Introduction
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) has been a transformative legislation in India, aiming to provide a speedy and efficient mechanism for resolving insolvency issues and facilitating the revival of distressed companies. In the matter of Central Bank of India v. Superfine Profile and Extrusions Private Limited[i], the National Company Law Tribunal (‘NCLT’) Mumbai Bench adjudicated on a petition filed under s. 7 of the IBC.
Brief Facts
The Central Bank of India, financial creditor (‘FC’) initiated proceedings under the IBC, against Superfine Profile and Extrusions Private Limited, corporate debtor (‘CD’), due to default on a secured loan amounting to Rs. 66,21,05,008.
The debt in question originated from various credit facilities provided to the CD, which were secured through corporate guarantee deeds (‘CGDs’) executed on 22.08.2015 and 18.11.2016, encompassing cash credit, term loan, funded interest term loan, and cash credit ad hoc facilities. A declaration of default was made on 06.03.2023 vide issuance of a demand notice to the CD, which triggered the initiation of insolvency proceedings. The FC argued that the CD failed to repay the outstanding loan despite the demand notice issued on 06.03.2023.
The CD contested the insolvency petition on several grounds, including the argument that the petition was barred by limitation under s. 10A of the IBC. They further disputed the invocation of the guarantees, asserting that the facilities sanctioned post the execution of the CGDs could not be covered under those guarantees.
The insolvency petition was filed before the NCLT, highlighting its jurisdiction over the matter based on the registered office location of the CD and the date of filing, which emphasized the procedural aspects and timeline of the case.
Security interests created to secure the loan included first pari passu charge by way of equitable mortgage and hypothecation over various assets of the CD, such as immovable properties, stock of inventory, and plant and machinery, which are pivotal to understanding the secured nature of the credit facilities extended.
Held
The NCLT while admitting the s. 7 petition rejected the CD’s contention that the same was barred by limitation, affirming that the petition was timely filed as per s. 10A of the IBC. It clarified that s. 10A of the IBC did not apply to the circumstances of this case, as the default in question occurred post the enactment of s. 10A and the demand notice was issued within the limitation period, thus validating the initiation of insolvency proceedings.
The NCLT rejected the argument of the CD challenging the applicability of the CGDs to credit facilities sanctioned post-execution. It highlighted that the credit facilities had been continuously renewed since 2013, as evidenced by the sanction letters and disbursement records, establishing the relevance of the CGDs to the transactions in question. It was further noted that the CGDs were issued not only in favour of the consortium but also in favour of each member of the consortium, including the FC.
In this background, the NCLT concluded that the CD had indeed defaulted on a financial debt exceeding Rs. 1 crore, which met the threshold for initiating a corporate insolvency resolution process (‘CIRP’) under s. 7 of the IBC. This finding was based on an uncontested acknowledgement of debt and default, as well as the establishment of the debt as a ‘financial debt’ within the meaning of the IBC.
Analysis
This case highlights the importance of adhering to contractual obligations in CGDs and debt resolution under the IBC. It reinforces principles laid down in Swiss Ribbons Pvt. Ltd. & Ors. v. Union of India & Ors[ii]. wherein the Hon’ble Supreme Court emphasized that s. 7 petitions must be admitted once debt and default are proved, thereby eliminating any scope of discretion. This decision reiterates the need for precise contract drafting and commitment to IBC objectives for efficient insolvency resolution. It sets a precedent for enforcing contractual rights and supports India’s financial stability. This decision reflects the IBC’s role in resolving insolvencies promptly and promotes commercial prudence and legal diligence in business transactions. It exemplifies the IBC’s effectiveness in addressing financial defaults and upholding contractual obligations in India’s corporate and banking sectors.
End Notes:
[i] 2024 SCC OnLine NCLT 8
[ii] (2019) 4 SCC 17
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.