Pre-Existing Dispute Between Financial Creditor And Corporate Debtor Doesn't Bar Petition U/S 7 Of IBC: NCLT

The National Company Law Tribunal, New Delhi bench comprising Chief Justice (Retd.) Ramalingam Sudhakar (President) and Avinash K. Srivatava (Technical Member) has held that a pre-existing dispute between the Financial Creditor and Corporate Debtor does not bar a petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to be entertained. The Tribunal also held that a claim of the Financial Creditor which did not form part of the Resolution Plan of the Holding/Parent Company is not extinguished because at the time of Corporate Insolvency Resolution Process (“CIRP”) of Parent Company of corporate guarantor, there was no default on the part of Corporate Debtor and hence there was no occasion to register its claim before the RP of Parent Company. Brief Facts Madhya Pradesh Road Transport Corporation Limited (“MPRDC”) invited Request for Qualification Applications for the development of Waraseoni-Lalbarra Section of Major District Road in Madhya Pradesh. MBL Infrastructure Ltd. was awarded the project via a Letter of Award (LOA) on 25.10.2011 for a 15-year concession period through Public Private Partnership. MBL Infrastructure requested MPRDC to accept MBL (MP) Toll Road Company Limited (“Corporate Debtor”) as the entity to undertake the project. The Corporate Debtor entered into a Concession Agreement with MPRDC on 07.12.2011 and subsequently entered into an agreement with MBL Infrastructure on 08.12.2011 for construction, operation, and maintenance. The Corporate Debtor availed a loan from Punjab National Bank International Limited (“Financial Creditor”) for project implementation. The Financial Creditor sanctioned a Term Loan Facility of USD 8.06 million and a Loan Facility Agreement was executed on 13.04.2012. MBL Infrastructure Ltd. provided a Corporate Guarantee. An Escrow Agreement was also executed. Due to non-payment by the Corporate Debtor, its Loan Account was classified as a Non-Performing Asset on 03.03.2023. The Corporate Debtor admitted the debt many times. The last payment was made on 3.03.2023. The Financial Creditor filed the application u/s Section 7 of IBC to initiate CIRP against the Corporate Debtor for a total financial default of USD 53,38,895.44 (Rs.44,04,58,873). Submissions of the Counsel for the Corporate Debtor There existed a dispute between the Financial Creditor and the Corporate Debtor due to breach of Escrow Agreement. Arbitration had been invoked by the Corporate Debtor prior to the alleged demand notice. The alleged demand notice had not been received by the Corporate Debtor. The applicant despite knowing the address of MBL Infrastructure Ltd. sent the alleged notice at an address which ceased to be of MBL Infrastructure. The CIRP of the Holding Company of the Corporate Debtor i.e. MBL Infrastructure had attained finality and a Resolution Plan had been approved by this Adjudicating Authority. The Financial Creditor was a part of the CoC yet it did not file its claim before the RP of the M/s MBL Infrastructure Ltd. and therefore the same did not form part of Resolution Plan. The claim of the Financial Creditor in respect of Corporate Guarantee not being part of Resolution Plan stood extinguished. Observations The Tribunal held that any dispute raised by the Corporate Debtor before the Arbitrator in terms of the Escrow Agreement dated 22.03.2012 does not preclude the Financial Creditor from initiating proceedings under IBC. It emphasized that the scope of inquiry under the Code is limited to the existence of 'debt' and 'default'. The Tribunal clarified that a pre-existing dispute does not serve as a defense against a Section 7 application, unlike a Section 9 application. The Tribunal observed that jurisdiction over disputes concerning the Escrow Agreement lies under the Arbitration and Conciliation Act, 1996, and that the Adjudicating Authority, exercising its summary jurisdiction, cannot go beyond the scope of IBC. The Tribunal observed that even if the demand notice was not sent to the correct address, the same does not enure to the benefit of Corporate Debtor since sending a demand notice under Section 7 of the Code is not an essential for filing an application unlike being a prerequisite under Section 9 of the Code. The Tribunal noted that the Corporate Debtor admitted the outstanding amount of USD 1.78 million as of July 2023. The Tribunal concluded that the elements of “debt” and a consequent “default” were present. The Tribunal held that the existence of dispute between the Financial Creditor and Corporate Debtor does not bar a section 7 petition to be entertained. The Tribunal noted that at the time of CIRP of Parent Company of corporate guarantor, there was no default on the part of Corporate Debtor and hence there was no occasion to register its claim before the RP of Parent Company. The Financial Creditor was neither the...

Pre-Existing Dispute Between Financial Creditor And Corporate Debtor Doesn't Bar Petition U/S 7 Of IBC: NCLT

Mohd Malik Chauhan

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Pre-Existing Dispute Between Financial Creditor And Corporate Debtor Doesn't Bar Petition U/S 7 Of IBC: NCLT

Mohd Malik Chauhan

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