Tribunal Need Not Examine Bank's Reasons For Rejecting OTS Once Debt And Default Are Established: NCLAT

The National Company Law Appellate Tribunal at Chennai has recently held it is not required to examine the reasons behind a bank's decision to reject a one-time settlement proposal while deciding whether insolvency proceedings should continue, so long as debt and default are established.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain made the observation while dismissing an appeal filed by the suspended directors of Anand Bharathi Fertilisers (India) Pvt Ltd against the admission of insolvency proceedings at the instance of Canara Bank. The Tribunal said,

“OTS is in the prerogative of the Financial Creditor and the Corporate Debtor cannot claim as of right to avail OTS in its own term. In the instant case the Corporate Debtor had proposed the OTS proposal of Rs. 11 Crores on 19.07.2023 and the Financial Creditor has rejected the same on 21.11.2023. This Tribunal is not required to venture into the reasons behind the said rejections except for noting that the Financial Creditor is within its rights to take a decision on the OTS proposal as per its internal policies and procedures and that it has decided on the same. Rejection of OTS will not stand in the way of filing an application under Section 7 of the Code as long as debt and default are established.”

The company had taken a term loan of 9 crore and working capital loan of 1.10 crore from Canara Bank in 2016 and later defaulted, following which its account was classified as a non performing asset in June 2018.

The loan was restructured, and repayment timelines were extended, including relief granted during the Covid period, but the company failed to repay even after the revised due date in March 2021. The Hyderabad bench of the NCLT admitted the bank's insolvency application in February 2024, which was challenged in appeal.

The directors argued that delay in release of working capital caused financial stress and led to default. They contended that the date of default fell within the period protected under Section 10A of the Insolvency and Bankruptcy Code. It was also argued that the bank was using the insolvency process as a recovery mechanism after earlier pursuing action under the SARFAESI Act and rejecting a settlement proposal. The appellants further pointed to pending arbitration proceedings and said the company was likely to recover amounts sufficient to clear the dues.

The Appellate Tribunal rejected these objections. It noted that the company had availed multiple loan facilities with different repayment schedules, and the latest default occurred on March 30, 2021, which fell outside the period covered under Section 10A.

The bench also held that the pendency of arbitration could not prevent insolvency proceedings since the claim had not crystallised and there was no certainty that the company would be able to repay the debt.

Referring to the scheme of the insolvency law, the tribunal observed that once material shows that the corporate debtor has committed default and is unable to pay its dues, the adjudicating authority is not required to examine the reasons for the default or refuse insolvency proceedings on that ground.

Holding that debt and default were established and that the NCLT had correctly admitted the case, the Appellate Tribunal dismissed the appeal.