Discretion Vested Upon NCLT U/S 7(5)(A) IBC Cannot Be Used To Impel Financial Creditor To Consider Settlement: NCLT Chennai

The NCLT, Chennai Bench, comprising Sanjiv Jain (Member-Judicial) and Venkataraman Subramaniam (Member-Technical), has held that the discretion vested upon the adjudicating authority under section 7(5)(a) IBC cannot be used to impel the financial creditor to consider the settlement proposed by the corporate debtor. The financial creditor, Punjab National Bank, filed a petition under section 7 of the IBC, seeking initiation of CIRP against the corporate debtor. However, the adjudicating authority initially declined to admit the application, citing the reason that the financial health of the corporate debtor indicates its ability to repay the debt. The corporate debtor also offered the one-time settlement 'OTS' amount, which was not accepted by the financial creditor. The financial creditor contended that the OTS letters and the admission of liability in the balance sheet are an acknowledgement of the loan in terms of Section 18 of the Limitation Act, 1963. The corporate debtor argued that the petitioner had not disclosed the fact that it was part of the consortium of lenders and it also received the sale of rigs belonging to the corporate debtor. It highlighted that the financial creditor had pulled itself out of the said consortium and is the only lender that has filed the petition. It was submitted that it was agreed between the parties that the outstanding debt of Rs. 486 Cr. would be paid in 32 instalments. And, despite the fall in the global crude oil prices, it continued paying the installment until 2017. It highlighted that the assets were classified as NPA, and the financial creditor had initiated the SARFAESI proceedings seeking recovery of secured assets. Referring to Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (Civil Appeal No. 9405 of 2017), the corporate debtor submitted that the IBC is not a recovery forum, and it is intended for situations where the corporate entity is genuinely incapable of paying debt. In its rejoinder, the applicant bank referred to the ruling of Bijnor Urban Cooperative Bank Limited and Ors vs. Meenal Agarwal and Ors reported in MANU/SC/1258/2021, that the debtor cannot take the legal defence of OTS proposal rejection. It referred to the ruling of E.S. Krishnamurthy v. Bharath Hi-Tecch Builders (P) Ltd., (2022) 3 SCC 161, wherein it was held that the adjudicating authority cannot compel a party to settle the dispute. The adjudicating authority observed that the acknowledgement and the OTS offers make it clear that the petition is within the limitation period. It was observed that the Supreme Court had made it clear that the tribunal has no power to defer the admission of the petition and direct the settlement. The adjudicating authority further discussed the ruling of Drip Capital Inc. v. Concord Creations (India) P. Ltd. (Company Appeal (AT)(CH) (Ins.) No. 167 of 2021), where it was held that factors like solvency, profitability, or temporary financial stress are irrelevant at the admission stage and cannot be used for exploring settlement options. Furthermore, the bench observed that “there exists some level of discretion vested in the Adjudicating Authority under Section 7(5)(a), the same must be exercised cautiously. Such discretionary power cannot be used to impel the financial creditor to consider the settlement proposed by the corporate debtor.” Accordingly, the adjudicating authority ordered the CIRP of the corporate debtor. Click Here To Read/Download The Order

Discretion Vested Upon NCLT U/S 7(5)(A) IBC Cannot Be Used To Impel Financial Creditor To Consider Settlement: NCLT Chennai

Mohd.Rehan Ali

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