Jagdish R. Pahuja vs Punjab National Bank & Anr.

Per: Barun Mitra, Member (Technical)

The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 (‘IBC’ in short) by the Appellant arises out of the Order dated 08.12.2025 (hereinafter referred to as ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-VI) in C.P. (IB) No. 294/MB/2025. By the impugned order, the Adjudicating Authority has admitted the Section 7 application filed by the Financial Creditor-Punjab National Bank and admitted the Corporate Debtor-Damara Gold Pvt. Ltd. into the rigours of Corporate Insolvency Resolution Process (“CIRP” in short). Aggrieved by the impugned order, the present appeal has been preferred by the suspended director of the Appellant-Corporate Debtor.

Coming to the brief facts of the case at hand, the Appellant had approached the Financial Creditor-Respondent No.1 for a Term Loan and Bank Guarantees (“BG” in short) which Term Loan of Rs 5,70,00,000/- and BGs amounting to Rs 21,50,00,000/- respectively was sanctioned vide sanction letter dated 17.03.2011. These facilities were disbursed on various dates and also renewed from time to time with the last such renewal done vide sanction letter dated 17.03.2022 in lieu of which certain properties situated at Mumbai were mortgaged as security. In 2023, as the BGs were invoked by the beneficiaries for a total amount of Rs 54,34,00,000/-, the Respondent No.1 charged the said amount to the Cash Credit Account of the Corporate Debtor. The Appellant purportedly became irregular in making payments with respect to the Cash Credit Account. The Appellant failed to regularize Cash Credit Account, hence, on 30.06.2023 their account was classified as NPA. The Respondent No.1 claimed a total amount of Rs 39,19,52,518.04/- including cash credit facility of Rs 38.32 Cr. and Term to which the Appellant has failed to repay the same. On 10.08.2023, a notice under Section 13(2) of SARFAESI Act was issued to the Appellant which the Appellant failed to reply. The Respondent No.1 on 18.12.2024 filed the Section 7 application which has been allowed by the Adjudicating Authority on 08.12.2025. Aggrieved by the impugned order, the present appeal has been filed by the Appellant.

Making submissions on behalf of the Appellant, Shri Krishnendu Datta, Ld. Senior Counsel submitted that the Respondent No.1 had claimed invocation of BGs aggregating to Rs 54.34 Cr. while their invocation letters reflected only Rs 40.65 Cr. Besides inconsistency in the amount claimed against BGs and wrongful inclusion of BG renewal charges; claim period guarantee charges; unexplained debits etc., it was also added that the claim of the Respondent No.1 was unsupported by documentary evidence such as Bank Statements, SWIFT confirmations, NEFT/RTGS etc. Submission was also pressed that there is no Tripartite Guarantee Arrangement, Inter-Bank Agreement or contractual document which authorised Respondent No.1 to honour such invocations of guarantees raised by HDFC Bank or ICICI Bank. It was also added that the Summary of Accounts of Respondent No.1 did not align with the claims made by them in Part-IV which shows that the alleged debt had not crystallised for purposes of admission of Section 7 application. It is also contended that the Respondent No.1 had recorded multiple dates of default and different dates of NPA classification in multiple proceedings undertaken by the Respondent No.1. It was vehemently contended that the Adjudicating Authority had erroneously admitted the Section 7 application without appreciation of the fact that the Appellant being an MSME, it was entitled to submit a restructuring proposal to Respondent No.1. This restructuring proposal having been submitted by them ought to have been considered fairly by the Respondent No.1 in terms of RBI Circular dated 29.05.2015. It was emphatically asserted that consideration of their restructuring proposal was mandatorily incumbent upon the Respondent No.1 for their consideration in terms of the judgment of the Hon’ble Supreme Court in M/s. Pro Knits vs. The Board of Directors of Canara Bank & Anr. (2024) 10 SCC 292. However, the Respondent No. 1 had rejected the same on the flimsy pretext of non-completion of stock audit of the Appellant. While admitting that the Appellant had earlier been prevented by circumstances beyond its control to have the stock audit conducted, they had subsequently requested Respondent No. 1 on 03.10.2025 to conduct the stock audit despite and the Respondent No. 1 having failed to do so acted in contravention of the RBI Circular. It was added that now that the custody of the Corporate Debtor is with the Interim Resolution Professional (“IRP” in short), stock audit can be conducted to enable restructuring by the Respondent No.1-Financial Creditor. It is also submitted that the Appellant had made substantial payments aggregating to Rs. 21.72 Cr. against the total BG invocations of Rs. 40.65 Cr. clearly demonstrating their intent to resolve the dues as well as their repayment capacity. In such circumstances, the Adjudicating Authority should not have pushed the Appellant-Corporate Debtor into the rigours of the CIRP, particularly when the objective of the IBC is resolution and value maximisation and not punitive insolvency proceedings against a substantially compliant borrower.

