Correctness Of NPA Classification Irrelevant To Initiating CIRP Once Default Is Proven: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has recently held that insolvency proceedings under the Insolvency and Bankruptcy Code depend only on the factual occurrence of default and are not affected by alleged irregularities in declaring an account as a Non Performing Asset or by non compliance with the MSME rehabilitation framework. It ruled that objections to the bank's NPA classification cannot defeat a creditor's right to initiate insolvency once a default is shown.

A coram of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar made this ruling while admitting Canara Bank's CIRP application against Galaxy Constructions and Contractors Private Limited.

The tribunal stressed that insolvency under the Code depends on whether repayment was actually defaulted, not on whether the NPA classification was correct. It said that even if the bank had not followed the MSME framework by failing to classify the account as Special Mention Account, it would amount only to a procedural lapse and would not erase the fact that a default had occurred.

“Non compliance with the MSME framework, even if assumed for argument's sake, would at best amount to an administrative irregularity, but cannot invalidate the occurrence of default under Section 3(12) of the IBC. The IBC process is not dependent upon the correctness of the NPA classification, but rather upon the factual default in repayment.”, it said.

It added that “the date of default under IBC refers to the earliest instance when repayment was due but not made, and not necessarily the NPA date."

Canara Bank had provided various credit facilities amounting to Rs 41.27 crore since June 2011, including cash credit, MSME CAP loans, vehicle loans and a bank guarantee to Galaxy Constructions. The company's earliest unpaid dues date back to July 25, 2017 and the account was later classified as NPA on 26 April 2018.

As of October 2024, the bank claimed an outstanding sum of Rs 149.95 crore. It relied on payments made after the NPA date, including credits in 2018 and 2019, and on One Time Settlement proposals submitted in November 2022 and May 2023, to show acknowledgement of liability and extension of the limitation period.

Galaxy Constructions, purportedly an MSME opposed the insolvency move and argued that the bank had violated the RBI's 2015 MSME revival framework by not issuing any Special Mention Account classification or constituting a committee for stressed MSMEs. It said the NPA declaration was illegal and that no valid default existed.

The company also said the petition was time barred, pointed to differing dates of default in the record, disputed the authority of the person making payments relied upon by the bank and argued that OTS proposals issued after the expiry of limitation could not revive the debt.

The tribunal rejected each of these objections. It held that the earliest instance the payment was missed the relevant default under the Code and found that the payments made after 2018 and the OTS proposals constituted valid acknowledgements of liability within time. It said the company had not shown that it had ever established or communicated MSME status at the relevant time and found that partial recoveries from auctioned properties did not prevent admission of the petition because unpaid debt remained. The Tribunal admitted the bank's application, imposed a moratorium and appointed Srigini Rajat Naidu as the Interim Resolution Professional.

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