NCLAT Affirms: Financial Creditor’s Project Oversight Does Not Nullify Corporate Debtor’s Default Under Section 7 IBC

NCLAT affirmed that the financial creditor’s oversight and involvement in the project through the Project Monitoring Committee does not nullify or absolve the corporate debtor’s liability for default under Section 7 of the Insolvency and Bankruptcy Code, 2016.

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 once financial debt and default are established and undisputed, the Adjudicating Authority is obligated to admit a Section 7 IBC application, regardless of any project monitoring role or control allegedly exercised by the financial creditor under a settlement agreement. The financial creditor’s control through the Project Monitoring Committee (PMC) does not absolve the corporate debtor of its independent obligation to repay the debt.

The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed by a suspended director of Shree Vardhman Infraheights Private Limited, challenging the order dated 08.01.2025 passed by the National Company Law Tribunal (NCLT), Principal Bench, New Delhi, admitting a Section 7 application under the Insolvency and Bankruptcy Code, 2016. The application was filed by IDBI Trusteeship Services Limited as a financial creditor, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor.

The facts of the case revealed that the corporate debtor had entered into a series of Debenture Trust Deeds and amendments from 2016 to 2021, with the last amendment dated 23.11.2021. A default in repayment occurred on 31.12.2021, and the financial creditor issued a default notice in September 2023. Subsequently, a Section 7 application was filed in December 2023, claiming an outstanding amount exceeding ₹263 crores. The appellant contended that the financial creditor, having dominant representation in the Project Monitoring Committee (PMC) under a Settlement Agreement dated 04.11.2019, exercised effective control over the project and orchestrated the default, thereby disqualifying itself from

initiating CIRP.

The NCLAT rejected these contentions, observing that the role of the PMC, as envisaged in the Settlement Agreement, was limited to monitoring and improving project execution and collections, and did not extend to assuming repayment obligations. Clauses 2.6 and 2.22 of the Settlement Agreement clearly stated that the responsibility for repayment remained solely with the corporate debtor and its promoters (referred to as "obligors"). The Tribunal also noted that the debt and default were not disputed during the hearing and had been acknowledged in various documents, including financial statements and amendment letters.

Relying on Supreme Court precedents such as E.S. Krishnamurthy and Others v. Bharath Hi Tech Builders Private Limited, REEDLAW 2021 SC 12544 and M. Suresh Kumar Reddy v. Canara Bank and Others, REEDLAW 2023 SC 05587, the NCLAT reiterated that once debt and default are established, the Adjudicating Authority has no discretion but to admit the Section 7 application. The ongoing disputes or other legal proceedings, including arbitration and civil suits, do not impede the maintainability of a Section 7 application.

Finding no merit in the arguments presented by the appellant, the NCLAT upheld the order of

the NCLT dated 08.01.2025 admitting the Section 7 application and dismissed the appeal.

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 Respondent No. 1.

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

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