State Bank Of India vs M/s. Metenere Limited

Per: SH. B.S.V. PRAKASH KUMAR, HON'BLE ACTG. PRESIDENT

State Bank of India (for brevity 'Financial Creditor') has filed the instant application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity 'the Code') for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor (the debtor) namely M/s. Metenere Limited for it has, as on 14.05.2018, defaulted repaying ₹768,68,01,441 to the creditor Bank.

The pleaded case of the Financial Creditor is that Credit facilities in the nature of fund based and non-fund based (FBWL/NFB/CEL/Term Loan) were sanctioned by the Financial Creditor to the Corporate Debtor in consortium with State Bank of Travancore, State Bank of Bikaner and Jaipur, State Bank of Patiala and State Bank of Mysore (for brevity 'Associate Banks') including other Banks. The aforesaid Associate Banks of State Bank of India (Transferor Bank) were merged into State Bank of India (Transferee Bank) w.e.f. 01.04.2017 (Effective Date) vide notification published in the Gazette of India dated 22.02.2017. As per the notification, from the Effective Date i.e. 01.04.2017, the undertakings of the Transferor Banks, as it stands immediately before the Effective Date, shall without any further act, instrument, deed stand transferred and vested in the Transferee Bank i.e. State Bank of India. The Credit facilities availed by the Corporate Debtor were modified, enhanced and varied from time to time. The Credit facilities were lastly modified/varied/enhanced by sanction letter dated 11.01.2017. The details of the facilities availed by the Corporate Debtor, as modified from time to time, are as under:

The Corporate Debtor executed several documents for availing aforesaid credit facilities from the Petitioner-Bank. True Copies of each one of those namely, Working Capital Consortium Agreement, Inter-se Agreement, Deed of Hypothecation, Deed of Guarantee, Security Trustee Agreement, Supplemental Agreements, Deed of Personal Guarantee, have been placed on record. The details of the securities held by, or charge created for the benefit of Banks which fulfils the requirements of Section 77 & 78 of Companies Act, 2013 have been given in Part V of the application. The Financial Creditor has also placed on record the list of all financial facilities granted by the Financial Creditor to the Corporate Debtor along with the copies of the said Financial Contracts.

The Corporate Debtor repeatedly committed default in repayment of the dues as per the terms agreed under the loan and security documents. On account of such persistent default, the account of the Corporate Debtor was classified as Non-Performing Asset (NPA) on 28.07.2017 by the Financial Creditor. The precise case of the Financial Creditor thus is, the total amount in default due and payable to the Financial Creditor by the Corporate Debtor as on 14.05.2018 is ₹768,68,01,441 along with interest and charges.

Learned counsel for the Corporate Debtor have argued that this petition shall not be admitted on the ground: -

The creditor Bank has failed to demonstrate that default has occurred on account of Corporate Debtor failed to discharge its liability and as to how the initiation of Corporate Insolvency Resolution Process shall maximize the value of the assets of the debtor or how the same shall benefit all stakeholders.

The restructuring of the debts is admittedly at an advanced stage and the debtor is commercially viable and not an insolvent company.

The debtor Company is a net worth positive entity, therefore both on the principles of commercial viability and balance sheet test, the Company is not insolvent.

The Company is facing temporary liquidity crisis due to the market conditions and the change in the policies of the Government and also due to fault of the banks.

"CDR Guidelines" and "Reserve Bank of India Guidelines" are both contractually and statutorily binding the parties as held by Hon'ble Supreme Court in the matter of Sardar Associates and Ors. V. Punjab & Sind Bank and Ors. (2009) 8 SCC 257.

The petition has been filed without the consent and permission of other lenders, therefore ought to be rejected on this ground alone because alleged loan facilities were disbursed to the debtor by a Consortium of Banks.

The classification of the Account is bad, for the fact that the same was never communicated to the debtor. SBI for the first time informed the Company that the account of the Company slipped into NPA category vide letter dated 05.02.2018 (Pg. No. 48 of the Reply) and the date of the account slipping into the NPA category was mentioned as 26.08.2017. Thereafter, the Company received another letter dated 09.03.2018 (Pg. No. 50 of the reply) from SBI wherein it had clandestinely, retrospectively and unilaterally changed the date in relation to the account slipping NPA category to 28.07.2017. This was done to bring the promoters of the Company within the bar set out in Section 29A of the Code.

