Anand Singh vs Harshad Shamkant Deshpande & Ors.

The present appeal has been filed by Mr. Anand Singh, who is Appellant herein and Erstwhile Director of Respondent No. 3 (‘Corporate Debtor’) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) against the Impugned Order dated 02.03.2022 passed by National Company Law Tribunal, Mumbai Bench, Court-III (‘Adjudicating Authority’) in C.P. (IB) No. 3650/MB/2018 whereby Section 7 application initiated by the Bank of Maharashtra (‘Financial Creditor’) for Rs. 24,24,42,995/- has been admitted.

Mr. Harshad Shamkant Deshpande was appointed as Resolution Professional vide Impugned Order dated 02.03.2022 who is Respondent No. 1 herein, Bank of Maharashtra the Financial Creditor is the Respondent No. 2 and Transport Solution Private Limited (‘Corporate Debtor’) is Respondent No. 3 herein.

Heard the Counsel for the Parties and perused the records made available including the cited judgements.

It is the case of the Appellant that in March, 2013 the Corporate Debtor availed cash credit facility of Rs. 20 Crores from the Respondent No. 2 and Corporate Debtor was servicing regular financial debt till March, 2015. The Appellant alleged that on 01.04.2015, the Respondent No. 2, made drawing power of the Corporate Debtor as ‘zero’ without giving any reason. The Appellant further alleged that the Respondent No. 2 did not follow RBI Guidelines with only intention to put the Corporate Debtor into CIRP.

The Appellant brought out that on 01.07.2015, followed by reminder on 26.07.2015, the Corporate Debtor requested the Respondent No. 2 to allow the Corporate Debtor to operate the account, however, no response was given and in March, 2016 the Respondent No. 2 through its Advocate directly issued the recall notice, inter-alia, stating that account of the Corporate Debtor was declared as NPA. The Appellant stated that the Respondent No. 2 on 21.03.2016 also filed an application before the Debt Recovery Tribunal (‘DRT’) for recovery of alleged dues vide Original Application bearing OA No. 176 of 2016 for claim of Rs. 22, 57,65, 097/-.

The Appellant brought out that the Respondent No. 2 approached the Corporate Debtor under MAHAMUKTI Scheme (‘Mahamukti OTS’) for settling of alleged dues of the Corporate Debtor on payment of Rs. 16.97 Crores as OTS amount and the Corporate Debtor deposited 10% of the OTS amount (approx.. Rs. 1.65 Crores) with Respondent No. 2 in January, 2018 itself but the Respondent No. 2 issued the OTS approval letter only on 17.03.2018 valid up to 31.03.2018 and demanded the Corporate Debtor to pay remaining 90% balance amount within 10 working days. The Appellant submitted that till that time the Corporate Debtor had already paid Rs. 5.5 Crores under the said scheme but due to such stringent and unrealistic time frame, the Corporate Debtor could not pay the remaining balance amount.

The Appellant submitted that the Corporate Debtor has all genuine intentions to settle the matter and therefore between 01.04.2018 to 19.10.2018 the Corporate Debtor wrote several letters to the Respondent No. 2 for seeking extension of time for depositing balance amount of OTS which was not granted by the Respondent No. 2.

It has been brought out that on 11.09.2018, the Respondent No. 2 filed Company Petition No. 3650/IBC/MB/2018 before the Adjudicating Authority under Section 7 of the Code r/w Rule 4 of Insolvency and Bankruptcy (application to Adjudicating Authority) Rules, 2016 which was admitted by the Adjudicating Authority vide Impugned Order dated 02.03.2022.

The Appellant alleged that even after filing an application under Section 7 of the Code before the Adjudicating Authority, the Respondent No. 2 once again approached the Corporate Debtor with a new MAHARIYAYT OTS Scheme (‘Mahariyayat OTS’) for Rs. 12 Crores and the Corporate Debtor deposited 10% of the same with the Respondent No. 2. The Corporate Debtor submitted that the account was illegally declared as NPA by the Respondent No. 2 without following RBI Guidelines.

