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If the bank refuses to extend credit facilities, the borrower has no option but to clear their dues

The Supreme Court bench comprising Justices Abhay S. Oka and Rajesh Bindal was hearing an appeal on Thursday and held that if the bank refuses to extend further the Bank Guarantees and Secured Overdraft Facilities, the borrower will have to clear their dues against these credit facilities. Any default on these dues is covered under Section 3(12) of the Insolvency and Bankruptcy Code.

In the present case, the respondent-Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Hyderabad, Telangana. The said application was filed against a Corporate Debtor. The present appellant claims to be a suspended Director of the Corporate Debtor. National Company Law Tribunal, by an Order dated 27th June 2022, admitted the application filed by the respondent Bank and declared a moratorium for the purposes referred to in Section 14 of the IB Code. The appellant claiming to be an aggrieved person preferred an appeal against the said Order before the National Company Law Appellate Tribunal. By the impugned judgment dated 5th August 2022, NCLAT has dismissed the appeal.

The first respondent, Canara Bank is the successor of Syndicate Bank, which made an application under Section 7 of the IB Code to NCLT. Syndicate Bank was merged into the first respondent Canara Bank. A letter of sanction dated 2nd April 2016 was issued by Syndicate Bank by which credit facilities were sanctioned to the Corporate Debtor for one year valid up to 28th February 2017. A Secured Overdraft Facility of Rs. 12 crores was granted by the Syndicate Bank, apart from sanctioning the Bank Guarantee limit of Rs. 110 crores. Thus, the facilities granted by the Syndicate Bank to the Corporate Debtor were fund-based (Overdraft Facility) and non-fund-based (Bank Guarantees).

In the application under Section 7 of the IB Code, the Syndicate Bank stated that as of 30th November 2019, the liability of the corporate debtor under the Secured Overdraft Facility was Rs. 74,52,87,564.93. The liability of the Corporate Debtor towards outstanding Bank Guarantees was Rs. 19,16,20,100.

On 21st October 2022, the Supreme Court while issuing notice, recorded a statement of the learned senior counsel appearing for the appellant that a proposal for settlement under a One-Time Settlement Scheme has been submitted to the first respondent-Bank and a sum of Rs. 6 crores has been deposited with the first respondent-Bank. Eventually, the said proposal was turned down by the first respondent-Bank. Therefore, the present appeal was taken up for hearing.

In the present case, a demand notice under Section 13(2) of the SARFAESI Act, 2002 dated 29th August 2018 was issued by the first respondent. As the Corporate Debtor did not honour the said notice, the original application for recovery has been filed by the first respondent before the Debt Recovery Tribunal at Hyderabad. Moreover, the Corporate Debtor acknowledged the debt on 5th May 2019. Moreover, the Balance Sheet as of 31.03.2019 of the Corporate Debtor reflects the said liability of the Corporate Debtor.

The Supreme Court bench noted that it is true that as far as Bank Guarantees are concerned, the Executive Engineer of the Government of Telangana addressed letters to the Bank requesting the Bank to revalidate the Bank Guarantees. On 8th January 2020, the Government addressed a letter to Syndicate Bank to extend the seven Bank Guarantees mentioned therein. The letter mentions that if the action of revalidation or extension of the Bank Guarantees is not taken, the Bank Guarantees be realized, and the amount be paid by Demand Drafts to the State Government. Thus, Bank Guarantees were invoked by the State Government. In view of the said letter, on 9th January 2020, the Corporate Debtor addressed a letter to the Syndicate Bank mentioning that the issue relating to the pre-closure of the two contracts granted by the State Government was under the active consideration of the State Government. The letter mentions that if the Bank Guarantees were not extended, the same is likely to be encashed by the Government. Therefore, a request was made by the Corporate Debtor to the Bank to revalidate the Bank Guarantees. However, the first respondent by a letter dated 18th January 2021, specifically informed the Corporate Debtor that the competent authority has not considered the proposal of the Corporate Debtor for extending Bank Guarantees and Secured Overdraft Facilities. By the same letter, the first respondent called upon the Corporate Debtor to clear the outstanding immediately. Thus, there is no doubt that the Corporate Debtor committed a default within the meaning of Section 3(12) of the IB Code due to non-payment of the amounts due to the Bank.

Once the NCLT is satisfied that the default has occurred, there is hardly any discretion left with the NCLT to refuse admission of the application under Section 7. Thus, even the non-payment of a part of debt when it becomes due and payable will amount to default on the part of a Corporate Debtor. In such a case, an order of̣ admission under Section 7 of the IB Code must follow. If the NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected. Otherwise, there is no ground available to reject the application.

The Supreme Court observed, “Even if NCLT has the power to reject the application under Section 7 if there were good reasons to do so, in the facts of the case, the conduct of the appellant is such that no such good reason existed based on which NCLT could have denied admission of the application under Section 7.”

The Appeal was dismissed.

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