No Right To Insist On OTS After Default: NCLAT Upholds Insolvency Against Karanja Terminal

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has upheld the admission of insolvency proceedings against Karanja Terminal & Logistics Pvt. Ltd., holding that repeated and unsuccessful one-time settlement proposals do not prevent action under Section 7 of the Insolvency and Bankruptcy Code once debt and default are established.

A bench headed by Chairperson Justice Ashok Bhushan, with Technical Member Barun Mitra, said the settlement proposals relied upon by the corporate debtor never went beyond the stage of proposals, as they did not receive unanimous approval of the consortium lenders.

The tribunal made it clear that a borrower cannot claim any enforceable right merely because settlement discussions were initiated.

“OTS proposal which was initiated by the Corporate Debtor on 23.05.2025 continued to remain only a proposal it having not been approved by all the three consortium members of the bank ultimately the process of OTS was annulled on 02.09.2025 and 03.09.2025. Thus, on the said OTS proposal, no right can be claimed by the Appellant. It is well settled that a borrower has no right to insist that any OTS proposal require to be accepted by the lenders.", it said.

Karanja Terminal & Logistics had availed credit facilities from a consortium of banks led by Canara Bank. After the company defaulted under a one-time restructuring arrangement, the loans were recalled and Canara Bank filed an application under Section 7 of the IBC before the NCLT. While the insolvency application was pending, the company submitted multiple settlement proposals, including under a Swiss Challenge process.

Although conditional acceptance letters were issued by two consortium banks, the proposals were expressly subject to approval by all lenders. As approval from Bank of Baroda was not received, the banks annulled the settlement process and later assigned the debt to Prudent Asset Reconstruction Company. The NCLT admitted the insolvency application and rejected the company's objections.

In appeal, the company's suspended director said the insolvency case was driven by malafide intent and was being used as a recovery tool, even though the company had repeatedly expressed its willingness to settle the entire debt. The lenders and the assignee disputed this, pointing out that none of the settlement proposals ever ripened into a binding agreement and that the company itself had acknowledged the debt and default through those offers.

The appellate tribunal was not persuaded. It held that the proceedings could not be described as malicious under Section 65 of the IBC simply because the lenders chose to assign the debt rather than accept a settlement.

It also upheld the rejection of applications filed after the matter had been reserved for orders, noting that no subsequent event had occurred which affected the maintainability or admission of the Section 7 application.

“Even we accept the submission of the Appellant that subsequent events even after reserving of the judgment which may have material bearing can be looked into. The present is a case where insofar as offers made by the Corporate Debtor to settle with the lenders, that we have already noticed and the offer made by Prudent ARC has not been accepted. Thus, no such subsequent events took place which could have affected the very maintainability or admission of Section 7 application. We, thus, are of the view that the Adjudicating Authority did not commit any error. ”, it said.

The tribunal clarified that once the insolvency process is admitted and the committee of creditors is constituted, any settlement can only be pursued in accordance with Section 12A of the IBC.

While dismissing all the appeals, it granted liberty to the corporate debtor's suspended director to place a settlement proposal before the resolution professional, to be considered by the committee of creditors in accordance with law.