Axis Bank Limited vs Midas Petrochem Private Limited

PER: SH. CHARANJEET SINGH GULATI MEMBER (TECHNICAL)

The Present Company Petition (IB) 989 (MB)/2023 is filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by Axis Bank Limited (“Financial Creditor/Petitioner”) for initiating Corporate Insolvency Resolution Process (“CIRP”) against M/s. Midas Petrochem Private Limited (“Corporate Debtor/Respondent”) for a default amount of Rs. 32,24,43,542.14 (Rupees Thirty-Two Crores Twenty-Four Lakhs Forty-Three Thousand Five Hundred and Forty-Two and Fourteen paise only) as on 31.07.2023 along with interest and other charges as per contractual rate.

The Corporate Debtor in order to meet its working capital requirements availed loan from the Financial Creditor in the following manner:

Further certain modifications sought by the Corporate Debtor in original Credit facility dated 12.09.2016 were duly accepted by the Financial Creditor vide letter dated 28.09.2016.

The Original Credit Facility were sanctioned to the Corporate Debtor by way of a takeover of the outstanding amounts from the Bank of India, therefore the Corporate Debtor approached the Financial Creditor vide its letter dated 30.09. 2016, enclosing foreclosure letter dated 29.09.2016, received from the Bank of India, Mahalakshmi Branch, Mumbai and effected the disbursement out of the Original Credit Facility by remitting the outstanding amount of Rs. 14,79,80,109.65/- in favour of Bank of India.

In the year 2017 the Corporate Debtor again approached the Financial Creditor to enhance the Cash Credit facility of 15,00,00,000/- to 23,00,00,000/-. The same was sanctioned by the Financial Creditor vide its sanction letter dated 21.11.2017.

The Cash Credit facilities availed by the Corporate Debtor were subsequently closed by the Corporate Debtor.

Further in August 2020, the Corporate Debtor approached the Financial to avail an additional credit facility of Rs.4,95,00,000/- under the Emergency Credit Line Guarantee Scheme (hereinafter referred to as the "ECLGS"), The same was granted to the Corporate Debtor vide Sanction Letter dated 25.08.2020 and a Term Loan cum Hypothecation document dated 07.09.2020 was executed between the Financial Creditor and Corporate Debtor.

Further to enable the Borrower to meet its funding requirements due to sudden outbreak of the COVID-19 Pandemic the Financial Creditor increased the aggregate Credit Facilities availed by the Corporate Debtor from the financial Creditor to Rs. 27,95,00,000/- vide its sanction Letter dated 23.06.2021.

On 26.11.2020 a letter of Acknowledgement was executed between the Financial Creditor and its guarantors acknowledging their indebtedness as on 13.10.2020 to the extent of 25,64,36,120.10/- in respect of total credit facilities granted by the financial Creditor.

At the time of sanctioning the Credit Facilities, the Corporate Debtor had agreed to abide by terms and conditions of Sanction Letters and had undertaken to repay the outstanding dues on the respective due dates as per the terms therein. However, the Corporate Debtor defaulted on repaying the amount due and payable to the Financial Creditor.

Despite sending repeated requests and reminders, the Corporate Debtor failed and neglected to repay the outstanding amount due and payable to the Financial Creditor. As result the account of the Corporate Debtor became Non-Performing Asset ("NPA") on 28.01.2022.

The Financial Creditor vide its letter dated 29.04.2022 ("Recall Notice") recalled the entire Credit Facilities availed by the Corporate Debtor together with further interest on the amount outstanding.

Further a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act) was sent on 23.06.2022, which was later withdrawn and replaced by notice dated 26.09.2022, calling upon the Corporate Debtor and its guarantors to make payment of the dues amounting to Rs. 28,65,81,700.14 outstanding repayable by them as on 31.08.2022.

The Corporate Debtor instead of making payment as and way of delay tactics sent emails dated 27.06.2022, 19.08.2022 and 15.09. 2022, to the Financial Creditor through their Advocates. The Financial Creditor has duly replied to all the emails sent by the Corporate Debtor.

The default occurred on 31.10.2021 when the account of the Corporate Debtor with the Financial Creditor became irregular and overdrawn.

The account of the Corporate Debtor with the Financial Creditor became NPA on 28.01.2022 and the Recall Notice was issued to the Corporate Debtor on 29.04.2022, thus the petition is filed within the limitation period of three years from the date of default.

The Corporate Debtor filed reply dated 03.04.2024 taking various defense which can be summarized as below: -

The Financial Creditor filed an Additional Affidavit dated 15.03.2024 to bring on record updated NeSL Certificate dated 06.03.2024.