Refuting the contentions of the Appellant, Shri Sunil Fernandes, Ld. Senior Counsel on behalf of the Respondent No.1 and the IRP submitted that the Corporate Debtor had categorically admitted that it had availed various credit facilities from the Financial Creditor-Respondent No.1. The loan facility is also authenticated by loan documents as well as account statements for the Term Loans and Cash Credit Account as well as NeSL data. It was also submitted that the Corporate Debtor cannot backtrack on the terms of the Sanction Letter having put endorsement signature on the sanction letter. The allegation made by the Corporate Debtor that unauthorized charges were levied by the Financial Creditor is also misplaced as these charges were levied as per the terms and conditions of the sanction letter and the loan document. It was contended that the Adjudicating Authority in dealing with Section 7 application is not expected to interfere with the terms of the contract/loan document entered into between the Financial Creditor and Corporate Debtor and as long as the debt and default exceeding the threshold limit of Rs 1 Cr. is proven, that suffices for admission of Section 7 application. Rebutting the argument canvassed by the Appellant that the Financial Creditor had unilaterally invoked the BG, it was submitted that the Corporate Debtor while approaching the Financial Creditor for restructuring of the cash credit facility, had acknowledged in their communication dated 02.09.2024 the factum that the BGs issued by the Financial Creditor were encashed, hence, the Corporate Debtor was aware of the invocation of the BG by the Financial Creditor. Rebutting the contention of the Appellant that the request made on 02.09.2024 for restructuring of the MSME account under the RBI Notification dated 29.05.2015 had not been considered by the Respondent No.1, it was asserted that this was misconceived as the Appellant’s request for restructuring was responded by them on 07.10.2024 which pre-dated the filing of the Section 7 application. On the applicability of the ratio contained in the judgment of the Hon’ble Supreme Court in Pro Knits judgment supra, the Ld. Sr. Counsel representing Respondent No.1 added that while the MSME Framework Notification of 29.05.2015 was binding upon lending banks, however, for any MSME to avail this benefit was also required to comply with the procedural requirements under the said Framework. In the present case, though the Appellant had been requested to permit stock and book audit and to allow inspection of plant to evaluate the feasibility of restructuring as per MSME framework, there was utter lack of response from the Appellant. Even an email sent as late as on 11.03.2025 by the Respondent No.1 requesting the Appellant to cooperate with the audit process and provide access to the secured assets which was not responded to by the Appellant. This clearly shows that the plea of restructuring has been contrived as a belated afterthought to derail the CIRP process. Further, it is submitted that, in any event, the Appellant being an MSME is eligible to participate in the CIRP process and is not hit by the disqualification under Section 29A of the IBC. Hence, with debt and default being proven, the impugned order admitting the Section 7 application is well-reasoned and does not warrant any interference.

Making submissions on behalf of Respondent No.2-IRP, it was submitted that since the Appellant was dealing in the business of manufacturing gold jewellery, it was of critical importance for the IRP to take immediate custody of the high-value assets for its protection and preservation. An e-mail dated 10.12.2025 was sent by the IRP to the Ex-Directors to handover the assets/records of the Appellant followed by visits to the factory premises of the Corporate Debtor on 11.12.2025 which did not yield any result as the premises was found locked. The Appellant instead of handing over charge of the factory premises alongwith assets/records immediately upon commencement of the CIRP made a request for further time to hand over charge of the assets and records which was in violation of the clear mandate of IBC. On 21.12.2025, the Appellant inter alia informed that the Corporate Debtor had already leased out their machines to Damara Advance Manufacturing Solutions Pvt. Ltd. w.e.f. on 01.04.2025 in which entity, the Appellant’s son is one of the directors giving rise to strong apprehension that the valuable assets of the Corporate Debtor are being diverted. The Appellant has also claimed on 12.12.2025 that the factory premises had been vacated upon expiry of lease on 10.10.2025. Seen together, all these acts on the part of the Corporate Debtor demonstrates continued non-cooperation by them during the CIRP aimed at frustrating the CIRP process.

