Mere OTS Proposals, Settlement Talks Cannot Postpone Valid Insolvency Application: NCLT Ahmedabad

The Ahmedabad bench of the National Company Law Tribunal (NCLT), while dismissing applications filed by a cotton spinning company seeking time to pursue a one-time settlement (OTS), held that OTS proposals, ongoing settlement discussions and identification of prospective purchasers cannot defeat or postpone adjudication of a valid insolvency application.

The applications had also sought permission to facilitate inspection of the company's assets by prospective purchasers.

The tribunal comprising Judicial Member Chitra Hankare and Technical Member Dr. V. G. Venkata Chalapathy made the observations while admitting an insolvency petition filed by State Bank of India against Varidhi Cotspin Pvt. Ltd.

The tribunal observed, “Mere arguments that they would find an investor and repay and delay the proceedings for settlement including a OTS during the pendency of this petition, cannot be further allowed as the CIRP is a time bound process and the intention is not only to recover the debt to the applicant, but also at later stage examine whether the entity can be resolved.”

It further observed, "Mere filing of OTS proposals, ongoing settlement discussions, or identification of prospective purchasers cannot defeat or postpone adjudication of a valid Section 7 application”

State Bank of India, the lead lender in a consortium, sought initiation of the corporate insolvency resolution process (CIRP) against Varidhi Cotspin Pvt. Ltd. It alleged a default of ₹43.39 crore.

Under the consortium arrangement, SBI had advanced credit facilities aggregating ₹49.50 crore. These comprised cash credit, GECL loans, term loans and a bank guarantee.

The tribunal recorded that the debt became due on July 1, 2024. The loan account was classified as a non-performing asset on September 28, 2024. SBI thereafter issued a recall notice and a notice under the SARFAESI Act. The dues remained unpaid.

Varidhi Cotspin opposed the petition. It alleged that SBI had suppressed restructuring discussions, settlement efforts and payments made by the company. It also questioned the authority of the officer who instituted the proceedings.

The company further argued that the claim was barred by limitation. It challenged the admissibility and evidentiary value of the loan documents, statements of account, Information Utility records and other documents relied upon by the bank. It also pointed out that proceedings under the SARFAESI Act had already been initiated.

SBI maintained that the insolvency application was within limitation. It relied on acknowledgements of debt reflected in the company's audited financial statements. The bank also relied on certified statements of account, loan documents and Information Utility records to establish the debt and default.

After considering the rival submissions, the tribunal held that the debt had become due on July 1, 2024 and remained in default. It found that the debt exceeded the statutory threshold. It therefore held that the petition was liable to be admitted.

The tribunal further observed, “Mere filing further IAs seeking indulgence for a settlement by this tribunal is not a process covered under Sec 7 of IBC 2016, making allegations for the purpose of evading adjudication of the matter, are not pérmissible based on evidences provided and mere acceptance of debt and its default and inability to pay is sufficient cause to trigger CIRP under provisions of IBC 2016.”

Accordingly, the tribunal admitted the insolvency petition. It initiated the corporate insolvency resolution process against Varidhi Cotspin Pvt. Ltd., imposed the moratorium under Section 14 of the Insolvency and Bankruptcy Code, and appointed Prawincharan Prafulcharan Dwary as the Interim Resolution Professional.