The Financial Creditor had duly paid amounts of Rs.14,79,80,109.65/- and Rs. 8 crores to Bank of India and Yes Bank Limited, respectively, on behalf of the Corporate Debtor in order to take over the outstanding amounts under the pre-existing facilities enjoyed by the Corporate Debtor from Bank of India and Yes Bank Limited, in accordance with the terms set out in its sanction as set out in the Company Petition.

The amounts under the Original Credit Facility and Enhanced Credit Facility were disbursed to the Corporate Debtor from time to time which can be seen from the statement of account for the period from 30.09.2016 to 27.07.2023 and Term Loan cum Hypothecation Agreement executed by the Corporate Debtor which explicitly states that the interest was payable monthly failing which it would be considered as an event of default.

The Corporate Debtor has also admitted to having availed an additional limit for an amount of Rs.4.95 crores under the "ECLGS Facility which is reflected in the statement of account for the period from 07.08.2020 to 27.07.2023

Further, National Credit Guarantee Trustee Company Limited (hereinafter referred to as the 'NCGTC') has also provided a clarification that the interest on the credit facility under ECLGS is payable even during the moratorium of 1 year granted on repayment of principal loan which means that it is payable from the day of disbursal.

The outstanding debt has also been authenticated by the Information Utility, NSEL, after following due process and under notice to the Corporate Debtor.

The Corporate Debtor executed various facility and security documents in favour of the Financial Creditor and provided Letters of Acknowledgement of the outstanding dues from time to time which shows various Credit facilities were sanctioned by the Financial Creditor to the Corporate Debtor, and disbursals were made to the Corporate Debtor against time value for money which establishes the existence of 'debt' and 'financial debt' under the Code.

The Corporate Debtor is clearly ignorant that a board resolution passed by the board of directors authorizing an employee of the company, inter alia, to sign the Company Petition on behalf of the Financial Creditor is a legally valid document for authorization.

The ECLGS facility has been disbursed as per Borrower's request from time to time. The Corporate Debtor had itself requested the Financial Creditor to utilise the amounts under ECLGS Facility towards the existing facilities since its business was affected due to COVID 19 and could not have serviced the existing credit facilities.

The Financial Creditor had renewed/reviewed the Enhanced Credit Facility and the ECLGS Facility on 23.06.2021 which is itself beyond the timeframe under section 10A of IBC, i.e. 25.03.2020 to 24.03.2021.

The Corporate Debtor had committed a default when it failed to service the interest payable on the ECLGS Facility from 31.10. 2021.Therefore, the account of the Corporate Debtor turned NPA after 90 days, i.e. on 28.01.2022. It is a well-established principle that the renewed terms/ modified terms supersede the original agreement therefore default under the restructured facilities is distinct event from the original default. The same was held by the NCLAT in the case of Pradeep Madhukar More Vs Central Bank of India (Company Appeal (A7) (Insolvency) No.837 of 2023

The Code does not recognize the Framework for Revival of MSME, 2015 and does not stipulate that the instructions under the Framework for Revival of MSME, 2015 have to be abided by the Bank before initiating proceedings under the Code. The Resolution Framework for COVID 19 Related Stress to MSME is in alternate to the mechanism provided to address the default of the Corporate Debtor for its benefit and interest of all the stakeholders. This Tribunal in the matter of Small Industries Development Bank of India vs Viola Resorts Pvt. Ltd. (Company Petition No. 61 of 2023) held that the RBI Framework benefit is an alternate mechanism to address the default of the Corporate Debtor for its benefit and interest of all the stakeholders. The denial of framework benefit is not tenable ground in consideration of an application us 7 of the Code.

As per Section 238 IBC supersedes all other prevalent laws despite inconsistencies or incongruous clauses including the MSME Development Act, 2006.

The case of M/S. Pro Knits Vs the Board of Directors of Canara Bank (SPL (C) No. 7898 of 2024) submitted by the Corporate Debtor since the Hon'ble Supreme Court itself did not reverse the declaration of NPA by the concerned banks and it only gave its observation.

The Department of Financial Services had introduced ECLGS with an aim to provide 100% Guarantee coverage to member lending institutions, like the Financial Creditor, for providing working capital term loans to Borrowers. The government has enabled the banks to provide additional credit facilities with a promise/guarantee to refund the 100% amount that could not be paid by the borrowers, however, subject to the condition, inter alia, that the banks take appropriate legal action to recover the said outstanding dues from the borrowers. The refund process entails the filing of Interim and Final Claim before the NCGTC.

Exhibit A to the present Affidavit in Rejoinder as follows;

The fact that Financial Creditor bank has filed its claim to NCGTC itself goes to show that the present Petition is not being filed with an object of 'Recovery' but to revive the business of the Corporate Debtor.

