Mr. Narendrabhai S/O Kantibhai Patel vs Pnb Housing Finance Ltd & Another

Company Appeal (AT)(Insolvency) No. 1461 of 2023

[Arising out of order dated 13.10.2023 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench - IV in CP (IB) No.264/MB/IV/2023]

IN THE MATTER OF:

Narendrabhai S/o Kantibhai Patel Suspended Director of Nakoda Fruit Products Pvt. Ltd., 239, Bagadganj, Small Factory Area, Nagpur, Maharashtra - 440008 ...Appellant

Versus

PNB Housing Finance Ltd. 9th Floor, Antriksh Bhawan, 22, Kasturba Gandhi Marg, New Delhi - 110 001 ...Respondent No.1

Varun Vashisht, IRP of Nakoda Fruit Products Pvt. Ltd. R-8, South Extension Part-2, New Delhi - 110 049 ...Respondent No.2

Present:

Appellant: Mr. Abhijeet Sinha, Advocate.

Respondents: Mr. Naman Singh Bagga, Advocate.

Company Appeal (AT)(Ins.) No. 1461 of 2023 1 JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code, 2016 ("IBC" in short) by the Appellant arises out of the Order dated

13.10.2023 (hereinafter referred to as "Impugned Order") passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench - IV

in CP (IB) No.264/MB/IV/2023. By the impugned order, the Adjudicating

Authority has admitted the Section 7 application filed by PNB Housing

Finance Ltd.-Financial Creditor seeking initiation of Corporate Insolvency

Resolution Process ("CIRP" in short) against M/s Nakoda Fruit Products Pvt.

Ltd.-Corporate Debtor. Aggrieved by the impugned order, the present appeal

has been filed by the suspended director of the Corporate Debtor.

2. The factual matrix of the case which is necessary to be noted for

deciding the matter are as below: -

 The Corporate Debtor had availed loan from the Financial Creditor

and mortgaged its immovable property for this purpose. The loan

had been sanctioned for an amount of Rs.10.52 crore on 29.09.2018

which was for a tenure of 144 months with floating interest and

repayable in EMI amounts of Rs.13,03,220/-.

 The loan account of the Corporate Debtor was classified as Non-

Performing Asset (NPA) on 14.12.2019 by the Financial Creditor as

according to them the Corporate Debtor had allegedly failed to

regularize the loan account.

Company Appeal (AT)(Ins.) No. 1461 of 2023 2  A loan recall cum arbitration notice dated 26.12.2019 was issued

by the Financial Creditor against the Corporate Debtor.

 The Financial Creditor issued a notice under Section 13(2) of the

SARFAESI Act, 2002 on 15.01.2020 and later on took possession of

the mortgaged property of the Corporate Debtor on 16.09.2021.

 Section 7 application under the IBC was filed by the Financial

Creditor seeking initiation of CIRP against the Corporate Debtor in

24.01.2023.

 In terms of Part IV of the Section 7 application, the amount claimed

is Rs. 15.18 crore and date of default shown as 14.12.2019 which

was also the date of NPA.

 The application was admitted by the Adjudicating Authority on

13.10.2023 and aggrieved by this order of admission, the

Appellant/Corporate Debtor has come up in appeal.

3. The Learned Counsel for the Appellant making his submissions, at the

very outset, denied that the Corporate Debtor had committed any default in

the discharge of the purported financial debt as claimed by the Financial

Creditor. It was contended that in terms of the loan sanction document, the

EMIs for the month of July and August 2019 had already been paid. Further,

the EMIs from September to December 2019 were adjusted out of the Fixed

Deposit Receipts (FDR) of the Corporate Debtor lying with the Financial

Creditor. Claiming that the EMI dues had already been equated by the

Financial Creditor from the FDRs, it was vehemently contended by the

Learned Counsel for the Appellant that the Corporate Debtor continued to

Company Appeal (AT)(Ins.) No. 1461 of 2023 3 discharge its obligations in terms of the loan document even though their

factory got gutted in a fire incident in June 2019. The EMIs having been

serviced on time, no default was therefore committed by the Corporate Debtor

in the context of IBC.