The Appellant brought out that on 23.02.2019, the Respondent No. 2 issued the OTS approval letter under Mahariyayat OTS Scheme but unilaterally increased the amount of OTS from Rs. 12 to Rs. 14 Crores which was opposed by the Corporate Debtor and wanted the Respondent No. 2 to refund money paid by the Corporate Debtor. However, no action was taken by the Respondent No. 2.

The Appellant assailed the Impugned Order which ignored vital facts of the case, genuine intentions of the Corporate Debtor and initiated CIRP proceedings against the Corporate Debtor vide Impugned Order dated 02.03.2022. The Appellant pointed out that no date of default has been mentioned in part IV of the application filed under Section 7 and as such on this account only, the Impugned Order need to be rejected.

The Appellant brought out that the NPA date has been shown as 18.05.2015, however, on this date, the account was standard account. The Appellant reiterated that his sanction limit was Rs. 20 Crores and stated that the account could have been declared as NPA only if the sanction limit got exceeded which is not the case.

In this regard he referred to ledger accounts highlighting that his account always remained in sanction unit of Rs. 20 Crores.

Concluding his arguments, the Appellant stated that all records shows clearly that the account of the Corporate Debtor could not have been declared NPA as the Corporate Debtor never exceeded Rs. 20 Crores sanctioned limit.

Per contra, Respondent No. 2 the Contesting Respondent, denied all the averments made by the Appellant treating these as misleading and malicious

The Respondent No. 2 submitted that the Corporate Debtor through Erstwhile Directors approached the bank in January, 2013 for grant of cash credit Rs. 20 Crores as working capital facility for business purpose along with sub limit of Rs. 7.5 Crores as letter of credit cum bank guarantee. The Respondent No. 2 stated that on 18.03.2013 the bank sanctioned these credit facilities and subsequent to which the Erstwhile Directors and the Corporate Debtor executed certain financing and security documents in favour of Respondent No. 2 on 25.03.2013.

The Respondent No. 2 bank mentioned that the Corporate Debtor agreed to get review from the Respondent No. 2, the said financing facilities every year till the same is terminated, however, the Corporate Debtor failed to adhere to the terms and conditions laid down in the sanction letter and also failed to pay the interest on time. The Respondent No. 2 submitted that they advised the Corporate Debtor on 02.08.2014 that credit facilities availed by the Corporate Debtor are over due for review/ renewal and due to non renewal of credit facilities, penal interest is being charged w.e.f. March, 2014.

The Respondent No. 2 bank submitted that in the letter dated 02.08.2014, the Respondent No. 2 bank requested the Corporate Debtor to furnish audited balance sheet as on 31.03.2014, CMA Data, Net worth Certificate of Directors/ partners and cautioned the Corporate Debtor that in absence of submission of these documents along with the review/ renewal request for facility, drawing power of cash credit account will become ‘zero’ and cheque issued by the Corporate Debtor will not be honoured by the Respondent No. 2.

The Respondent No. 2 reiterated that he brought to the notice of the Corporate Debtor that the cash credit account of Rs. 20 Crores sanctioned on 15.03.2013 has already become over due for review/ renewal for which despite official communication by the Respondent No. 2 to the Corporate Debtor no request has been received from the Corporate Debtor.

The Respondent No. 2 also brought to the notice of this Appellate Tribunal that in the letter dated 21.08.2014, major irregularities noticed by the Respondent No. 2 were brought to the notice of the Corporate Debtor namely, 1.) Non-Execution of registered mortgage of the Properties. i.e. property comprising Land, Building, Plant & Machinery at S. No. 170, Plot NO. D-1, Chakan-Telegaon Highway, Khalunmber, Chakan-MIDC, P:Une, 2.) Non -Registering charge of mortgage with ROC and 3.) Non-Submission of Tripartite agreement with MIDC.