We have duly considered the arguments advanced by the Learned Counsel for the parties and perused the records carefully.

The first and the foremost question that requires to be answered is whether the Adjudicating Authority has rightly returned the finding that debt and default on the part of the Appellant-Corporate Debtor in the repayment of dues of the Respondent No.1-Financial Creditor is fully established and basis this finding to have admitted the Section 7 application.

It is a well settled legal proposition that the Adjudicating Authority while adjudicating a Section 7 application is empowered only to verify whether a default has occurred or not and basis the findings thereon can admit or reject a Section 7 application. The celebrated judgment of the Hon’ble Supreme Court in Innoventive Industries Ltd. Vs ICICI Bank (2018) 1 SCC 407 has laid down the guiding precepts in para 28 of its judgment which is as reproduced below:

Having noted the guiding precepts for admission or rejection of Section 7 application, we now proceed to look at the Section 7 petition which was filed by the Respondent No.1 before the Adjudicating Authority. The foundation of any application under Section 7 is default committed by the Corporate Debtor in the repayment of its loan/facilities as depicted in Part-IV of the said application. In the present case, in Part-IV of the application under which the particulars of financial debt have been enumerated and explained by the Respondent No.1, it shows that the total amount of debt claimed was Rs 39,19,52,518.04/- only which included the amount claimed to be in default arising out of the Cash Credit Facility and the Term Loan Agreement including charges, interest and penal interest. The date on which default occurred has been shown as 30.06.2023.

When we look at the impugned order, we find that the Adjudicating Authority has satisfied itself that the Financial Creditor had placed on record the necessary documents including loan documents, security documents and account statements to substantiate the sanction and disbursal of credit facilities to the Corporate Debtor. The impugned order also notes that the NeSL record of default is under the “Authenticated” status category. Further the Adjudicating Authority has also taken notice that the Corporate Debtor had not denied the fact that it had availed the loan facilities from the Respondent No.1. This coupled with the fact that the Appellant had also approached the Respondent No.1 with a letter dated 02.09.2024 seeking restructuring of their loan facility was held by the Adjudicating Authority to clinch the fact that this letter was an admission of debt on part of the Appellant qua the Respondent No.1 and that the restructuring proposal was an acknowledgement by the Corporate Debtor that it was in default.

At this stage, it may be useful to advert attention to the relevant extracts of the impugned order as reproduced below:

When we look at the above excerpts of the impugned order, we notice that the Adjudicating Authority in the impugned order has duly considered all relevant facts on record placed by both the parties in reaching at their conclusion that the Respondent No.1 had successfully established that they had sanctioned and disbursed loan facility to the Corporate Debtor and that the latter has committed default in repaying the same and that the said default exceeded the threshold of Rs 1 Cr. The Adjudicating Authority has also noticed the primary defence raised by the Corporate Debtor in that the Financial Creditor had unilaterally invoked the BGs though they were not bound to honour these guarantees thus making an unilateral and unauthorized adjustment beyond the sanctioned limit without knowledge of the Corporate Debtor. However, the Adjudicating Authority held that this objection of the Appellant was not sustainable since the Appellant in the restructuring proposal letter of 02.09.2024 have on their own volition acknowledged the invocation of BGs and non-payment by them.