4. It was further added that the Corporate Debtor had never defaulted in

the payment of EMIs for 90 days at a stretch as mandated by the RBI for any

account to be classified as NPA. Since, the Corporate Debtor was liable to pay

only the EMI amount and not the entire purported loan advanced, it is

misconceived to hold that any default had occurred on the date of NPA. Since

the Financial Creditor filed the Section 7 application in January 2023 on the

basis of classification of the account of the Corporate Debtor as NPA as on

14.12.2019, the application was barred by limitation.

5. It was further argued by the Learned Counsel for the Appellant that

even if it is assumed that there was a default, since the EMIs due from the

Corporate Debtor till 19.03.2020 stood clear, such a default can be said to

have surfaced somewhere in June 2020 and therefore clearly hit by Section

10A. In support of their contention, reference was made to the judgment of

the Hon'ble Supreme Court in the matter of Ramesh Kymal v. Siemens

Gamesha Renewable Power Pvt. Ltd. in (2021) SCC 224.

6. Advancing their arguments further, it has been submitted by the

Learned Counsel for the Appellant that the Corporate Debtor had been

earnestly trying to keep its loan account healthy and untainted. This is

evident from the fact that even during the Covid period, the Corporate Debtor

Company Appeal (AT)(Ins.) No. 1461 of 2023 4 had deposited Rs. 12 lakhs which is also recorded in the ledger statement of

the Corporate Debtor. The Corporate Debtor had also sent letters to the

Financial Creditor for one-time restructuring and OTS proposals which also

proves their bona-fide. Relying on the judgment of the Hon'ble Supreme Court

in the matter of M/s Vidarbha Industries Power Ltd. v. Axis Bank (2022)

8 SCC 352, it was pointed out that since the insurance claim arising out of

the fire outbreak incident is pending adjudication before the District

Consumer Disputes Redressal Commission, the Adjudicating Authority before

admitting the Section 7 petition should have looked into the difficulties of the

Corporate Debtor and allowed it a fair chance for revival.

7. It has also been submitted that the Financial Creditor/Respondent No.

1 deliberately concealed the issue of arbitration notice of 26.12.2019 which

categorically indicates existence of dispute. Hence, though the Section 7

application was hit by Section 5(6) of the IBC, this has been ignored by the

Adjudicating Authority. By overlooking the fact that the application was hit

by Section 5(6) of the IBC and that a pre-existing dispute existed which was

not frivolous and spurious, the Adjudicating Authority ought to have rejected

the Section 7 application. The Financial Creditor had also willfully breached

the terms and conditions set out in the loan document which provided for

remedies in case of contingencies or unprecedented situation that would arise

in the course of these transactions.

8. Making rival submissions, the Learned Counsel for the Respondent No.

1 emphatically asserted that the loan account of the Corporate Debtor

continued to be an NPA and remained in default since 2019. The loan facility

Company Appeal (AT)(Ins.) No. 1461 of 2023 5 was recalled on 26.12.2019 and at the time of loan recall, the total

outstanding amount was Rs.10.95 crore. The said loan account could not be

regularized since in terms of the RBI framework, NPA account cannot be

upgraded/regularized unless the entire amount comprising of arrears of

interest and principal are paid by the borrower. Thus, it is clear that the

account was never regularized/upgraded and the Corporate Debtor's debt

obligation was unequivocal and indisputable. It is also been contended by the

Learned Counsel for the Respondent No.1 that OTS offer letters issued by a

Corporate Debtor also amounts to clear admission of debt and default as has

been held by the Hon'ble Supreme Court in Dena Bank (Bank of Baroda) v.

C. Shivakumar Reddy & Ors. (2021) 10 SCC 330 ("Dena Bank" in short).

9. Countering the contention of the Appellant that since the date of default

is to be reckoned from the date of NPA as mentioned in the Section 7

application, which being 14.12.2019, the Section 7 application filed in 2023

was hit by limitation, it was contended that date of default had shifted since

the Corporate Debtor had sent letters to the Financial Creditor for one-time

restructuring and OTS proposals thereafter. In support of their contention,

reliance has been placed on the judgement of this Tribunal in SBI v.

Hackbridge Hewittic and Easun Ltd. in CA (AT) (CH) (Ins.) No. 05 of 2021

wherein it has been held that the date of default shifts to the date when the

OTS offer is made.

