Bank Cannot Be Compelled To Accept Shareholders' Settlement Offer At Pre-CIRP Stage: NCLT Delhi

The National Company Law Tribunal (NCLT), New Delhi, has ruled that shareholders cannot compel a financial creditor to accept a settlement offer or intervene in insolvency proceedings initiated under Section 7 of the Insolvency and Bankruptcy Code (IBC) at the pre-admission stage.

The tribunal held that merely arranging funds through a third party and preparing demand drafts does not amount to a concluded settlement when the creditor has rejected the proposal.

A bench of Judicial Member Manni Sankariah Shanmuga Sundaram and Technical Member Reena Sinha Puri observed, “This Adjudicating Authority cannot compel the Financial Creditor to accept the proposed amount, as the terms of settlement fall within the domain of the parties concerned. Nor can this Adjudicating Authority issue directions for the release of securities or withdrawal of proceedings involving persons and transactions falling beyond the scope of adjudication under Section 7 of the IBC.”

The case arose from insolvency proceedings initiated by Indian Bank against Mahamaya Exports Private Limited. Sona Bansal held 17.16% of the company's paid-up equity share capital, while Atul Bansal Hindu Undivided Family (HUF) held 26.84%.

Together, they held approximately 44% of the company's shareholding and sought to intervene in the pending proceedings.

The applicants claimed that they had arranged approximately ₹72 crore through financial assistance from Brightlane Infraspace Private Limited, secured against a pledge of their shareholding. They sought permission to tender eight demand drafts worth ₹73.91 crore towards full and final settlement of the Bank's dues. They also sought directions to the Bank to release the original title deeds, mortgage documents and other securities upon realisation of the amount. However, Indian Bank opposed the proposal and informed the tribunal that it had rejected the settlement offer.

Rejecting their plea, the tribunal observed that the responsibility to repay the debt rested with the principal borrower and its guarantors, and not the shareholders proposing the payment.

“The onus of repaying the debt owed to the Financial Creditor lies on the Principal Borrower and the Guarantors, who may be Corporate Guarantors or Personal Guarantor. The Intervenor here does not fall in any of these categories. We note that the Corporate Debtor has not made any proposal for repayment of the outstanding debt of the Principal Borrower,” it observed.

The tribunal further noted that the proposed payment did not constitute a concluded settlement as Indian Bank had rejected it. It also pointed out that the aggregate amount of the demand drafts had not been reconciled with the Bank's revised claim. One of the drafts was expressly returnable upon a separate contingency. The proposal also sought the release of securities and withdrawal of proceedings involving other guarantors.

Relying on the National Company Law Appellate Tribunal's ruling in Vekas Kumar Garg v. DMI Finance Pvt. Ltd., the NCLT observed that proceedings under Section 7 of the IBC at the pre-admission stage essentially concern the financial creditor and the corporate debtor. The adjudicating authority's inquiry is confined to determining whether a financial debt exists and whether the corporate debtor has committed a default warranting initiation of the Corporate Insolvency Resolution Process (CIRP). Third-party intervention is not contemplated at this stage.

The tribunal also relied on the Supreme Court's ruling in Elegna Co-operative Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Ltd., which clarified that proceedings under Section 7 remain in personam before admission of the insolvency petition. Unrelated third parties, therefore, have no independent right of audience at this stage.

“The shareholders of the Financial Creditor or the Corporate Debtor, in their capacity as shareholders, have no locus standi to seek impleadment or intervention in proceedings instituted under Section 7 of the Code,” the NCLT observed.

It clarified that shareholders who have grievances concerning how the company is being represented or decisions taken by its management in the Section 7 proceedings may approach the appropriate forum under the Companies Act, 2013. However, such grievances do not give them a right to intervene in the insolvency proceedings.

The tribunal also noted that the applicants' request for the Bank to hand over security documents to the shareholders proposing the payment suggested the existence of disputes among the shareholders. It recorded that such disputes were already pending before the NCLAT.

Holding that the shareholders had no locus standi to maintain the intervention petitions and that the rejected settlement proposal did not constitute a legal basis to defer the insolvency proceedings, the NCLT dismissed both applications.