The Financial Creditor is very well within its right to invoke the guarantee with the NCGTC and it does not concern the Corporate Debtor. The guarantee only covers Rs.4.95 crores and not the remaining outstanding dues of more than Rs. 28 crores.

The closure of the business activity of the Corporate Debtor was a result of the violation of RBI guidelines and Central Government Scheme by the Financial Creditor is devoid of any merit.

The Corporate Debtor to utilize the credit facilities provided by the Financial Creditor which have been extended and renewed from time to time and the failure to apply under the Framework for Revival of MSME, 2015 and other schemes launched by the RBI that led to the closure of its business.

The object of the Code is for revival of the Corporate Debtor and it should not be used as a tool for recovery and hence the present Company Petition deserves to be admitted to protect the interest of all the stakeholders.

Heard the Ld. counsel for the parties and perused the records.

The Corporate debtor submitted that this Tribunal lacks the jurisdiction to entertain the present Petition as despite being registered as an MSME the Corporate Debtor was not provided with the benefit under the Framework for Revival and Rehabilitation of MSMEs ('Framework), notified in pursuance to section 9 of the MSME Development Act, 2006. Therefore, the Petition is in violation of the MSME Development Act, 2006.

It was submitted that the Financial Creditor has failed to disburse the Emergency Credit Line Guarantee scheme (ECLGS) funds as mandated by the scheme and has utilized the said ECLGS funds towards overdue outstanding loans and has adjusted the balance against monthly interest dues thereby violating guidelines under the Reserve Bank.

It was also submitted that the Financial Creditor has failed to produce any evidence to show existence and disbursement of the debt claimed.

It is also contended that Ms. Payal Rajiv Kapila of Axis Bank is not a person duly authorised to act on behalf of the Financial Creditor or to initiate any Corporate Insolvency Resolution Process.

Also, that the default transpired in September 2020 and November 2020, falling within the period from 25.03.2020 to 24.03.2021, under section 10 A of the Code and therefore, the present application cannot be filed.

Per Contra, the Financial Creditor submitted that the benefit under the Framework for Revival and Rehabilitation of MSMEs is an alternative mechanism for recovery of debt remedies. As per Section 238, IBC supersedes all other prevalent laws despite any inconsistencies or incongruous clauses including the MSME Development Act, 2006.

It was submitted that ECLGS facility were disbursed as per Borrower's request. The Corporate Debtor had itself requested the Financial Creditor to utilise the amounts under ECLGS Facility towards the existing facilities since its business was affected due to COVID 19 and could not have serviced the existing credit facilities.

Further the Original Credit Facility and Enhanced Credit Facility were disbursed to the Corporate Debtor which can be seen from the statement of account for the period from 30.09.2016 to 27.07.2023 and that it has availed an additional limit for an amount of Rs.4.95 crores under the "ECLGS Facility which is reflected in the statement of account for the period from 07.08.2020 to 27.07.2023.

It was submitted that a board resolution was passed by the board of directors authorizing Ms. Payal Rajiv Kapila, inter alia, to sign the Company Petition on behalf of the Financial Creditor which is a legally valid document for authorization.

The Financial Creditor had renewed/reviewed the Enhanced Credit Facility and the ECLGS Facility on 23.06.2021 which is itself beyond the timeframe under section 10A of IBC, therefore, there is no bar on filing application under Section 7 of IBC.

In regard to the contention raised by the Corporate Debtor that this tribunal does not have jurisdiction as the Financial Creditor is first bound to Act in accordance with provisions of MSME Act, 2006 and Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises under MSME Act, it is stated that there is no such stipulation provided in the Code. Compliance and prior action in terms of MSME Act is not prerequisite or mandatory before any petition under Section 7 of the Code could be entertained. IBC aims at resolution of the Corporate Debtor and for attaining the same various provisions and regulations are enshrined in the Code. Under Section 7 Petition, the Tribunal has to merely see whether there is a debt and default in the matter before it.

We are supported by the judgement of Hon’ble Supreme Court in Innovative Industries Limited vs. ICICI Bank and Anr [(2018) 1 SCC 407] wherein it was held as follows:

Therefore, as long as there is debt and default has occurred, this tribunal would have jurisdiction to entertain the case.

Further the Corporate Debtor has raised contention on that Ms. Payal Rajiv Kapila, Axis Bank is not a person duly authorised to act on behalf of the Financial Creditor or to initiate any Corporate Insolvency Resolution Process. In this regard, we have perused all the documents annexed by the Financial Creditor to the Petition. The Financial Creditor vide its Board Resolution dated 10.07.2019 has duly authorized Ms. Payal Rajiv Kapila to sign and initiate Insolvency Resolution Process. Therefore, this contention of the Corporate Debtor also stands rejected.