The petition has not been filed by a duly authorized person.

The provisions of the Code cannot be used as a recovery mechanism to extract undue amounts and filing of the petition is nothing but an abuse of the process of law.

While negotiations were going on between the parties, in the interregnum, Covid-19 was declared as pandemic by WHO on 11.03.2020, which has taken a significant toll on the business throughout the world posing unprecedented unforeseen challenges.

No insolvency petition should be admitted during the pandemic as the timelines under the Code shall not be binding. (Refer: Order dated 23.03.2020 passed by the Hon'ble Supreme Court in Suo Moto Writ Petition (Civil) No(s). 03/2020). Entities shall have difficulty in filing their claims and submitting Resolution Plans. In this situation no bidder would come forward to buy businesses, if anybody comes forward, businesses will be asked to be sold at miniscule value which can never be the intent of the Code. This will not serve the purpose of maximization of the assets.

Besides the above, the Corporate Debtor counsel heavily contended that the present petition was filed by the Bank pursuant to RBI Circular dated 12.02.2018. The Writ Petition (Civil) No. 1359/2018 was filed by the Corporate Debtor before the Hon'ble Supreme Court inter-alia assailing the legality and validity of the Circular dated 12.02.2018 issued by the Reserve Bank of India, since the Corporate Debtor was adversely affected by the Impugned Circular which derailed the entire resolution process of the Corporate Debtor. On 16.11.2018, the above mentioned Writ Petition was listed before the Division Bench of Hon'ble Supreme Court and the status quo order was passed. Afterwards a consolidated judgment was pronounced by the Hon'ble Supreme Court, by clubbing several Writ Petitions, dated 02.04.2019, titled as Dharani Sugar and Chemicals Limited v. Union of India and Others {(2019) 5 SCC 480}. The Hon'ble Supreme Court in the judgment has declared RBI circular dated 12.02.2018 as "ultra vires" of Section 35AA of the Banking Regulations Act, 1949. As a consequence, the Hon'ble Supreme Court has also opined that the proceedings initiated by a Bank as a Financial Creditor u/s 7 of the Code on the basis of said Circular shall become "non-est". Placing reliance on the decision of the Hon'ble Supreme Court, the Corporate Debtor has pleaded for dismissal of the present petition filed by the Financial Creditor.

The Financial Creditor, on the contrary, contended that it has independently filed this petition u/s 7 of the Code against the Corporate Debtor as there is a huge debt due and payable by the Corporate Debtor for the Corporate Debtor defaulted in repaying it. The account of the Corporate Debtor was irregular, as a result, it has been classified as Non-Performing Asset on 28.07.2017, pursuant to which, the Financial Creditor has initiated proceedings against the Corporate Debtor. It has also been stated that the circular dated 12.02.2018 would not be applicable to the present case because in para 8 of the circular under caption 'D', Timelines to Large Accounts were fixed to initiate action under the Code – it was mentioned that the accounts with an exposure of ₹20billion and above as on or after 01.03.2018 were to be referred for initiating proceedings u/s 7 of the Code. For ready reference, the relevant portion of the RBI Circular dated 12.02.2018 is reproduced hereunder:-

To say that this Account is covered by Dharani Sugars supra for the Corporate Debtor exposure is over and above ₹20billion, the Corporate Debtor Counsel has placed reliance on the latest balance sheet as on 31.03.2018, according to which the total debt exposure against the Debtor is more than ₹2100 crores. The details of borrowing and interest thereon as well as calculation of exposure as per balance sheet as on 31.03.2018 (at pgs. 168 & 169) in the form of table is relied upon by the Corporate Debtor which is as follows:

The Debtor Counsel has further submitted that the Bank never urged before Hon'ble Supreme Court that default occurred in the loan accounts of this debtor is not above ₹20billion and not pursuant to RBI circular dated 12.02.2018.