The Respondent No. 2 bank brought out that despite their best efforts, the Corporate Debtor failed to adhere to the terms and conditions of financial facilities and did not pay the interest on time which became over due and therefore, the Respondent No. 2 had to declare the account of Corporate Debtor as NPA in accordance with then prevalent RBI Guidelines dated 18.05.2015 and subsequent to which the Respondent No. 2 bank issued recall notice to the Corporate Debtor and erstwhile directors the Corporate Debtor on 01.03.2016.

The Respondent No. 2 denied allegations regarding bank putting the Corporate Debtor into CIRP and submitted that the Respondent No. 2 bank on its own encouraged the Corporate Debtor to avail the OTS as per Government Schemes like Mahamukti and Mahariyayat OTS Scheme, however, despite issuing the sanction letters under these schemes, the Corporate Debtor failed to meet the terms and conditions.

The Respondent No. 2 bank stated that the Corporate Debtor has been continuously acknowledging the dues and thus the debt is established without any doubt. Similarly, very fact that the Corporate Debtor could not pay in time and offered to make the payment under OTS also signifies the default and as such there is nothing wrong in the Impugned Order, since the Adjudicating Authority was only required to establish debt and default under Section 7 of the Code and these conditions were met in the present case, therefore the Impugned Order was passed correctly by the Adjudicating Authority.

The Respondent No. 2 bank brought to the notice of this Appellate Tribunal that sanction limit of the cash credit facility is one aspect and another aspect of such cash credit facility is the drawing power. According to approval, the Corporate Debtor was required to maintain his account standard and submit the documentary evidence from time to time and also initiate to get credit facility reviewed/ renewal before expiry of one year. The Respondent No. 2 bank reiterated that despite their continuous reminders and persuasions, the Corporate Debtor did not full fill the terms and conditions and did not take any action for renewal of cash credit facilities as such the Respondent No. 2 had to make the drawing power as ‘zero’ and due to non payment of interest on time the same became overdue and thus the account of the Corporate Debtor was declared as NPA in accordance with the RBI Guidelines.

The Respondent No. 2 bank brought out duly that they conveyed their approval of the offer put forth by the Appellant and had asked the Corporate Debtor to pay in terms of the OTS Scheme before 31.03.2018 which was the deadline for the OTS Scheme. However, the Corporate Debtor failed to do so, as such the Respondent No. 2 could not grant the extension of time asked by the Corporate Debtor as the OTS Scheme expired at the end of the financial year i.e., 31.03.2018.

The Respondent No. 2 bank submitted that despite filing the Section 7 Application before the Adjudicating Authority, the Respondent No. 2, in order to provide one last opportunity to the Corporate Debtor, approached the Corporate Debtor and sent letter dated 29.10.2018 to the Corporate Debtor stating that once the Appellant conveys his willingness along with a deposit of 10% of the OTS amount, the sanction letter will be issued and the OTS amount was to be paid before the end of the financial year i.e., 31.03. 2019, which the Corporate Debtor failed to do with regard.

The Respondent No. 2 concluded his pleadings with request to this Appellate Tribunal to dismiss the appeal with exemplary costs.

We note that cash credit facilities were sanctioned in favour of to the Corporate Debtor in 2013 and loan documents were executed by the Corporate Debtor through its erstwhile directors in order to secure those facilities which proves of the financial debt. The said financial facilities were required to be renewed yearly as per sanction letter. We also note that the Corporate Debtor failed to pay the interest that was accruing on the loan account and thus, the amount became overdue. We take into consideration that since the Corporate Debtor failed to pay the amount due and payable, the Respondent No. 2 Bank classified the account of the Corporate Debtor as NPA and issued a recall notice in order to recover the outstanding from the Corporate Debtor and subsequently the Respondent No. 2 filed an application in accordance with Section 7 of the Code to initiate the Corporate Insolvency Resolution Process (‘CIRP’) against the Corporate Debtor.

