Constitution Of Project Management Committee Under Settlement Agreement Does Not Absolve Corporate Debtor From Repayment Obligations: NCLAT

The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) has held that any dispute even pending in the arbitration does not in any manner prohibit the financial creditor to take remedy under Section 7 of the code. It also held that the constitution of a Project Management Committee comprising members of financial creditors and corporate debtor in pursuance of a Settlement Agreement does not absolve the CD from its repayment obligations. Brief Facts: The First Amended Debenture Trust Deed was executed on 20.07.2017, followed by the Restated and Amended Debenture Trust Deed on 27.09.2018. A repayment notice was issued by the IDBI when a default was committed. Subsequently, a commercial suit was also filed before the Delhi High Court. During pendency of this suit, a settlement agreement was entered into between the parties by which repayment schedule was revised. The commercial suit pending in the Delhi High Court was decided on 21.11.2019 in terms of the Settlement Agreement dated 04.11.2019. Under the restated settlement dated 04.11.2019, parties agreed for constitution of Project Monitoring Committee (PMC) with respect to development of residential project (Shree Vardhman-Victoria). In the Project Management Committee, three members were to be nominated by financial creditor and two members by the corporate debtor. The Project Management Committee was contemplated to monitor the project. The Corporate Debtor again failed to fulfil its payment obligation. The responsibility of construction, development, marketing and sale of project continued with the corporate debtor including payment obligation. The corporate debtor failed to repay the amount on 31.12.2021 even in terms of the revised repayment schedule. On 27.09.2023, default notice was issued by the financial creditor to the corporate debtor. Section 7 application was filed by the financial creditor seeking initiation of CIRP against the corporate debtor. The Adjudicating Authority heard the parties and by impugned order after returning the findings of debt and default has admitted Section 7 application. 'IA No. 1527 of 2024' was also allowed and disposed of aggrieved by which order this Appeal has been filed. Contentions: The appellant submitted that the financial creditor by virtue of its majority position in the Project Monitoring Committee constituted under a Settlement Agreement executed on November 4, 2019 ,exercised dominant control over the entire project. It was also argued that Financial Creditor having full authority over the funds, leaving the company with no independent control over the project's cash flow, the alleged default was not attributable to the corporate debtor. It was also argued that the Company has already obtained Occupancy Certificate for the eight towers and is only required minor finishing works to be able to handover the units to the buyers. Financial Creditors itself having become co-promoter in view of the Settlement Agreement dated 04.11.2019 was equally responsible for completion of project and repayment. Per contra, the respondent submitted that debt and default committed by the corporate debtor is not even disputed. The question of debt and default being admitted fact, no error has been committed by the Adjudicating Authority admitting 'Section 7' application. it was also argued that the ongoing litigation in the Delhi High Court, arbitration proceedings initiated by the CD and enforcement of the “Settlement Agreement” by the CD does not impact the maintainability or adjudication of the application under section 7 of the code. It was further argued that the Settlement Agreement in no manner affected the liability of the corporate debtor to make the repayment of outstanding amount and the mere fact that in the PMC, three members were nominated by financial creditor has no effect and consequence on the clauses of the Settlement Agreement which oblige the corporate debtor and promoters to make the repayment. Observations: The tribunal, after examining the clauses of the settlement agreement, observed that the PMC was constituted to monitor the project, enhance sales and collections and oversee construction. The role of the PMC was limited to improving the functioning of the company with respect to the project therefore it cannot be said that its role extended even to assume the repayment obligations of the obligors. Based on the above it observed that “we, thus, do not find any substance in the submission of Shri Arun Kathpalia that after constitution of PMC in which there are three members of the financial creditors i.e. majority, blame for non-payment of due amount can be put on the financial creditor itself. The default in repayment of the obligation by obligors cannot in any manner be put on the financial...

Constitution Of Project Management Committee Under Settlement Agreement Does Not Absolve Corporate Debtor From Repayment Obligations: NCLAT

Mohd Malik Chauhan

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