Order Of DRT Setting Aside NPA Classification Does Not Negate Existence Of Financial Debt Or Occurrence Of Default: NCLT Delhi

The National Company Law Tribunal (NCLT), New Delhi bench of Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Dr. Sanjeev Ranjan (Technical Member), held that an order of Debt Recovery Tribunal (DRT) setting aside NPA classification does not negate existence of financial debt or occurrence of default, which are the two primary factors for admitting a Section 7 petition under the Insolvency & Bankruptcy Code (“the code”) . Background Facts: The Applicant, M/S Encore Asset Reconstruction Company Private Limited, financial creditor, had given loan to the Corporate Debtor for a total sum of Rs. 23,85,32,000/- However, the Corporate Debtor defaulted in re-payment of the outstanding dues and the Financial Creditor issued a Loan Recall Notice to the Corporate Debtor asking demanding re-payment of the entire amount. As, the Corporate Debtor still defaulted in repayment, the account of the Corporate Debtor was declared as NPA on 09.05.2021 by the Financial Creditor. Subsequently, On 16.07.2021 a notice under Section 13(2) of the SARFAESI Act, 2002 was sent by the Financial Creditor to the Corporate Debtor and its Guarantors. However, despite multiple reminders made by the Financial Creditor, the Corporate Debtor failed each time after itself confirming the outstanding due. Hence, it filed an application before the NCLT u/s 7 for initiation of Insolvency Proceedings against the Corporate Debtor. Contentions of the Corporate Debtor: The Corporate Debtor submitted that the Date of Classification as NPA Cannot Be Considered as Date of Default for initiation of insolvency proceedings. Further, as per Section 3(12) of the Code, a "default" occurs when a debt becomes due and is not paid, not when the account is classified as NPA. It also submitted that it was held by the DRT that the date of NPA classification was inconsistent with the bank's own communications and the bank had failed to comply with RBI guidelines while classifying the account as NPA. The Corporate Debtor contended that since the NPA classification itself had been declared illegal by the DRT, valid cause of action survives for the financial creditor to initiate insolvency proceedings. Findings: The Tribunal held that it is a well settled principle that mere classification of an account as NPA does not constitute 'default' under Section 7 of the Code. The determination of default under IBC based on an independent assessment of non-payment of a financial debt, rather than solely relying on the categorization of the account as NPA. The NCLAT IN Edelweiss Asset Reconstruction Company Limited v. Perfect Engine Components Private Limited, 2022 held “"While the date of NPA classification is ordinarily considered as the date of default, such classification by itself does not amount to a conclusive determination of default. The adjudication under the IBC must be based on a clear establishment of non-payment of a financial debt, rather than the mere classification of the account." The Tribunal further noted that an order by the DRT setting aside NPA classification does not negate the existence of financial debt or the occurrence of default. As per Section 238 of the Code, IBC has an overriding effect over all other laws including the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), under which the DRT exercises jurisdiction. The NCLAT in Shri M.K. Dhir & Ors. v. Punjab National Bank & Anr held that “The DRT has only adjudicated upon the procedural lapses in NPA classification under SARFAESI. It has not ruled upon the existence of financial debt or default, which are the primary considerations under the IBC." Thus, the tribunal admitted the Section 7 petition and held that there is an existence of financial debt or the occurrence of default, which are the two primary factors for admitting a Section 7 petition under the IBC. Case Title: M/s Encore Asset Reconstruction Company Private Limited V/s M/s New Tech Imports Private Limited Case Number: CP (IB) No. 823 (ND)/ 2022 Judgement Date: 17.04.2025 For Applicant: Mr. Sudhir Makkar, Senior Advocate, Ms. Sanya Lamba, Adv. For Respondent: Mr. Anuj Mirdha, Mr. Krish Kalra, Ms. Rashi Arora, Advs.Click Here To Read/Download The Order

Order Of DRT Setting Aside NPA Classification Does Not Negate Existence Of Financial Debt Or Occurrence Of Default: NCLT Delhi

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