National Company Law Tribunal, Chennai: In an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, a Division Bench of Sanjiv Jain (Judicial Member) and Venkataraman Subramaniam (Technical Member), admitted the Section 7 IBC application and initiated the insolvency proceeding against Corporate Debtor
Factual Matrix
The instant matter revolves around an application filed by Canara Bank-Financial Creditor against ARS Energy Pvt. Ltd.-Corporate Debtor seeking to initiate an insolvency proceeding against the Corporate Debtor. The Corporate Debtor, incorporated on 19-09-1990, had availed various financial assistance from a consortium of banks, including Canara Bank, for working capital and term loans. The total amount claimed by the Financial Creditor as financial debt due and payable by the Corporate Debtor was ₹ 110,57,11,831.97/-. The Corporate Debtor defaulted on its repayment obligations, leading to the classification of its accounts as Non-Performing Assets (NPA). The Financial Creditor issued a notice demanding payment, but the Corporate Debtor failed to comply, prompting the initiation of the CIRP.
Appellant’s Contentions
The appellant contended that the Corporate Debtor had committed defaults on multiple loan accounts, leading to the classification of these accounts as NPA in accordance with the guidelines issued by the Reserve Bank of India (RBI). The appellant asserted that the Corporate Debtor acknowledged its debt through various documents and communications, including revival letters and balance sheets. The appellant cited the Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, where the Supreme Court emphasised that once a default is established, the tribunal is required to initiate the CIRP. Furthermore, the appellant argued that the Corporate Debtor’s claims of force majeure do not absolve it of its contractual obligations, as established in Energy Watchdog v. CERC, 2018 SCC OnLine SC 3904.
Respondent’s Contentions
The respondent contended that the defaults were a result of force majeure events beyond its control, including the significant increase in coal prices and the operational disruptions caused by the COVID-19 pandemic. The respondent argued that it had consistently engaged with the Financial Creditor and the consortium to restructure its debts and had made several proposals to address its financial difficulties. The respondent cited Dena Bank v. C. Shivakumar Reddy, (2021) 100 SCC 330 and asserted that the acknowledgment of debt in balance sheets should be considered in the context of the overall financial health of the company. The respondent also claimed that the appellant’s refusal to consider its restructuring proposals indicated a lack of genuine intent to resolve the financial issues.
Court’s Observations
Existence of Debt and Default
The Court noted that the Financial Creditor had provided comprehensive documentation, including loan agreements, demand letters, and balance sheets that reflected the outstanding amounts, demonstrating the existence of a financial debt owed by the Corporate Debtor. The Court emphasised that the Corporate Debtor had acknowledged its debt through various communications, including revival letters and acknowledgments of liability, which were pivotal in establishing the existence of a financial obligation.
Classification as NPA
The Court observed that the Financial Creditor had classified the Corporate Debtor’s accounts as NPA in accordance with the guidelines set forth by the RBI. The Court highlighted that the classification was not arbitrary but followed the regulatory framework that mandates such action when a borrower defaults on repayment. The Court referenced to the RBI’s circulars, which stipulated that all facilities granted to a borrower must be treated as NPA if any one of them becomes irregular. The Court deemed this classification as valid given that the Corporate Debtor had defaulted on multiple loan accounts.
Response to Force Majeure Claims
The Court assessed the Corporate Debtor’s claims of force majeure, which it argued were the primary reasons for its inability to meet its financial obligations. The Court acknowledged the unprecedented rise in coal prices and the operational disruptions caused by the COVID-19 pandemic. However, the Court held that while these factors are significant, they do not absolve the Corporate Debtor of its contractual obligations. The Court referred to Energy Watchdog (Supra), where the Supreme Court established that commercial impossibility or hardship does not negate the duty to perform contractual obligations.
Engagement with Financial Creditor
The Court noted that the Corporate Debtor had made several attempts to engage with the Financial Creditor and the consortium of banks to restructure its debts. The Court found that the Financial Creditor had adequately documented the Corporate Debtor’s failure to adhere to the repayment schedule and the lack of substantial progress in the restructuring discussions. The Court emphasised that while the Corporate Debtor’s efforts to propose restructuring plans were commendable, they did not mitigate the fact that defaults had occurred.
Overall Corporate Debtor’s Financial Health
While the Court recognised the Corporate Debtor’s claims regarding its operational challenges, it maintained that the financial health of the Corporate Debtor, as evidenced by its acknowledgment of debt and the classification of accounts as NPA, warranted the initiation of CIRP. The Court held that the Corporate Debtor’s financial distress was not sufficient to counter the established defaults and the resultant legal obligations.
Court’s Decision
In light of facts of the case, arguments advanced, authorities cited and observations, the Court admitted the Financial Creditor’s application under Section 7 of IBC and initiate the insolvency proceeding against Corporate Debtor. The Court appointed the Interim Resolution Professional (IRP) and mandated him to take necessary steps as per the provisions of the IBC. The Court also imposed a moratorium on the Corporate Debtor, prohibiting any legal proceedings against it during the CIRP.
[Canara Bank v. ARS Energy (P) Ltd., 2025 SCC OnLine NCLT 1062, Decided on 14-02-2025]
Advocates who appeared in this case:
Shri. Varun Srinivasan, Counsel for the Petitioner
E.Om Prakash, Senior Counsel for P.S.Suman, Counsel for the Respondent
