Punjab National Bank vs OGD Services Limited

Per: Kishore Vemulapalli, Member (Judicial)

This is a Company Petition being C.P. (IB) No. 17/NCLT/MB/C-IV/2019 filed by Punjab National Bank, the Financial Creditor/Applicant, under section 7 of Insolvency & Bankruptcy Code, 2016 (I&B Code) against OGD Services India Limited formerly known as Essar Oilfield Services India Limited, Corporate Debtor, for initiating Corporate Insolvency Resolution Process (CIRP).

The Petition is filed claiming an amount of Rs.253,50,07,485/- (Rupees Two Hundred Fifty-Three Crores, Fifty Lakhs, Seven Thousand, Four Hundred and Eighty-Five only) as on 05.12.2018 inclusive of interest. The computation of claim amount is reproduced hereunder: -

The date of Default is 30.09.2016 (date of NPA). The petition is filed on 03.01.2019.

The case of the Financial Creditor is as under:

The Corporate Debtor filed reply thereby oppose for admission of the Petition and also submit that the alleged that the Petition is not maintainable because it does not demonstrate any claim, debt and default and also the Petition is devoid of merits, therefore, the Petition is ought to be rejected on following grounds: -

a. the petition fails to demonstrate any claim against the alleged Corporate Debtor;

b. the steps taken by the Financial Creditor are in violation of RBI norms and/or illegal;

c. SBLC Agreement under which the Financial Creditor made a claim is void and thus enforceable;

The Corporate Debtor submits that the documents produced by the Financial Creditor indicate that the claim is based on two SBLCs issued by it to secure foreign currency loans granted by Bank of India, New York Branch (BOI) allegedly in pursuance of the SBLC Facility Agreement. Loans were granted to two Singapore based entities Varada Drilling One Pte. Ltd. and Varada Drilling Two Pte. Ltd. and these foreign currency loans were used to repay the Term Loan.

The Reserve Bank of India issued a Circular dated 22.04.2014 issued by to all scheduled and commercials Banks precluding them from extending non-fund credit facilities such as SBLCs to subsidiaries of their Borrowers, for the purposes of availing foreign currency loans for repayment of Rupee Loans. Apart from the aforesaid circular, the RBI expressed an opinion vide its letter dated 15.05.2014, issued to co-lenders of the Financial Creditor, in the context of the Rupee Term Loan granted to the Respondent, confirming the position. It is also pertinent to note that the two SBLCs in question were issued on 30^th September 2014, i.e. after the issuance of the RBI circular and the RBI letter addressed to Punjab & Sindh Bank, a co-lender of the purported Financial Creditor in the present transaction. Thus, the Financial Creditor consideration for executing the SBLC Agreement now being invoked by it, i.e. repayment of its Rupee Term Loan become illegal and/or unlawful and has the effect of defeating the provisions of law.

Such situation is contemplated under Section 23 of Indian Contract Act, which is reproduced hereinunder: -

The Corporate Debtor also relied on Jehal Tanti & Ors. Vs. Nageshwar Singh, reported at [AIR 2013 SC 2235], wherein it was held that in every case, where the consideration or object of an agreement is unlawful is void.

The object/purpose of the SBLC Agreement become impossible. The Corporate Debtor submits that object/purpose of First Sanction Letter and the SBLC Agreement was to finance VD1PL and VD2PL to acquire the two jack-up RIGS from ABG which is evident from the documents annexed with the Petition. This inference is buttressed by the Corporate Debtor letter dated 07.03.2018, which states that the Financial Creditor did in fact issue the SBLCs in question to Bank of India to finance acquisition of the said Jack-up-rigs from ABG by VD1PL to VD2PL. It is submitted that the very object/purpose of the issuance of the SBLCs by the Financial Creditor has become impossible as on date i.e. after the said SBLCs were issued and thus there is a legal and factual supervening impossibility and/or frustration. They further submit that such situation is contemplated and governed under section 56 of Indian Contract Act, 1872. Section 56 of the Contract Act, interalia provides that a contract to do an act which, after the contract is made, becomes impossible, becomes void when the act is impossible. It also provided that where one person has promised to do something which he knew, or, with reasonable diligence might have known, and which the promisee did not know to be impossible or unlawful, such a promisor must make compensation to such promisee for any loss which such promise sustains through the non-performance.

It is evident from the aforesaid that the sole Foreign Currency Lender and/or Beneficiary of the SBLC Agreement was IDBI Bank Limited. Further, there is no mention of Bank of India, New York, in either the first sanction letter or the SBLC Agreement.