The debtor counsel further submitted that the additional effect of the striking down of RBI Circular dated 12.02.2018 by the Hon'ble Supreme Court was that all restructuring schemes including the restructuring scheme being Strategic Debt Restructuring (SDR) for the Corporate Debtor Company, were rehabilitated. Upon RBI Circular dated 12.02.2018 being struck down, RBI came up with a new circular dated 07.06.2019 which stipulates that there shall be Board Approved Policies of Lenders on Resolution of Stressed Assets. Till date, the Financial Creditor did not come forth with a policy framework, however the Debtor Company submitted a restructuring proposal in absence of Board Approved Policies.

To substantiate his arguments learned counsel for the Corporate Debtor placed reliance on the order passed by NCLT Bench of Mumbai in the Case of Indian Steel Corporation Ltd v. Punjab National Bank, MA 2209/2019 in CP(IB) 3606(MB)/2018 decided on 10.07.2019 and has argued that this case is squarely covered by the said order wherein NCLT Mumbai Bench dismissed the petition filed by the Punjab National Bank holding that there is no iota of doubt that the entire proceeding u/s 7 of the Code by PNB is on the basis of RBI circular dated 12.02.2018 and as per the judgment of Hon'ble Supreme Court in Dharani Sugars supra, the proceeding has become non est.

Earlier this Bench vide its order dated 04.01.2020 found that there is an apprehension of bias against appointment of the proposed IRP, therefore granted an opportunity to the Financial Creditor to substitute the name of the IRP in place of the earlier one. The said controversy finally travelled up to the Hon'ble Supreme Court, wherein the Hon'ble Supreme Court, on agreement of counsels of both the parties, disposed of the Civil Appeal vide its order dated 19.08.2020 directing this Bench to appoint a new Resolution Professional.

On hearing the submissions of either side, we have noticed from the JLF minutes dated 15.07.2017 and 23.10.2017 relied upon by the debtor that it is an admitted fact that the Corporate Debtor had availed loan from this Applicant/Financial Creditor and failed to service the interest portion of the debt facilities. For the Corporate Debtor himself relief upon the JLF minutes to say something else, the Corporate Debtor cannot renege from the statements made by it and it is not the case of the Corporate Debtor that it has not made such a statement in the minutes aforementioned. In para 7A of the reply filed by the Corporate Debtor, it has admitted that it had serviced interest in the cash credit account only up to March 2017. It is evident on record (Annexure-G) that the dues payable to this Applicant was outstanding to ₹719.44Crores as on 25.05.2018.

The main thrust of the Corporate Debtor in its argument is that it is an IBC proceeding initiated pursuant to the RBI Circular dated 12.02.2018 and the said circular is struck down by the Supreme Court of India in the case of Dharani Sugars supra and the claim against the company is not ripen to file it before NCLT for the Corporate Debtor has already submitted restructuring proposal, therefore this IBC proceeding shall be dismissed by following the ratio held by the Coordinate Benches.

As against this argument, the Financial Creditor counsel has submitted that the Corporate Debtor has made a frivolous attempt to rely on its Audited Balance Sheet for Financial Year 2018 to show that its total outstanding amounted to above ₹20billion (although even if it assumed that the exposure exceeds ₹20billion, then the same by itself is not sufficient to bring it within the ambit of circular dated 12.02.2018). The Corporate Debtor relied on Note 47 – Commitments and Contingencies to state that Contingent liabilities mentioned therein, amounting to ₹145.57 crores should be added to the outstanding of the Corporate Debtor. The Financial Creditor counsel has further submitted that a perusal of page 52, at point (iii) Contingent liabilities would reveal that the above figure refers to guarantees given by the Corporate Debtor to one “Met Trade (UAE) FZC Subsidiary Co.”. The said liabilities, being corporate guaranties given by the Corporate Debtor, and being contingent in nature, and not crystallized, cannot be added to the Corporate Debtor’s exposure merely for the purpose of forcibly falling under the purview of the aforesaid judgment. However, whether the overall exposure against the Corporate Debtor is over and above ₹20billion or less than that, it does not make any difference to proceed against the Corporate Debtor under the Code.

