Appellate Tribunal Directs NCLT to Re-examine Section 7 Application with Due Consideration of Evidence and Facts

The Appellate Tribunal has directed the NCLT to re-examine the Section 7 application, giving due consideration to the evidence and facts presented.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Barun Mitra, reviewed a batch of two appeals. The Tribunal found the Adjudicating Authority's findings on the existence of a default and misuse of funds to be unsustainable, as these issues were not adequately considered. Consequently, the Tribunal directed that the matters be re-examined with due consideration of the evidence and facts presented, including the Cash Management Agreement and the usage of ECLGS funds.

The appeals in Company Appeal (AT) (Ins.) No. 165 of 2024 and Company Appeal (AT) (Ins.) No. 212 of 2024 were filed challenging the NCLT’s orders of initiating the Corporate Insolvency Resolution Process (CIRP) against two Corporate Debtors—JW Marriott (Bengaluru) and Crown Plaza Hotel (Pune). Both appeals arose from the same Loan Agreement dated 26.12.2017, under which GSTAAD Hotels Pvt. Ltd. and its subsidiary Neo Capricorn Plaza Pvt. Ltd. had obtained loans from Piramal Capital Housing Finance Ltd. and subsequently faced financial distress, leading to proceedings under the Insolvency and Bankruptcy Code (IBC).

The appellants argued that the hotels were profitable and had repaid substantial sums, including during the pandemic, and that the assignment of debt to Omkara Asset Reconstruction Company Pvt. Ltd. was unjustified as the loans had never been classified as Non-Performing Assets (NPA).

A significant contention raised by the appellants was the improper assignment of the loans to Omkara. They claimed that GSTAAD Hotels' account had never been declared as NPA, which they argued violated the provisions of the SARFAESI Act and the Reserve Bank of India’s Circulars. The High Court of Karnataka had dismissed GSTAAD’s writ petition challenging the assignment, affirming that there was no statutory violation. Further, the appellants argued that the earlier withdrawal of Section 7 applications by IDBI Trusteeship Ltd. precluded the filing of a fresh Section 7 petition by Omkara under the principles of res judicata. The NCLAT rejected this argument, holding that the new application was based on defaults related to the Emergency Credit Line Guarantee Scheme (ECLGS), which was not part of the earlier proceedings.

The appellants also contested the NCLT’s findings regarding loan defaults, particularly in relation to the Cash Management Agreement (CMA), which they argued governed the repayment mechanism. Despite presenting evidence that the CMA existed and defined how loan servicing was to be managed, the NCLT had dismissed it on the grounds that no evidence was produced to prove its existence. The NCLAT criticized this oversight, noting that the CMA was integral to understanding the repayment arrangement and required further examination.

Additionally, the appellants challenged the NCLT’s findings regarding the misuse of funds under the ECLGS scheme. The NCLAT emphasized that the issue of whether the funds were used as stipulated needed to be considered properly, and that the Adjudicating Authority had erred in dismissing the arguments based solely on an end-use certificate. The NCLAT ruled that these matters required further investigation, especially in light of the forensic audit report and other evidence submitted by the appellants.

In conclusion, the NCLAT did not uphold the NCLT's decision, particularly on the issues of loan default, the misuse of funds under the ECLGS scheme, and the treatment of the Cash Management Agreement. It directed that these matters be reconsidered, ensuring that the findings were based on a thorough examination of all relevant facts and evidence.

Mr. Ajesh K. Shankar, Ms. Shweta Bharti, Mr. Srihari S., Ms. Suneha, Mr. Rohit Jolly, Ms. Bheeni Goyal and Mr. Raghav Sachdev, Advocates, represented the Appellants.

Mr. Krishnendu Datta, Sr. Advocate with Mr. Varun Kalra, Mr. Samir Malik, Mr. Shahan Ulla, Mr. Ryan Dsouza and Mr. Rahul Gupta, Advocates, appeared for Respondent No. 1.

Mr. Gaurav Mitra, Sr. Advocate with Mr. Ishaan Roy Choudhury and Ms. Honey Satpal, Advocates, appeared for IRP/RP along with Mr. Aakash Parikh and Mr. Jay Sanghrajka, Advocates

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