The only point which is to be decided in the present appeal is whether there was any default, since, the debt is undisputed fact and has not been agitated by either of the parties.

It is the case of the Appellant that since his sanction limit never exceeded and remained under Rs. 20 Crores approved by the Respondent No. 2, there could not be any chance of declaring his account as NPA and thus the alleged default is wrong and the Impugned Order is illegal. On the other hand, the Respondent No. 2 bank pleaded that the sanction letter was subject to drawing limit. In this connection, we would like to look into the sanction letter which reads as under :-

(Emphasis Supplied)

From the above sanctioned letter, we note that the sanction limit was Rs. 20 Crores for cash credit facilities and it is significant to note that “review was to be done within a year”. Similarly, letter of bank/ bank guarantee also sanctioned of Rs. 7.5 Crores within overall total CC limit of Rs. 20 Crore for procurement of raw material and the same was also required to be renewed within a year. Drawing power under CC including sub limit proposed for LC/BG sub limit was not to exceed Rs. 20 Crore at any time including outstanding payment under LC/BG.

We note that the sanction limit also includes “ other terms and condition as per enclosed sheet” and condition No. 6 is relevant to the present case which is reiterated as under for clarity :-

We would like to take into consideration the intimation sent by the Respondent No. 2 bank to the Corporate Debtor regarding the requirement of review/renewal of credit facilities vide letter dated 02.08.2014 and 21.08.2014 which reads as under :-

We observe that the intention the Respondent No. 2 seems to help the Corporate Debtor to complete the formalities. We further observe that the Respondent No. 2 also sent their team to the Corporate Debtor on 19.11.2014 for verification of assets and follow up of the review/ renewal of credit facilities and brought to the notice of Corporate Debtor to submit the review/ renewal urgently and as the review of the account was due since March, 2014. The visit report reads as under :-

We also note that the Respondent No. 2 bank informed the Corporate Debtor to renew the credit facilities through its Advocate K. Ashar and company who vide letter dated 27.05.2015 who advised the Corporate Debtor to complete the formalities.

Thus, we come to conclusion that the sanction letter of Respondent No. 2 specifically contained clauses for review/ renewal before expiry of one year. This review/ renewal was to be done by Bank based on Annual Audited Financial Statements and other documentary evidence to be submitted by the Corporate Debtor along with request letter which the Corporate Debtor did not furnish.

It will be worthwhile to understand as to what is the need for such review/ renewal of cash credit facilities by banks at the request of the Corporate Debtor. It is noted that banks require such renewal regularly to ensure that the credit facilities and terms on which these facilities were granted, remains in sync with risk profile and credit worthiness of the Corporate Debtor so that such financial facilities remain healthy. By regular reviews, banks monitor financial performances of the borrowers, assessing that the business of the Corporate Debtor remains viable so as to meet the repayment schedule of the banks. Similarly, banks also would like to ascertain and reassess the risk profile of the Corporate Debtor which may change from time to time on several micro and macro factors including business performance by the Corporate Debtor due to technological and economical changes.

Bank also take this opportunity during annual renewal to ensure with the Corporate Debtor is meeting the stipulated conditions of sanction of facilities and thus through monitoring ensure compliance.

Yet another important aspect for review is to adjust credit limits, which can be adjusted depending upon business growth and challenges and keeping in mind with the increase or decrease requirement of funds by the Corporate Debtor as well as their capacity to repay the same. This occasion provide opportunity to banks to revisit the sanction limit as well as drawing power linked to such sanction.

We understand that although the sanction limit may remain the same, yet drawing power may be increased or reduced depending upon the result of such review/ renewed. In case such facilities are not requested to be reviewed or renewal by the Corporate Debtor, bank may contain clause regarding implication of non renewal, inter-alia, including making the drawing power of the Corporate Debtor as “zero” and not honoring the cheques issued by the Corporate Debtor. Due to higher risk profile consequent to non renewal of such facilities, the interest is also generally increased by banks.

