Financial Creditor’s Control No Shield for Default: NCLAT Affirms CIRP Against Shree Vardhman Infraheights Despite PMC Oversight

NCLAT held that the financial creditor’s involvement and control through the Project Monitoring Committee (PMC) did not shield the corporate debtor from its repayment obligations and affirmed the initiation of CIRP against Shree Vardhman Infraheights Private Limited on account of established debt and default.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and held that in a Section 7 IBC proceeding, once the existence of financial debt and default is established—even if acknowledged through documents such as amended debenture trust deeds or financial statements—the Adjudicating Authority is duty-bound to admit the application. The Tribunal further clarified that the presence of a Project Monitoring Committee (PMC) does not relieve the corporate debtor of its independent repayment obligations under the financial agreements.

The National Company Law Appellate Tribunal (NCLAT), New Delhi, dismissed an appeal filed by a suspended director of M/s. Shree Vardhman Infraheights Private Limited is challenging the admission of a Section 7 application by the Adjudicating Authority (NCLT, Principal Bench, New Delhi) on 08.01.2025. The Section 7 application had been filed by IDBI Trusteeship Services Limited, acting as a financial creditor under a series of Debenture Trust Deeds originally executed on 19.04.2016 and subsequently amended through agreements dated 20.07.2017, 27.09.2018, 04.11.2019, and 23.11.2021. The financial creditor sought initiation of the Corporate Insolvency Resolution Process (CIRP) on account of default in repayment obligations aggregating to ₹263.00 crore as on 30.09.2023.

The appellant contended that the financial creditor exercised substantial control over the project through a Project Monitoring Committee (PMC) constituted under a Settlement Agreement dated 04.11.2019, and that the default was orchestrated by the financial creditor itself, thereby absolving the corporate debtor of liability. It was argued that the financial creditor acted not as a lender but as a co-promoter, using its majority position in the PMC to influence project decisions, including construction and financial disbursements. The appellant also asserted that the insistence on proceeding with the construction of additional FAR towers without the necessary RERA approvals led to delays and cancellation of project registration, which impaired the corporate debtor’s ability to fulfil repayment obligations.

In rebuttal, the financial creditor argued that the only relevant consideration under Section 7 was the existence of financial debt and default, both of which stood admitted. The PMC was formed only to monitor project execution, and responsibility for repayment remained entirely with the corporate debtor and promoters, as expressly stated in Clauses 2.6 and 2.22 of the Settlement Agreement. It was submitted that the corporate debtor had repeatedly acknowledged the debt and default through written correspondence, financial statements, and amendments to the trust deed. The financial creditor relied on documentary evidence, including a default notice dated 27.09.2023, acknowledgement letters, and financial records.

The NCLAT noted that the existence of debt and default had not been disputed by the appellant. It held that the constitution of the PMC did not absolve the corporate debtor from its repayment obligations, as the Settlement Agreement made clear that PMC’s role was supervisory and did not shift financial responsibility. The Tribunal emphasised that under settled law, including the Supreme Court’s decisions in Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 and E.S. Krishnamurthy and Others v. Bharath Hi Tech Builders Private Limited, REEDLAW 2021 SC 12544, the Adjudicating Authority’s role in a Section 7 proceeding is limited to determining whether a financial debt exists and whether a default has occurred. The Tribunal found that both conditions were met in this case.

The NCLAT concluded that there was no merit in the appeal and upheld the NCLT’s order admitting the Section 7 application. It held that the financial creditor had successfully established the default in repayment obligations and that the mere presence of disputes or parallel proceedings before other forums, including arbitration and litigation, did not preclude the initiation of CIRP. The appeal was accordingly dismissed.

Mr. Arun Kathpalia and Ms. Pooja Mehra Saigal, Sr. Advocates with Mr. Rajat Joneja and Ms. Sakshi Kapoor, Advocates, represented the Appellant.

Mr. Krishnendu Datta and Mr. Abhijeet Sinha, Sr. Advocates with Mr. Pranjit Bhattacharya, Ms. Salonee Shukla, Mr. Akhil Nene and Mr. Auritro Mukherjee, Advocates, appeared for the Respondent No. 1.

Mr. Abhirup Dasgupta, Advocate, appeared for the Respondent No. 2/RP.

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