The First Sanction Letter indicated that the purpose of the SBLC facility was to secure a Foreign Currency facility to be raised by the Corporate Debtor overseas associate concerns. It is further contemplated that IDBI Bank Limited would be the FC lender i.e. the Bank granting the FC facility. This is evident from the following portion of said Sanction Letter:

The Corporate Debtor also submits that only the IDBI Bank limited was entitled to invoke the SBLCs and make demands for payment from the Financial Creditor in pursuance of thereof. Thus, if the Financial Creditor had been called upon to pay any moneys under the SBLCs by IDBI Bank Limited, then and only the, could it have claimed reimbursement from the Corporate Debtor. Until such reimbursement, such claim would have been deemed to be a demand loan. Therefore, it is clear from such examination that no entity other than IDBI Bank Limited, could have triggered the Financial Creditor obligations and consequently the Respondent’s obligations, under the SBLC Agreement.

The Financial Creditor has enclosed two letters in made under the SBLC agreement. These letters are the purported “Letter of Invocation” dated 01.04.2016 and a purported “Recall Notice” dated 18.05.2018. Both these letters showed that the Financial Creditor issued SBLCs to BOI not IDBI. The issuance of SBLCs to BOI by the Financial Creditor, the subsequent payments made by it to BOI on the basis of which the invocation of such SBLCs and the consequent claims for reimbursement made on the Corporate Debtor are completely outside the ambit of the SBLC Agreement. The Corporate Debtor also submits that in the documents filed by the Financial Creditor, it has not only failed to deny the contention of the Corporate Debtor but also failed to produce any documents under which the Financial Creditor made payments to BOI, New York.

The Corporate Debtor also states it is also important to examine whether the claim sought to be projected in the present Application is a “financial debt” as contemplated by Section 5(8) of the Code. The Financial Creditor only intended to charge a commission on the SBLCs to be issued under the said agreement. Further, the SBLC does not carry any time value for money. Therefore, the issuance of SBLC by the Financial Creditor do not appear to create “financial debt” as contemplated in Section 5(8) of IBC. Hence, there is no default as contemplated under Section 2 (12) of Code.

The main issue raised by the Corporate Debtor is that there is nothing on record to make the Corporate Debtor liable for the claim of Rs.159.86 Crores consequent to the payment made by the Financial Creditor under the SBLC to Bank of India (New York) since in the SBLC Facility Agreement at Schedule V in the List of Foreign Currency Lender (FCL), the name of IDBI Bank Ltd, Dubai is shown whereas in the referred case it is Bank of India, New York Branch who is the FCL. The Corporate Debtor wants to take advantage of this fact to absolve from the liability.

SBLC’s are documentary credit whose rules and regulations are as per Uniform Customs and Practice for Commercial Documentary Credit (UCP 600). The said UCP is revised time to time. The last UCP revised is called UCP 600. Article 37(d) of Uniform Customs and Practice for Commercial Documentary Credit (UCP 600) specifically says that the applicant is bound and liable to indemnify the issuing bank. Accordingly, once payment is made under the SBLC, the applicant is bound to pay the issuer. There is no requirement of any other document to substantiate the liability of the Corporate Debtor. Assuming no SBLC Agreement is executed, the liability of the Corporate Debtor subsists as UCP is binding in India and enforceable.

Admittedly in in the Schedule of SBLC facility agreement, the LIST OF THE FOREIGN CURRENCY LENDERS only IDBI Bank Ltd was mentioned. The fact remains that the SBLC Facility Agreement the name of the foreign currency lender was open ended and not limited to IDBI Bank. SBLC Facility Agreement itself defines Foreign Currency Lender:

The same shows that at the time of execution of the said agreement the foreign currency lender was not identified hence the name of IDBI Bank in the foreign currency lender shall not vitiate the SBLC and the liability of the corporate lender. The said agreement specifies that the Corporate Debtor shall be liable to indemnify at Para 4.3 of the Agreement which is as follows:

The obligation of the obligator to indemnify and pay/ reimburse the Lender with respect to the Outstanding shall be absolute, unconditional and irrevocable, and such Outstanding shall be paid/reimbursed strictly in accordance with the terms of this agreement, under any and all circumstances and irrespective of any setoff, counterclaim or defence to payment which the Obligator may have or have had against the Lender or any of its Affiliates.”

The Financial Creditor submits that, in response to the Recall Notice dated 18.05.2018, there has been no denial by Corporate Debtor of their liability. The only instance they have challenged their liability is in reply to Company Petition. The same only proves that their defence is a ruse for non-payment. Further, like any other documentary credit SBLC is an unconditional promise to the beneficiary that in case of default, payment shall be made by the issuing bank. Precisely for the said reason SBLC is an independent contract and not bound by the underline contract. The issuing bank therefore has no other option but to make payment on invocation. The only instance wherein the SBLC can be challenged is in the event of fraud since fraud vitiates all contracts and SBLC is no exception. Whereas there is no allegation of fraud made by CD.

The financial Creditor further submits with respect to the issue of RBI norms violation, the fact remains that the sanction of SBLC is subject to the corporate debtor obtaining approval letter from RBI. This is clear from the Sanction Letter. Therefore, it is clear that SBLC was issued after obtaining permission from RBI. Notwithstanding any non-compliance of the RBI norms is not a defence for non-repayment of the debt.