We understand that if bank do not follow such standard practice of review/ renewal of financial facilities of the borrowers on regular basis, the bank itself may attract adverse non compliance risk from the regulator i.e., RBI.

Thus, the regular review/ renew of cash credit facilities is considered to be critical and vital for risk management, compliance and maintaining the account of the Corporate Debtor as standard account and failing of which such accounts are liable to be declared as an NPA with drawing power as “zero”.

We also observe that despite several attempts made by the bank i.e., writing letter, followed by reminder, letter by bank’s advocate and team visit to the Corporate Debtor by bank to pursue Corporate Debtor to complete formalities of review/ renew, the Corporate Debtor failed to do so. Thus, one of material stipulated condition of sanction letter was breached by the Corporate Debtor and as intimated by bank to the Corporate Debtor in advance that drawing power would become zero, which bank did. We do not find any irregularities in it. There was also case of non payment of interest payment, thus the account of the Corporate Debtor became NPA. We find that the Corporate Debtor committed default and there is no error in the Impugned Order on this account.

As regard allegation of the Appellant about non disclosure of date of default in part IV of the Section 7 application by the Respondent No. 2, we note that in part IV the amount has been mentioned as Rs. 24,24,42,995/- and the detailed working for the same was attached as the enclosure marked as Appendix A given all the details. As such the allegation of the Appellant is not found to be true.

We will now like to refer to then prevailing RBI Guidelines dated 01.07.2014 under caption “Master Circular No. DBOD No. BP.BC.1/21.04.048/2013-14 dated July 1, 2013”.

The relevant portion of the RBI Guidelines applicable to the present case is contained in Para 2.1 and 2.2 which reads as under :-

From the above it is seen that the account becomes “out of order in terms of Para 2.2 of RBI Circular dated 01.07.2013 for cash credit facilities if the outstanding balance remains continuously in excess of sanction limit/ drawing power.

We note that although the outstanding balance in the account of the Corporate Debtor may be less than sanction limit yet the account will be treated as “out of order”. If the following conditions are met :-

We put a pointed query to both the parties to seek clarification regarding word used sanction limit/ drawing power in the RBI Circular i.e., whether such sanction limit and drawing powers are to be read as :-

The Respondent No. 2 bank clarified that account of the Corporate Debtor remains in order till both the conditions i.e., sanction limit as well as drawing power are met. The Respondent No. 2 bank further clarified that it is possible to have sanction limit at higher value and to have the drawing power at a lower value which will depend upon several factors from time to time.

We also note that as per sanction letter, the drawing power was to become ‘zero’ in cases the terms and conditions of sanction are not met which included the application on the part of the Corporate Debtor to get it reviewed/renewed within the time before expiry of the cash credit facility approval.

We have already noted that the Respondent No. 2 bank has written two official letters to the Corporate Debtor to get it reviewed/ renewed which was followed by yet another letter by the banks advocate to Corporate Debtor and followed by personal visit by bank officials for the same. Despite these opportunities, the Corporate Debtor could not get its cash credit facilities account review/ renewal.

It is a fact that the Corporate Debtor could not get its accounts reviewed/ renewed in time and also could not take action to rectify regularities pointed out that banks (as noted earlier), as such the Respondent No. 2 was within its right in declaring the account of Corporate Debtor as NPA and initiate Section 7 application.

The submission made by the Appellant that the sanction limit was always less than Rs. 20 Crores, does not seem to be make any impact in this case. Although, the Corporate Debtor might have drawn or utilized the CC limit less than sanction limit of Rs. 20 Crores that the Corporate Debtor ignored the fact that interest became due which was not paid on time and became over due which made the account of the Corporate Debtor as “out of order” along with the conditions regarding non review/ non renewal of the cash credit facilities by the Corporate Debtor.

In view of above detailed observations, we find that the Adjudicating Authority has correctly passed the Impugned Order.

In fine the appeal devoid of any merit, fails and stands rejected. No cost. IA, if any, are closed.