10. On the contention raised by the Appellant that the EMIs due from the

Corporate Debtor having been cleared till 19.03.2020, default in the discharge

of debt obligations, if any, arose only on or after 25.03.2020, which period

Company Appeal (AT)(Ins.) No. 1461 of 2023 6 being covered under Section 10A of the IBC, no Section 7 application was

maintainable, the Learned Counsel for the Respondent No.1 submitted that,

in the first place, this pleading needs to be rejected since it was never raised

before the Adjudicating Authority. In any case, it was contended that this

standpoint of the Appellant is misplaced since the first default arose in May

2019, which date corresponds to a period prior to 25.03.2020 and hence the

bar of Section 10A would not apply.

11. Further, it has also been stated that the plea taken by the Appellant

that they need to be given a chance for revival is misconceived. It was also

added that the contention of the Appellant that their debt can be paid out of

the proceeds of the insurance claim deserves scant regard since the purported

insurance claims had already been rejected by the insurance provider.

Further the erstwhile directors of the Corporate Debtor having resigned from

their directorship without the consent of the Financial Creditor in breach of

the loan documentation shows their mala-fide intent not to pay the

outstanding debt.

12. We have duly considered the arguments advanced by the Learned

Counsel for the parties and perused the records carefully.

13. At the outset, we must deal with the contention raised by the Learned

Counsel for the Appellant that the impugned order was passed by the

Adjudicating Authority without considering the written submissions of the

Corporate Debtor thus rendering the impugned order perverse. It is submitted

that when the main company petition was listed before the Adjudicating

Company Appeal (AT)(Ins.) No. 1461 of 2023 7 Authority, the Corporate Debtor was left unrepresented and could not file its

detailed reply to counter to the Section 7 application. Not getting an

opportunity to participate in the proceedings before the Adjudicating

Authority, their rights stood jeopardized.

14. Perusal of the interim orders passed by the Adjudicating Authority as

placed at Annexure A-14 of the Appeal Paper Book ("APB" in short) shows that

on 19.06.2023 the Corporate Debtor had sought time to file reply which was

allowed. On the next date of hearing on 07.07.2023, the Counsel for the

Corporate Debtor had made a submission that the IA No. 3163/2023 filed by

them challenging the company petition itself may be treated as their reply and

that they were engaging with the Financial Creditor for settlement. When the

matter came up next for consideration again before the Adjudicating Authority

on 18.07.2023, 24.07.2023 and 26.07.2023, it is seen from the interim orders

that the Counsel for the Corporate Debtor was present on each occasion and

no further request for filing any reply was made. When the matter was finally

heard on 27.07.2023, there was a change in the Counsel for the Corporate

Debtor who sought time to file reply. Since the earlier Counsel had

categorically stated that IA 3163/2023 filed by them seeking direction to

consider their OTS proposal was to be treated as their reply, the Adjudicating

Authority while reserving the matter for orders gave liberty to both the parties

to file their written synopsis. The written submissions were also filed by the

Corporate Debtor on 04.08.2023. Thus, the matter having been heard on 8

occasions and permission having been granted to file written submissions

even after the matter was reserved for orders and this opportunity had also

Company Appeal (AT)(Ins.) No. 1461 of 2023 8 been availed by the Corporate Debtor, we are of the considered opinion that

their contention of having been denied opportunity to be heard before the

Adjudicating Authority lacks foundational basis.

15. At this juncture, it may be useful to notice the findings returned by the

Adjudicating Authority which is to the effect:

"4. We have heard the arguments of Learned Counsel for Financial

Creditor and the Corporate Debtor.

4.1. The bench observes that, the Financial Creditor in

Part IV of the application has specified date of default as

14.12.2019, which is date of NPA. Since the account was

classified as NPA on 14.12.2019, the date of default

would be 90 days prior i.e. 13.09.2019. The SARFAESI

notice u/s 13(2) was sent to the Corporate Debtor on

15.01.2020. The Corporate Debtor through its

correspondences dated 24.08.2020 and 11.11.2022 to

the Financial Creditor submitted the OTS proposal and

these OTS proposals constitute acknowledgement u/s 18

of the Limitation Act. The present petition is filed on

24.01.2023 is well within the limitation. Therefore, this

Tribunal has jurisdiction to adjudicate the Company

Petition filed by the Financial Creditor.