Coming to our findings, it is an undisputed fact that the Corporate Debtor had issued a letter dated 02.09.2024 by which they approached the Respondent No.1 for restructuring of the Cash Credit Facility. We are inclined to agree with the observation of the Adjudicating Authority that if the Appellant had genuinely entertained any objection to the unilateral invocation of BGs by the Respondent No.1 without their knowledge, there should have been some signs of demur or protest registered on this score in their letter dated 02.09.2024. The Appellant has failed to place on record any document or material to show that they had raised such objections to the invocation of BGs on any occasion either before their letter dated 02.09.2024. This defence therefore seems to be an eye wash which was clearly contrived as an afterthought. We are of the view that Adjudicating Authority has rightly disregarded this defence and held it to be unsustainable. We therefore concur with the findings and conclusions drawn by the Adjudicating Authority of existence of the debt and default and that the default amount exceeded the statutory threshold of Rs 1 Cr. Once the Adjudicating Authority is satisfied that there exists a debt and that a default had occurred, there is no other recourse left for the Adjudicating Authority but for allowing admission of the Section 7 application as has been enunciated in the Innoventive judgment supra of the Hon’ble Apex Court. In the present facts of the case, the Adjudicating Authority was not left with any discretion but to reject the Section 7 application and hence we do not find any infirmity in the impugned order.

This now brings us to the other defence raised by the Appellant that being an MSME, they had submitted a restructuring proposal on 02.09.2024 prior to the filing of the Section 7 application by the Respondent No. 1 and that the said proposal ought to have been considered before admission of the Section 7 application by the Adjudicating Authority. It is the case of the Appellant that in terms of RBI Circular dated 29.05.2015, this restructuring proposal had to be necessarily considered by the Respondent No. 1. To buttress their argument, attention was adverted to judgement of the Hon’ble Supreme Court in Pro Knits judgement supra wherein it was held that the terms of the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises as notified by the Central Government vide notification dated 29.05.2015 was needed to be followed by all lending banks/secured creditors before the account of any micro, small and medium enterprise is classified as non-performing asset. It was pointed out that the Adjudicating Authority inspite of noticing that a restructuring proposal was submitted by the Appellant on 02.09.2024 did not dwell upon the fact that the Respondent No. 1 did not seriously appraise their restructuring proposal thus violating the canons of the RBI Circular as well as the ratio contained in Pro Knits judgement supra. It is also contended that it was misplaced on part of the Respondent No.1 to reject the restructure proposal on the ground of non-completion of a stock audit at a time when the Appellant had consented to stock audit evaluation exercise. Moreover, since the Corporate Debtor in praesenti was already under the control of IRP, it did not stand to reason for the Respondent No. 1 to contend that the Appellant was creating hurdles in the conduct of the stock evaluation exercise. It is also contended that when they requested Respondent No. 1 on 03.10.2025 to conduct the stock audit, the Respondent No. 1 failed to do so which was in violation of the mandate of the RBI Circular.

Per contra it is the contention of the Respondent No.1 that they had duly considered the request of the Appellant for restructuring and on 07.10.2024 had requested the Appellant to permit conduct of stock and book audit and inspection of plant to evaluate the feasibility of restructuring as per MSME framework. It was emphatically asserted that while the RBI Circular dated 29.05.2025 was binding on lending institutions, the Hon’ble Supreme Court in Pro Knits judgement supra made it amply clear that there was a reciprocal obligation on the part of the MSME to also be diligent and show compliance to the procedural requirements under the Framework for completion of the restructuring exercise. The Auditor of the Respondent No.1 had issued ten emails calling upon the Appellant to permit inspection and audit of stocks but to no avail. The lack of response from the Appellant clearly shows deliberate non-cooperation. Even an email as late as on 11.03.2025 was issued by the Respondent No.1 to the Appellant requesting them to cooperate with the audit process and provide access to the secured assets. Even this email went un-responded which shows that the Appellant was not cooperating and now raising this plea of restructuring as an afterthought to obstruct the insolvency resolution process.

At this stage it may be useful to advert our attention to the judgement of the Hon’ble Supreme Court in Pro Knits supra and note the relevant extracts thereof as reproduced below:

When we look at the above excerpts of the Pro Knits judgement supra, we entertain no doubts in our minds that The Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises as notified by the Central Government vide notification dated 29.05.2015 safeguarding the interest of the defaulters-borrowers for giving them opportunities to discharge their debt has been adopted by the Reserve Bank of India in exercise of the powers conferred by Sections 21 and 35-A of the Banking Regulation Act leading to issue of Reserve Bank of India [Lending to Micro, Small and Medium Enterprises (MSEM) Sector] Directions, 2016, which is binding on all scheduled commercial banks. The terms of this Framework needs to be followed by the lending banks/secured creditors before the account of an MSME is classified as non-performing asset. Be that as it may, the judgement also emphasises on a reciprocal obligation on the MSMEs to be vigilant and follow the process laid down under the said Framework by producing authenticated and verifiable documents/material to prove its eligibility to avail benefit of the said Framework.

