NCLT Hyderabad Flags Nearly Ten-Fold Increase In Admitted Claim In CIRP, Orders Fresh Verification

The National Company Law Tribunal (NCLT) at Hyderabad has directed a fresh verification of a financial creditor's claim in the corporate insolvency resolution process of Sri Nagakrishna Chemicals Ltd. after noting a nearly ten-fold increase in the admitted claim amount.

The tribunal noted that the amount reflected in the creditor's application was about ₹7.95 crore, while the amount admitted during the CIRP stood at ₹73.98 crore.

A Bench of Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri observed the following,

"Therefore, we are of the prima facie view that there exists a substantial increase in the claim amount, which requires verification to ensure correctness and transparency in the CIRP process."

The order came on an application filed by Frontline Enterprises Ltd., which claimed to be a financial creditor of Sri Nagakrishna Chemicals Ltd.

Frontline challenged the admission of Madhya Pradesh Financial Corporation's (MPFC) claim of ₹73.98 crore and the resulting constitution of the Committee of Creditors.

It pointed out that MPFC's Section 7 petition reflected an outstanding liability of about ₹7.95 crore as on July 18, 2017.

According to Frontline, the increase was due to the inclusion of interest, revised interest, and penal interest after the loan account had been classified as a non-performing asset in April 2011.

Frontline also argued that the admitted claim reduced its voting share in the Committee of Creditors from 74.3% to 23.77%.

MPFC was allotted an 80.66% voting share.

MPFC opposed the challenge.

It contended that the ₹7.95 crore figure represented only the outstanding amount as on July 18, 2017, for the purpose of initiating the insolvency proceedings and not the total liability of the corporate debtor.

MPFC maintained that the outstanding dues stood at ₹73.98 crore when its claim was submitted during the insolvency process.

It argued that contractual interest and penal interest continued to accrue under the loan documents.

The Resolution Professional informed the Tribunal that there appeared to be some error in the calculation of interest.

It suggested that the claim be independently examined.

The Tribunal rejected Frontline's argument that interest could not be charged after the account was classified as a non-performing asset.

Referring to earlier decisions, it held that RBI prudential norms governing non-performing assets deal with accounting treatment, income recognition, and provisioning by banks.

The tribunal held that those norms do not extinguish a borrower's contractual obligation to pay interest under the loan documents.

The Bench observed, "We are also of view that the RBI Master Circular relied upon by the Applicant does not provide for waiver or extinguishment of contractual interest payable by the borrower under the loan documents. Accordingly, we are not inclined to accept the contention of the Applicant that interest cannot be charged after classification of the account as NPA."

While rejecting that contention, the tribunal noted that the amount admitted during the insolvency process was substantially higher than the amount reflected in the Section 7 application.

It observed that the admitted claim was almost ten times the amount reflected in 2017.

The Tribunal held that the correctness of the computation required verification.

The Tribunal directed the Resolution Professional to re-verify MPFC's claim on the basis of supporting documents, including the computation of interest, within seven days.

It also directed that no meeting of the Committee of Creditors be convened until the claim is re-verified and accurately determined.