4.2. The bench further notices that, the Corporate

Debtor's obligation to repay the Financial Creditor is

unequivocal, undisputed and established. The Tribunal,

Company Appeal (AT)(Ins.) No. 1461 of 2023 9 while adjudicating upon an application for admission into

Corporate Insolvency Resolution Process filed by a

Financial Creditor, is mandated to ascertain the existence

of the debt, and any default in payment of such debt.

Further in the facts and circumstances as set out, it is

clear that the Corporate Debtor is unable to pay off its

debts arising in the usual and ordinary course of its

business and is in default of the amount claimed in the

petition.

5. Considering the facts placed before us and the fact that, the

Corporate Debtor owes the Financial Debt in excess of Rs.1 Crore,

which is in default, this bench is of the view that in such

circumstances, it is imperative that the Corporate Insolvency

process to be initiated in the matter of the Corporate Debtor. The

petition is complete in all aspect. Since, the debt and default exist,

this bench is of the view, that the present case deserves to be

admitted under Section 7 of the Insolvency and Bankruptcy Code,

2016."

16. This brings us to the contention of the Learned Counsel for the

Appellant that the Adjudicating Authority had failed to recognize that the

Financial Creditor had failed to produce incontrovertible and unimpeachable

evidence to prove the debt. It is their case that EMIs having been serviced on

time, the Corporate Debtor had continued to discharge their debt obligations

in terms of the loan document. Further, letters were addressed by the

Company Appeal (AT)(Ins.) No. 1461 of 2023 10 Corporate Debtor to the Financial Creditor on 09.08.2019 and 31.10.2019 to

adjust the EMIs from September to December 2019 out of the FDRs of the

Corporate Debtor lying with the Financial Creditor. It was also submitted that

the Financial Creditor had at no point of time objected to the request of the

Corporate Debtor to adjust the FDRs against the EMIs. Neither did the

Financial Creditor send any written communication to the Corporate Debtor

refusing to consider their request for adjusting the EMIs against the FDRs.

The Financial Creditor had infact willingly liquidated the FDRs and

appropriated the amounts towards repayment of the purported EMIs. It has

been pointed out that part liquidation of the EMI against the FDR was done

on 27.12.2019. It has also been pointed out that liquidation of the second

part of the FDR was done on 19.03.2020. This re-appropriation was also

confirmed by the Financial Creditor on 26.12.2019 and 18.03.2020. No

default was therefore committed by the Corporate Debtor in the EMI

repayment. It has also been contended that the loan account of the Corporate

Debtor under these circumstances could not have been legitimately classified

as NPA.

17. On the plea taken by the Appellant that there was no default since the

EMI amounts had been liquidated by appropriation from FDR, it has been

contended by the Financial Creditor that FDRs were pledged as security

towards the loan and hence regularization of the loan account from such

security interest was an untenable proposition. It was also added that the

FDRs being in the nature of Debt Service Reserve Account (DSRA), the funds

in DSRA are to be used on discretion of the Financial Creditor and not the

Company Appeal (AT)(Ins.) No. 1461 of 2023 11 Corporate Debtor. Moreover, whether security interest could be enforced from

the DSRA was the prerogative of the Financial Creditor and the Corporate

Debtor was not entitled to dictate the timing of enforcement of the security

interest. Moreover, encashment/appropriation of FDR entailed a

corresponding obligation on the Corporate Debtor to replenish the said

amount which obligation was duly communicated to the Corporate Debtor on

07.01.2020.

18. We have perused the email as placed at pages 82-83 of the APB and we

notice that in the said communication, the Financial Creditor had clearly

asked the Corporate Debtor to clear the EMI overdue for the next month along

with the earlier months' appropriation done from the FDR. It was clearly

indicated in the letter that the FDR amount of Rs. 50 lakh was required to be

restored. This replenishment was however not done by the Corporate Debtor

and therefore there is substance in the contention of the Financial Creditor

that EMI appropriation from the FDR cannot be treated as automatic

regularization of the loan account and that this was clear evidence of debt

and default.

