the learned counsel had also drawn our attention to the payment schedules through monthly instalments and stated that the term loan account was overdue as on 01.09.2017 by Rs. 13,20,491/-. She also submitted that even otherwise the benefit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch were rejected by the applicant. We have also considered the objections raised by the Corporate Debtor as regards to the classification of its account in view of the RBI circular dated 07.02.2018. We have also taken note of the entries in the cash credit accounts & terms loan accounts for the relevant period. Having considered the facts of the case, we are of the view that the Corporate Debtor has defaulted payment of due debt which is above threshold amount of Rs 1 lakh and as such the application under Section 7 deserves to be admitted" 7. Counsel for the 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. He has also submitted that in Para 11 of the impugned order, the Court has only referred to various documents which are on record but there is no discussion on the said documents to hold as to how the application under Section 7 is required to be admitted in respect of the debt due and default committed by the Appellant. In support of his submission, he has referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... committed by the Appellant for the purpose of attracting Section 7 of the Code.
11. As a result thereof, the appeal succeeds and the impugned order is set aside. 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.
12. The parties are directed to appear before the Adjudicating Authority on 06th May, 2024.
13. It is made clear that we have not touched any part of the merits of the case which are left open for the Adjudicating Authority to decide in accordance with law.
14. At this stage, Counsel for the Respondent has submitted that a direction may also be issued to the Adjudicating Authority to decide this application in a stipulated time. Since, the application was filed in the year 2018, therefore, we request the Adjudicating Authority to make all endeavour to decide the application as early as possible but preferably within a period of two months from the date of appearance of the parties before it. X X X X Extracts X X X X X X X X Extracts X X X X
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