NABARD Refinance Receivables Are Third-Party Assets, Not Part Of Corporate Debtor's Insolvency Estate: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has recently held that receivables from refinance transactions extended by National Bank for Agriculture and Rural Development (NABARD) are third-party assets held in trust and cannot form part of the borrower's insolvency estate.

A coram of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra held that NABARD's statutory rights under Section 29 of the NABARD Act are not waived merely because it filed its claim in Form-C during the corporate insolvency resolution process.

Section 29 of the NABARD Act provides that amounts recovered by a borrowing institution from loans refinanced by NABARD are deemed to be held in trust for NABARD and must be paid to it in priority.

SREI Equipment Finance Ltd had availed a refinance facility of Rs. 2,212.5 crore from NABARD between 2016 and 2019 under multiple sanction letters. To secure these loans, SREI executed several General Refinance Agreements and deeds of assignment of book debts in favour of NABARD.

Following default, NABARD classified the account as a non-performing asset, with ₹883.63 crore outstanding as on 8 October 2021.

On the same day, the Reserve Bank of India superseded SREI's board, and corporate insolvency resolution proceedings were initiated by an order of the National Company Law Tribunal, with an Administrator appointed.

NABARD wrote to the Administrator asserting priority over receivables under Section 29 of the NABARD Act and filed its claim as a financial creditor on 21 October 2021. Its claim was admitted in full, with a voting share of 2.71% in the Committee of Creditors.

On 16 June 2022, NABARD approached the NCLT seeking directions for priority repayment from the assigned assets. While this application was pending, a resolution plan was approved on 11 August 2023, under which NABARD received ₹122 crore as a dissenting financial creditor.

The NCLT subsequently rejected NABARD's application, leading to the appeal before the NCLAT.

Before the appellate tribunal, the Committee of Creditors contended that since NABARD had filed its claim in Form-C as a financial creditor for ₹883 crore, it was required to be treated strictly in accordance with the approved resolution plan.

Rejecting this contention, the tribunal observed that NABARD had consistently asserted its statutory rights under Section 29 both prior to and after the commencement of the CIRP.

"... mere filing of claim in Form-C, which Form was not applicable with regard to CIRP of financial service providers, none of the rights of the Appellant can be said to be waived,” the tribunal held.

The NCLAT further held that receivables arising from refinance transactions constituted third-party assets and could not be treated as assets of SREI. In this context, it relied on Rule 10 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers) Rules, 2019.

“The provisions of Section 29 of the NABARD Act as well as Rule 10 of the FSP Rules do support the contention of the Appellant that receivables from the accounts relating to refinancing done by the corporate debtor are assets of the Appellant, that is, third-party assets, and cannot be held to be assets of the corporate debtor,” it observed.

Accordingly, the NCLAT allowed the appeal and set aside the NCLT's order, holding that NABARD would be entitled to receive the amount set aside for it under the approved distribution mechanism, after adjusting the amount already paid to it as a dissenting financial creditor.

For Appellants: Senior Advocate Abhijeet Sinha, Advocates Anand Varma, Apoorva Pandey, Ayush Gupta, Shaunak Mitra, Joveria Sabbah and Heena Kochar

For Respondents: Senior Advocate Krishnendu Datta, Advocate Anoop Rawat, Saurav Panda, Shaly Bhasin, Prateek Gupta, Arushi Chandra, Snigdha Saraff, Rachna Dubey, Mahek Khuranna, Rashi Sharma, Harsh Gurbani and Yash Tandon