The judgement of the Hon’ble Supreme Court in Pro Knits supra has been reaffirmed and elaborated by another judgment of the Hon’ble Apex Court in Shri Shri Swami Samarth Construction and Finance Solution Vs Board of Directors of NKGSB Co-op. Bank Ltd. 2025 SCC OnLine SC 1566 which is to the effect:

Coming to our analysis and findings as to whether there is substance in the allegation of the Appellant that the Respondent No. 1 did not consider the restructuring proposal in the right earnest, we need to find out whether any restructuring proposal was placed by the Appellant before Respondent No.1 and if so how the proposal was treated. Records clearly reveal that the restructuring proposal request was made by the Appellant on 02.09.2024 which date was undisputedly prior to their filing of the Section 7 application. To find out what treatment was meted out by Respondent No. 1 to the restructuring proposal, we advert our attention to an e-mail addressed by Respondent No.1 to the Appellant in this regard appearing at page 980 of Appeal Paper Book (“APB” short) which is as reproduced below:

From the above e-mail, it becomes clear that the Respondent No. 1 on 07.10.2024 had urged the Appellant to ready itself for their stock audit. Thus, it becomes clear that the Respondent No. 1 had also responded to the restructuring proposal before filing of Section 7 application by requesting the Appellant to permit stock and book audit to evaluate the feasibility of restructuring as per MSME framework. It is also clear from record that it was the Appellant who was unable to accede to the request of Respondent No. 1 for stock audit on account of circumstances which they have admitted to be beyond their control. In all fairness, we also find that the Corporate Debtor on their own volition has admitted that in response to their restructuring proposal, the Respondent No. 1 on 07.10.2024 had requested them for carrying out stock audit. Material on record at page 980 of APB further show that another email dated 11.03.2025 was sent by the Respondent No.1 requesting Appellant to cooperate with the audit process and provide access to the secured assets. The said e-mail is as reproduced below:

There is no material on record to show that the Appellant had responded to the above e-mail of 11.03.2025. It is pertinent to notice that the above e-mail also states that even the Auditor of the Respondent No.1 had purportedly issued ten emails calling upon the Appellant to permit inspection and audit of stocks. The persistent lack of response from the Appellant clearly shows deliberate non-cooperation on their part. Thus the judgement of the Hon’ble Supreme Court in Pro Knits judgment supra does not come to rescue of the Appellant as the Hon’ble Supreme Court had categorically stressed that this benefit can be availed by an MSME where the MSME entity itself acts with diligence and complies with the procedural requirements under the Framework and remains vigilant in participating in the restructuring exercise while in this case the Appellant is found decisively wanting in this respect.

It is only after take-over of the Corporate Debtor by the IRP that the Appellant has now requested that stock audit can be conducted to enable restructuring by the Respondent No.1-Financial Creditor. It is therefore clearly borne out from material on record that the Corporate Debtor has yielded to the request for stock audit only after the management control has gone into the hands of the IRP. In such circumstances, we are inclined to agree with the Respondent No.1 that it is not open for the MSME’s to agitate their request for restructuring belatedly without having cooperated in the conduct of restructuring exercise when it was undertaken by the Financial Creditor in the first place. From the pattern of conduct of the Appellant it is amply borne out that far from being proactive in their effort at taking their restructuring proposal to its logical culmination, the Appellant was unwilling to budge inspite of repeated nudges of the Respondent No.1 and their auditors to facilitate stock audit and are now raising this bogey again as an opportunistic ploy which does not meet our countenance. Hence, this inordinate belated request for carrying out stock audit being made now cannot be a ground not to admit the Section 7 application.

In sum, we hold that the Adjudicating Authority has considered all relevant factors which needed to have been considered in coming to the conclusion that the Section 7 application deserved to be admitted. We are satisfied that impugned order of Adjudicating Authority initiating CIRP against the Corporate Debtor cannot be faulted. The Appeal being devoid of merit is dismissed. No costs.