It was a one-of-a-kind judgment by the Bangalore Bench of NCLT in the case of India Asset Growth Fund And Ors. Vs CMRS Projects Pvt Ltd on 23.06.2020.
The Hon'ble Tribunal decided on the matter specifically bearing in mind the intent of the Insolvency and Bankruptcy Code (IBC) and the parameters while considering admitting a Corporate Debtor (CD) into Corporate Insolvency Resolution Process (CIRP) in light of the prevalent economic slowdown due to COVID-19.
The highlights of the judgment and its possible impact on stressed companies have been provided below.
Brief Facts:
The Corporate Debtor herein is engaged in the business of real estate and property development. In due course of business, the Corporate Debtor approached various Financial Creditors to raise funds for the project undertaken by the Debtor and an amount of Rs. 13,00,00,000/-was disbursed to the Corporate Debtor. In the meanwhile, The Financial Creditors had entered into a Trust Deed for the aforementioned amount lent.
The Corporate Debtor failed to pay back the amount and the debt fell due on 24.08.2018. Subsequently, a notice was issued for the repayment and only after a year of the notice being issued the Debenture Trustees initiated a Company Petition.
During the course of the same, there were various settlement talks and, in parallel, significant amounts (few crores) was paid back towards the debt by the Corporate Debtor in various tranches. Finally, a settlement proposal was entered into which was feasible (before COVID-19) by the Corporate Debtor, to which the Financial Creditors had accepted to the tune of Rs.14,50,00,000/-.
In these circumstances, the Corporate Debtor is currently eligible for the SWAMIH Investment Fund, provided to aid the completion of construction of affordable and mid-income housing towards their last leg of completion. The Corporate Debtor is also commercially solvent, and is currently undertaking various projects. The Corporate Debtor has 17 employees whose monthly salaries are to the tune of Rs. 3,00,000/-, in addition to which he has engaged contract workers, who are migrants from various places, who have gone back to their native due to COVID-19. The Corporate Debtor has 110 homebuyers and other stakeholders on the line as well.
The Corporate Debtor is unable to adhere to the settlement proposal due to COVID-19 and a revised payment term, which was in line with the earlier proposal to tune of Rs. 14,50,00,000/-, was produced but the timeline of payment was varied.
Key Issues in the Judgment:
There were mainly four main issues discussed under this Judgment, which are as follows:
• Whether the instant case is in consonance to the object of the Code?
• Whether the initiation of CIRP is the only effective alternative available to the petitioner?
• Whether petitioners have satisfied the AA towards initiation under Sec 7 of IBC?
• Whether the parties can be given one more chance to find a solution?
Observations of the Tribunal:
The Hon’ble Tribunal observed that there is sufficient reason in this instant matter to show that the Corporate Debtor is willing to provide a settlement proposal which was earlier accepted by the Financial Creditors, however, the new settlement proposal showcases an amendment in the period of payments due to the economic difficulties faced due to COVID-19.
The Hon’ble Tribunal also observed that the Financial Creditors had various other remedies available to deal with the events of default, as set out in the Trust Deed entered between the parties as well as remedies under the Contract other than the fact that settlement talks were ongoing. However, the Petitioners have filed this Petition seeking Corporate Insolvency contenting that it would get recovery of outstanding dues during the CIRP, which is contrary to the intent of the Code.
The Hon’ble Tribunal termed the initiation of CIRP proceedings at this instant would be a 'civil death' to the Corporate Debtor. This is considering the economic situation due to the pandemic and the continued payment of wages and other expenses as the company is still solvent and is abiding by its duties as a functioning entity.
The Tribunal further observed that it must be satisfied on the rounds for the initiation of such Petition by taking into consideration the object of the code, financial status of the Corporate Debtor, whether the Corporate Debtor is a going concern, the effect of the initiation of CIRP on stakeholders and public at large. These conditions are to be considered, especially in this severe economic conditions of the pandemic.
The Hon'ble Tribunal observed that the issue must be seen in a positive way and the Petitioner cannot first initiate the CIRP and then later resolve the issues during CIRP proceedings. Although the default occurred prior to 25.03.2020 (as per notification) in this instant matter, the Corporate Debtor has not been admitted into CIRP and considering the prevailing economic conditions, the FCs must consider the settlement proposal put forth by the Corporate Debtor as debt and default in question is continuous cause action till date.
Ruling of the Hon’ble NCLT in the present case:
• The initiation of CIRP of the Corporate Debtor is not justified and parties must resolve the issue considering the prevailing economic pandemic situation
• After exhausting all remedies including the proposed settlement, the FCs can invoke the provisions under the IBC.
• The FCs are required to re-consider the settlement proposal due to the severe economic conditions and that the Corporate Debtor is in going concern.
• The Respondent is directed to extent full cooperation to settlement efforts.
Impact of this judgment on stressed companies:
This decision of the NCLT Tribunal has given a new meaning to the already understood ingredients to initiate a Section 7 matter as per IBC. The Hon’ble NCLAT as well as Supreme Court through the landmark judgment of Innoventive Industries vs ICICI Bank has established that the NCLT as the adjudicating Authority must look into the existence debt and default to initiate a Section 7 matter under IBC.
In spite of the SC ruling; in this once in a lifetime pandemic situation (hopefully) the Hon’ble NCLT has taken a different approach which comes as a lifesaver to many distressed companies during this pandemic period. This has opened up a ray of hope to various companies who are not only affected by the pandemic but also otherwise.
The new parameters as laid out in this judgment along with the determination of debt and default will certainly uphold the object of the Code and prevent misuse of the Code as well. This judgment stresses that the Code is to be construed as a mode of restructuring the company and its debt rather than a mode of money recovery, as has been time in and again conveyed through various forums and Law Reports.
This judgment is likely to be the subject matter of appeal in the Hon’ble NCLAT as well as Supreme Court to decide the extent of the inherent powers exercised by the Bangalore NCLT and set a new precedent which will be relevant for at least the next 6-12 months. In the light of this, it is also to be duly noted that the FCs need to rethink their strategy forward on corporate insolvency. Extraordinary circumstances call for extraordinary decisions and some out-of-the-box thought processes; this is one such instance and has given spark to deliberations on the subject.
The views expressed are personal.