19. The Learned Counsel for the Respondent No.1/Financial Creditor has

further submitted that the limited contours of enquiry while considering a

Section 7 application is that there must be a debt and there must be existence

of default as held by the Hon'ble Supreme Court in the matter of Innoventive

Industries Ltd. v. ICICI Bank (2018) 1 SCC 407.

Company Appeal (AT)(Ins.) No. 1461 of 2023 12

20. It has been contended by the Financial Creditor that the present facts

of the case show that this is a case of admitted debt and default by the

Corporate Debtor in the context of the IBC. It has been stated that the

Adjudicating Authority had taken note that in so far as existence of financial

debt and default in repayment is concerned it is undisputed in view of the

OTS offer letters. These OTS offer letters had been brought to the attention of

the Adjudicating Authority but since the Appellant had not placed them on

record before this Tribunal, they were allowed to be placed by way of

Additional Affidavit by the Financial Creditor. It is the case of the Financial

Creditor that the Adjudicating Authority has correctly referred to the

communications sent by the Corporate Debtor to the Financial Creditor on

24.08.2020 and 11.11.2022 containing OTS proposals. We agree with the

Financial Creditor that in the OTS request dated 24.08.2020, the Corporate

Debtor has categorically admitted that the account was a NPA as on

14.12.2019 as is seen from the communication placed at page 9 of Additional

Affidavit. Further, in the OTS proposal of 11.11.2022, the Corporate Debtor

has again acknowledged the existence of a loan account amounting Rs.10.40

crore since 2018. In this letter, as placed at page 11 of Additional Affidavit,

we notice that the Corporate Debtor after acknowledging that their account

had become irregular and converted into NPA, they have stated that they

wanted to settle the said loan account by paying Rs.4 crore towards full and

final OTS. This proposal of 11.11.2022 was rejected by the Financial Creditor

on 13.07.2023 for being a meagre sum and this has been acknowledged the

Corporate Debtor in their communication dated 27.07.2023 when they again

submitted a revised OTS proposal of Rs.4.10 crore. This communication has

Company Appeal (AT)(Ins.) No. 1461 of 2023 13 been placed at page 12 of the Additional Affidavit. The Financial Creditor again

rejected the modified OTS proposal on 04.08.2023 as is seen from page 16 of

the Additional Affidavit.

21. Basis these OTS proposals, it has been contended by the Financial

Creditor that such OTS offers made on more than one occasion clearly

constitute acknowledgment of debt and default. The only defence which has

been raised by the Corporate Debtor is that the OTS offers were made "without

prejudice". Be that as it may, even if the OTS offer were made on a "without

prejudice" basis, it does not dilute the acknowledgment of debt. This has

already been well settled by this Tribunal in Ishrat Ali v. The Kosmos

Cooperative Bank Ltd. in CA (AT) (Ins.) No. 373 of 2022 that merely

because the standard phrase of 'without prejudice' has been used, it cannot

be construed as denial of debt involved. Further the Appellant before the

Adjudicating Authority in the hearing held on 07.07.2023 as placed at page

103 of APB has made a clear submission about their engagement with the

Financial Creditor for settlement which again validates that there is a clear

admission of debt and default. Thus, in the face of multiple communications

wherein the Corporate Debtor has admitted debt and default, the Adjudicating

Authority did not commit any error in holding that these OTS proposals

constitute acknowledgement.

22. This now brings us to question whether the Section 7 application was

filed on time or whether it was barred by limitation. The Learned Counsel for

the Appellant has emphasized that the date of default is to be reckoned from

the date mentioned in the application under Section 7 of the IBC. On the

Company Appeal (AT)(Ins.) No. 1461 of 2023 14 contrary, the Learned Counsel for the Respondent No.1 has submitted that

the OTS letters and restructuring proposals of 24.08.2020, 11.11.2022 and

27.07.2023 clearly acknowledge the admission of debt and thereby constitute

acknowledgement under Section 18 of the Limitation Act, thereby making the

Section 7 application as one which was filed well within the limitation period.