Apart from the above, the Debtor counsel has stated that this company is commercially viable, not an insolvent company therefore based on the ratio decided in Park Energy Limited Vs. Syndicate Bank by Hon'ble NCLAT in an order dated 24.08.2020 in Company Appeal [AT] [Insolvency] No. 270/2020, this CP shall be dismissed.

The Corporate Debtor has also referred another order passed by an adjudicating authority Mumbai on 09.06.2020 in CP (IB) No. 3077/2019 in between Indus Biotech Private Limited and Kotak India Venture Fund-I on the ground that the company is not an insolvent company.

As to IRP issue again raised by this Corporate Debtor being dealt with in the earlier order as per the directions of the Hon'ble Supreme Court of India, this Corporate Debtor is cannot rake up the same issue in its written submissions.

The Corporate Debtor counsel further stated while other banks were looking for a solution through restructuring upon hiving off Gandhi Dham Unit of the Debtor for ₹600 Crores, the Corporate Debtor counsel says that, this bank from one side passively agreeing for negotiations and on the other side independently initiating IBC proceedings is incorrect therefore sought for dismissal of the company petition.

As to the allegation against this Bank purportedly agreeing for restructuring, on verification of records, we have not come across any document reflecting the applicant involving or taking active participation in the JLF proceedings. Therefore, these submissions cannot stop the Bank from proceeding with Section 7 Petition furnishing material to prove that debt and default are in existence.

When IBC stating that existence of debt and default is sufficient for admission of a petition under section 7 of the Code, for the Honourable Supreme Court having categorically held in Innoventive Case, decision or proposal in JLF meeting will not be binding upon IBC proceedings, the debtor cannot argue that since JLF has been perusing for a solution, IBC petition shall not be admitted. Moreover, this Bank has not agreed for any solution as stated by the debtor counsel. Restructuring is an arrangement or a consensus arrived at. It cannot be considered on par with an order having statutory force, more so against IBC proceeding. In Dharani Supra itself the Honourable Supreme Court held that default shall be established as stated under IBC. Once it is established as stated under IBC, it is not relevant what plan Corporate Debtor or the other creditors proposed. The summation in Dharani supra is default shall be established as per the mandate given under IBC and it takes primacy over other aspects, therefore it cannot be said that owing to other situations IBC petition shall not be admitted.

This Corporate Debtor has raised another argument saying that since Covid-19 pandemic has come after filing this company petition, this Bench shall take Covid-19 pandemic into consideration and provide time to this company to survive and clear the dues of this Creditor.

With regard to Covid-19 pandemic, NCLT cannot take in this argument because this issue has been dealt with by the State and incorporated amendment to IBC stating that in the cases default occurred after 25th March 2020, the Petition under Section 7, 9 & 10 shall not be initiated, in the same amendment it is also be mentioned that the cases filed before 25th March 2020 or default occurred before 25th March will not be hit by the mandate given in the amendment.

With regard to the argument saying that the Corporate Debtor is viable and it is not insolvent company, this has been dealt with by the IBC stating that to admit a petition under section 7, two elements have to be proved, one is – existence of debt and another is - existence of default, in this case, both are accomplished. It is not the case of the Corporate Debtor that debt is not in existence and it is also not the case of it that default is not in existence. Whether the company is solvent or insolvent was a regime in vogue under Companies Act, 1956, curing all those inadequacies, IBC has come into existence holding the field by envisaging that if debt and default are proved, section 7 petition shall be admitted. When a repeal has come in, curing the evil haunting the society, it is not right on the part of anybody to rake up that solvency of company is to be taken as a criteria to decide the admission of the company petition under IBC, it is nothing but nullifying the repeal of 1956 Companies Act.

The Corporate Debtor has raised another point in Section saying that stated that since the word “may” has been used in Section 7 (5) (a) of the Code, it is the discretion left with this Adjudicating Authority whether to allow the application or not. To verify to what extent this argument is correct, Sec.7 (5) is reproduced below:

It is also pertinent to see as to what is the mandate with regard to winding up under section 433 of the Companies Act 1956, for completeness, that section is also reproduced.