It is pertinent to note that by letter dated 07.03.2018, the Corporate Debtor has admitted that due to the continuous default by VD1PL and VD2PL, the said SBLC were invoked by BOI and accordingly, the Financial Creditors, UBI, PNB, SBH and Financial Creditor herein discharged their liability to BOI as per the terms of the SBLC.

The Financial Creditor relied on Drive India Enterprise Solutions Ltd. Vs. Haier Telecom (India) Pvt. Ltd. & Ors. which highlighting the fact that SBLC is independent and not bound by the underlying contract.

We have heard and prudently gone through the pleadings available on record. On the request of the Corporate Debtor, the Financial Creditor sanctioned SBLC Loan to the extent of Rs. 159.86 Crores in favour of the Corporate Debtor. To secure the facility, the Corporate Debtor executed SBLC facility Agreement dated 29.03.2014, The Corporate Debtor enjoyed the facility but failed to liquidate the dues. The Financial Creditor issued recall notice dated 18.05.2018 recalling for outstanding dues. Despite recall notice, the Corporate Debtor neither replied nor repaid the dues.

The Corporate Debtor submits that as per the terms and conditions of the sanction letter the Financial Creditor does not hold authority to initiate the proceedings under Section 7 of the Code. Being the first charge holder, the IDBI Bank Limited holds right to initiate proceedings under IBC.

The Ld. Counsel for the Corporate convened in his arguments that this is a fit case for applying the law laid down by the Hon’ble Supreme Court in Vidharbha Industries Power Limited Vs Axis Bank Limited.

Further, on perusal of the SBLC Agreement dated 29.03.2014 and amended SBLC Agreement dated 23.09.2014 executed by the Corporate Debtor in favour of the Financial Creditor, this Bench also noted that Corporate Debtor unconditionally and irrevocably agreed/undertook for repayment of outstanding dues in the event of default. The relevant extract of the Agreement is reproduced hereinunder: -

This Bench observes that the Corporate Debtor approached the Financial Creditor for sanction of SBLC facility and the same was disbursed in the name of Corporate Debtor which is evident from the materials available on record. Further, the Corporate Debtor also issued an OTS proposal to all the lenders on 17.04.2018 in which the Corporate Debtor acknowledged and admitted the due amount is payable by them to the Financial Creditor. The relevant extract of the OTS is reproduced hereinunder: -

By virtue of the aforesaid OTS proposal, this Bench is of the view that the Corporate Debtor accepted the liability as well as default and there is no reason to deny for admission of this Company petition. Thus, this is a fit case for admission.

The Petition is complete and has been filed under the proper form. The debt amount is more than Rupees One Crore and default of the Corporate Debtor has been established.

The Financial Creditor has proposed the name of Mr. Vikas Prakash Gupta, a registered insolvency resolution professional having Registration Number [IBBI/IPA-007/IP-P00501/2017-2018/10889] as Interim Resolution Professional, to carry out the functions as mentioned under I&B Code and has also given his declaration that no disciplinary proceedings are pending against him.

This Application being C.P. (IB) No. 17/NCLT/MB/C-IV/2019 filed by Punjab National Bank, the Financial Creditor/Applicant, under section 7 of Insolvency & Bankruptcy Code, 2016 (I&B Code) against OGD Services Limited, Corporate Debtor, for initiating Corporate Insolvency Resolution Process (CIRP) is admitted. We further declare moratorium u/s 14 of I&B Code with consequential directions as mentioned below:

I. That this Bench as a result of this prohibits:

II. That the supply of essential goods or services to the corporate debtor, if continuing, shall not be terminated or suspended or interrupted during the moratorium period.

III. That the provisions of sub-section (1) of Section 14 of I&B Code shall not apply to

IV. That the order of moratorium shall have effect from the date of this order till the completion of the corporate insolvency resolution process or until this Bench approves the resolution plan under sub-section (1) of section 31 of I&B Code or passes an order for the liquidation of the corporate debtor under section 33 of I&B Code, as the case may be.

V. That the public announcement of the corporate insolvency resolution process shall be made immediately as specified under section 13 of I&B Code.

VI. That this Bench appoints Mr. Vikas Prakash Gupta, a registered insolvency resolution professional having Registration Number [IBBI/IPA-007/IP-P00501/2017-2018/10889], Phone No. as Interim Resolution Professional to carry out the functions as mentioned under I&B Code, the fee payable to IRP/RP shall comply with the IBBI Regulations/Circulars/Directions issued in this regard.

VII. The Financial Creditor shall deposit a sum of Rs.5,00,000/- (Rupees five lakh only) with the IRP to meet the expenses arising out of issuing public notice and inviting claims. These expenses are subject to approval by the Committee of Creditors (CoC).

VIII. A copy of this Order be sent to the Registrar of Companies, Maharashtra, Mumbai, for updating the Master Data of the Corporate Debtor.

IX. The Registry is directed to immediately communicate this order to the Financial Creditor, the Corporate Debtor and the Interim Resolution Professional even by way of email or WhatsApp. Compliance report of the order by Designated Registrar is to be submitted today.