23. The application of Section 18 of the Limitation Act, 1963 under IBC has

been well settled in the judgment of the Hon'ble Apex Court in Laxmi Pat

Surana Vs. Union Bank of India & Anr. (2021) 8 SCC 481. It has been

held therein:

"43. .......Thus, when the principal borrower and/or the

(corporate) guarantor admit and acknowledge their liability after

declaration of NPA but before the expiration of three years

therefrom including the fresh period of limitation due to

(successive) acknowledgments, it is not possible to extricate them

from the renewed limitation accruing due to the effect of Section

18 of the Limitation Act. Section 18 of the Limitation Act gets

attracted the moment acknowledgment in writing signed by the

party against whom such right to initiate resolution process under

Section 7 IBC ensures. Section 18 of the Limitation Act would come

into play every time when the principal borrower and/or the

corporate guarantor (corporate debtor), as the case may be,

acknowledge their liability to pay the debt. Such acknowledgment,

however, must be before the expiration of the prescribed period of

limitation including the fresh period of limitation due to

Company Appeal (AT)(Ins.) No. 1461 of 2023 15 acknowledgment of the debt, from time to time, for institution of

the proceedings under Section 7 IBC. Further, the

acknowledgment must be of a liability in respect of which the

financial creditor can initiate action under Section 7 IBC."

24. Clearly the OTS proposals, which undisputedly fall within the three-

year period from the date of default, clearly provided for a fresh period of

limitation of three years. We, therefore, find that the Adjudicating Authority

did not commit any error in holding that the OTS proposals dated 24.08.2020

and 11.11.2022 constitute acknowledgement under Section 18 of the

Limitation Act, 1963 and hence the Section 7 application filed on 24.01.2023

was correctly held to be within the limitation period.

25. Now we come to the contention raised by the Learned Counsel for the

Appellant that for arguments sake, even it is assumed that there was a default

in the liquidation of the debt, however, as the EMIs due from the Corporate

Debtor till 19.03.2020 stood extinguished, default would have arisen only

sometime in June 2020 and in that case the Section 7 application would have

been clearly hit by Section 10A. The Learned Counsel for the Respondent No.

1 countering these submissions has stated that the Corporate Debtor's loan

account was declared NPA on 14.12.2019 on account of non-discharge of debt

since May 2019. The loan facility stood recalled since 26.12.2019. Thus, the

default pre-dated the period covered by Section 10A of IBC.

26. A bare reading of Section 10A shows that what is barred is initiation of

CIRP proceedings when the Corporate Debtor commits any default during the

Company Appeal (AT)(Ins.) No. 1461 of 2023 16 Section 10A period. However, if the default is committed prior to the Section

10A period and continues in the Section 10A period, this statutory provision

does not put any bar on the initiation of CIRP proceedings. The present is a

case where the default has been committed by the Corporate Debtor prior to

commencement of Section 10A period. The default having been committed

before the bar of Section 10A came into play, the Corporate Debtor was clearly

not entitled to claim that the Section 7 application was not maintainable.

27. The Hon'ble Apex Court in the case of Innoventive Industries Limited

v. ICICI Bank (2018) 1 SCC 407, has laid down the guiding principles to

admit or reject an application filed under Section 7 of the IBC. Under the

ambit of Section 7 of the Code, the Adjudicating Authority is to only determine

whether a 'default' has occurred and whether the 'debt', which may still be

disputed, was due and remained unpaid. A debt may not be due if it is not

payable in law or in fact. The moment the Adjudicating Authority is satisfied

that a default has occurred, the Application must be admitted unless it is

incomplete. On the question as to whether debt and default was adequately

demonstrated before the Adjudicating Authority, basis the records made

available before it, the Adjudicating Authority has rightly concluded that it

was satisfied with the evidence and material produced before it by the

Financial Creditor to prove that a debt had crystallised; that a default has

occurred and that the Section 7 petition is complete in all aspect. In view of

the foregoing discussions, we find no cogent reasons to disagree with the

impugned order.

Company Appeal (AT)(Ins.) No. 1461 of 2023 17

28. For the foregoing reasons, we are of the considered view that no error

has been committed by the Adjudicating Authority in allowing the Section 7

application and admitting the Corporate Debtor into the rigours of CIRP. We

do not find any reason to interfere with the Impugned Order. The Appeal fails

and is accordingly dismissed. No costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Arun Baroka] Member (Technical)

Place: New Delhi Date: 03.01.2024

PKM

Company Appeal (AT)(Ins.) No. 1461 of 2023 18