When IBC has come into force with a mandate of existence of debt and default, in the place of determination of ability of the company to wind up, it can never be construed that discretion is left with this Authority to go back to the concept of determination of solvency of the company for admission. If that is so, it will become nothing but restoration of repealed provision by ignoring the mandate that has come into force through IBC. Determining insolvency by applying cash flow and balance sheet insolvency tests is a gone-concept, no chance to insinuate such concept because when a provision is repealed and new concept has been introduced, courts shall not go back to the old concept. Yes, courts can go back, provided vacuum is left not providing a way out to a situation, here the concept has come into place, that is existence of debt and default for admission. The use of “may” never be considered as leverage to ignore the mandate, for that matter courts shall read it in such a way that gives accomplishment of the provision, not otherwise. Satisfaction mentioned in the aforesaid section is relating to occurrence of default, compliance of section 7 (2) of the Code, and to ensure disciplinary proceedings are not pending against the proposed Resolution Professional, when these three are met, then “may” shall be read as “shall”, perhaps “may” has been used to have satisfaction relating to three issues mentioned above, not otherwise. In any event, the Debtor having failed to service the accounts since March 2017 and the same being admitted by the corporate debtor in JLF minutes, now it cannot even be said that it has ability to pay the debts. If it has capacity to pay, it would have paid it before admission. That has not been done. Therefore, we have not found any merit in this point.

As to the classification of the account as NPA, the grievance of the Corporate Debtor is, default date is varying, when the corporate debtor itself admitted that it was unable service the debt since 2017, and the case of the debtor not being that it has not defaulted, its defence pales into insignificance, therefore we have not found in the merit that default date is varying. As to this aspect the creditor has given explanation that there being two accounts classified as NPAs with different dates, two dates have come into existence. However, the Financial Creditor in terms of the internal guidelines on 28.07.2017 is classified as NPA date for all accounts of the Corporate Debtor.

Another argument raised by the Corporate Debtor, authorization given for filing this company petition is not duly authorised therefore this application shall be dismissed by following the ratio decided by Honourable NCLAT in M/s. Palogics infrastructure private limited vs. ICICI Bank Limited (Company Appeal (AT) (Insolvency) No. 319 of 2017 date 3.4.2018). With regard to this point, in banking parlance, authorization will be given to an officer in the Bank to take legal actions, but not on case-to-case basis, this argument will not lie, henceforth it is rejected.

For the reasons aforementioned, this bench is satisfied that the Applicant has proved debt and default and the consent of the Proposed Resolution Professional, this company petition is hereby admitted by appointing Shri Shailesh Verma as RP, with the following directions:

In pursuance of Section 13 (2) of the Code, we direct that Interim Insolvency Resolution Professional to make public announcement immediately with regard to admission of this application under Section 9 of the Code. The expression 'immediately' means within three days as clarified by Explanation to Regulation 6 (1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

We also declare moratorium in terms of Section 14 of the Code. It is made clear that the provisions of moratorium are not to apply to transactions which might be notified by the Central Government. Additionally, the supply of essential goods or services to the Corporate Debtor as may be specified is not to be terminated or suspended or interrupted during the moratorium period. These would include supply of water, electricity and similar other supplies of goods or services as provided by Regulation 32 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Directions are also issued to the Ex-Management/Auditors etc. to provide all the documents in their possession and furnish every information in their knowledge as required under Section 19 of the Code to the Interim Resolution Professional within a period of one week from today otherwise coercive steps to follow.

We direct the Financial Creditor to deposit a sum of Rs. 2 lacs with the Interim Resolution Professional to meet out the expenses to perform the functions assigned to him in accordance with Regulation 6 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016. The needful shall be done within three days from the date of receipt of this order by the Financial Creditor. The amount however be subject to adjustment by the Committee of Creditors. The amount must be accounted for by Interim Resolution Professional and shall be paid back to the Financial Creditor.

The office is directed to communicate a copy of the order to the Financial Creditor, the Corporate Debtor, the Interim Resolution Professional and the Registrar of Companies, NCR, New Delhi at the earliest but not later than seven days from today. The Registrar of Companies shall update its Master data & its website by updating the status of 'Corporate Debtor' and by making a specific mention regarding admission of this petition.

A copy of this order shall also be sent to the Secretary, Ministry of Corporate Affairs, New Delhi to ensure compliance of directions issued in para 32 above.