Further having considered the submissions made by the parties, the other issues to be decided by the Adjudicating Authority are as follows:

In regards to the first issue we note that the Corporate Debtor had approached Yes Bank and Bank of India to avail various Original Credit Facilities. Further the Corporate Debtor approached the Financial Creditor and requested it to take over its pre-existing facilities enjoyed by the Corporate Debtor from Bank of India and Yes Bank Limited. Accordingly, Axis Bank through its various sanction letters disbursed loan to the Corporate Debtor which is mentioned as under:

The Financial Creditor paid Rs.14,79,80,109.65/- on 30.09.2016 to Bank of India and Rs. 8 crores to Yes Bank Limited, respectively, on behalf of the Corporate Debtor. As the loan/ facilities were taken over the by the Financial Creditor the Corporate Debtor is now liable to pay the Financial Creditor the total debt of Rs. 22,79,80,109.65/- along with interest.

Further the Corporate Debtor on 25.08.2020 approached the Financial Creditor to avail Additional Credit facilities under Emergency Credit Line Guarantee Scheme (ECLGS) of Rs.4.95 crores. In furtherance to the same a term Loan cum Hypothecation Agreement dated 7.09.2020 was executed between the parties. It is to also note that this ECLGS facility was utilised by the Financial Creditor towards payment of the Original Credit existing facilities since the business of the Corporate Debtor was affected due to COVID 19 and it was unable to repay the existing debt. In the agreement dated 07.09.2020 it was clearly stated that interest applicable on the ECLGS facility was payable monthly failing which it would be considered as an event of default. Eventually the Corporate Debtor failed to pay interest on ECLGS facility, and therefore default occurred on 31.10.2021. Subsequently the account of the Corporate Debtor with the Financial Creditor became NPA on 28.01.2022.

We also note that the total debt due and payable as on 31.10.2021 is as follows:

Further the Corporate Debtor had executed Joint and Several Demand Promissory notes in favour of the Financial Creditor promising to pay back the loans availed by the Corporate Debtor along with interest when called for.

Also, the Corporate Debtor vide its Letter of Acknowledgement dated 26.11.2020 has acknowledged the debt, due and payable to the Financial Creditor. The relevant extracts of letter dated 26.11.2020 are reproduced herein under:

From the facts and discussions above it is clear that, there is a Financial Debt exceeding much more than 1 crore on the Corporate Debtor.

It is also observed that Recall Notice dated 29.04.2022 and Demand Notice dated 23.06.2022 have been served on the Corporate Debtor. Despite serving the same the Corporate Debtor has failed the repay the amount of debt.

It is to note that the Petitioner has also placed in its Additional Affidavit FORM D issued by NeSL wherein the status of default is stated as “AUTHENTICATED”. Further we note that in the said Form the date of default is mentioned as 23.03.2023 and the default amount is Rs.20,89,19,585.00. Therefore, the default in repayment is also established.

In regards to the third issue, we say that the Corporate Debtor submitted that default in the present case has transpired in the month of September 2020 and November 2020, However, the Financial Creditor has stated that renewed ECLGS Facility itself was availed on 23.06.2021. Further the ECGLS funds were adjusted against the loans/interest due; and default occurred when interest due on 31.10.2021 on ECGLS were not paid, leading to issue of Recall Notice dated 29.04.2022 and demand notice dated 23.06.2022.

We note that the Corporate Debtor on 25.08.2020 availed Additional Credit facilities of Rs. Rs.4.95 crores under Emergency Credit Line Guarantee Scheme from the Financial Creditor. This additional Credit Facility availed was adjusted to pay the Original Credit facility availed by the Corporate Debtor from Axis Bank.

It is to further note that a Loan cum Hypothecation Agreement dated 7.09.2020 was executed between the Financial Creditor and Corporate Debtor wherein it was stated that the interest applicable on the ECLGS facility was payable monthly failing which it would be considered as an event of default. Once the entire amount of Rs.4.95 crore was exhausted the Financial creditor failed to pay interest, and such default occurred on 31.10.2021. The date of default is 31.10.2021 which is beyond the period of IBC specified under provision of Section 10 A, Hence the present Petition is not hit by the provisions of Section 10 of IBC.

Further it is a well-settled position that the Adjudicating Authority has to determine whether there is debt and default and if it is satisfied that a default has occurred, then the application under section 7 of the Code must be admitted unless it lacks other necessities as mandated thereunder.

We are supported by the decision of Hon’ble Supreme Court in Innovative Industries Limited vs. ICICI Bank and Anr [(2018) 1 SCC 407] wherein it was held as follows:

Given the facts and circumstances of the case and discussions hereinabove, the Company Petition bearing no.989 of 2023 is admitted and ordered as follows: