The National Company Law Appellate Tribunal (NCLAT), New Delhi bench comprising Justice Ashok Bhushan, Chairperson, and Dr. Ashok Kumar Mishra, Technical Member of NCLAT was recently hearing an appeal against the order of the Adjudicating Authority (AA), wherein the AA admitted the section 7 Application. The NCLAT bench held that "The Adjudicating Authority, thus, had not committed any error in taking the view that even if, the Facility Agreement dated 14.05.2018 is ignored, there was still default on the part of the Corporate Debtor on the basis of which IBC proceedings under Section 7 can be proceeded."
An application under Section 7 in Part-IV contained three separate transactions, on the basis of which default was claimed. Copies of Debentures Trust Dees dated 04.12.2015, as well as 24.11.2016, were part of the Section 7 Application. The Facility Agreement dated 14.05.2018 was also filed along with the Section 7 Application. Total default on the basis of the aforesaid three financial transactions was amounting to INR 462,34,02,742. On 01.10.2019, Respondent No.2 issued an acceleration cum enforcement notice to the Corporate Debtor recalling all financial assistance and declaring the outstanding amount as on 16.09.2019 as due and payable. As per Section 7, sub-section 4, the Adjudicating Authority has to ascertain the existence of a default from the records of the information utility or on the basis of other evidence furnished by the Financial Creditor. Under Section 7, sub-section (5) it is mentioned when the Adjudicating Authority is satisfied that “a default has occurred and the application under sub-section (2) is complete …. it may, by order, admit such application”. The Hon’ble Supreme Court in Innoventive Industries Limited v. ICICI Bank and Another, REED 2017 SC 08563, while considering statutory scheme under Section 7 of the Code. The Adjudicating Authority has merely to see the records of information utility and other evidence produced by the Financial Creditor to satisfy itself that a default has occurred.
The Assignment Agreement dated 23.03.2019 was executed between Altico Capital India Ltd. and Asset Care and Reconstruction Enterprises Ltd. – Respondent No.2. In Schedule 1 of the Assignment Agreement details of the ‘Financing Documents’ had been mentioned and ‘Facility wise Principal Outstanding as of March 22, 2019. The interim order dated 12.10.2018 came to be modified by the Delhi High Court by subsequent order dated 08.01.2020. The modification as directed by the Delhi High Court on 08.01.2020 did not modify or vacate the interim direction and modification was to the limited extent that Defendant No.1 to 10 were permitted to mortgage, charge or create a lien on their movable/ immovable assets. The interim order dated 12.10.2018 as extracted above was confined to an injunction against Defendant No.17 regarding the Facility Agreement dated 14.05.2018. The interim injunction was not with regard to non-convertible Debenture Trust Deed dated 04.12.2015 and Debenture Trust Deed dated 14.11.2016 and the debt due under the aforesaid Debenture Trust Deed as was detailed in Section 7 Application were unaffected by the interim order dated 12.10.2018. Hence, the debt under the aforesaid financial transaction was due and default was there with regard to the said financial transactions.
At this juncture, the Appellate Authority noticed one of the Clauses of the Assignment Agreement dated 23.03.2019, which was Clause 10.5 dealing with ‘Severability’. The Assignment Agreement, thus, contained a ‘Severability’ clause specifically providing that if any provision in the Agreement is unenforceable under applicable law, such provision will be fully severable. Provision of the Agreement insofar as it assigns the debts arising out of the Facility Agreement dated 14.05.2018 being under the injunction of the Delhi High Court vide order dated 12.10.2018, this could not have been given effect to and the Facility Agreement, thus, can be held to be unenforceable under the applicable law. There being three financial transactions dated 04.12.2015, 24.11.2016 and 14.05.2018, even if, 18.05.2018 was unenforceable, there was no cloud on the enforceability of the other two transactions i.e. 04.12.2015 and 24.11.2016 and they were clearly severable by virtue of Clause 10.5 as noted above. The Adjudicating Authority, thus, had not committed any error in taking the view that even if, the Facility Agreement dated 14.05.2018 is ignored, there was still default on the part of the Corporate Debtor on the basis of which IBC proceedings under Section 7 can proceed.
The Hon’ble Supreme Court had approved the judgment of the High Court, which directed that the second transaction with regard to the charge being a severable transaction could be validly ignored and the personal obligation to pay the transaction, not being required to be compulsorily registered could be enforced, the Award was admissible in the above respect.
In the present case, the Appellate Authority had noticed that there were three financial transactions, which were assigned by Agreement dated 23.03.2019. Even if, one transaction the Facility Agreement dated 14.05.2018 was under a cloud due to the interim order passed by the Delhi High Court dated 12.10.2018, there was no cloud on other financial transactions, which were much before of passing of the interim order. There could be no illegality with regard to the assignment of debt in favour of Respondent No.2 with regard to the above two transactions and there being default with regard to the above two transactions, which was an admitted fact, no exception could be taken to the admission of Application under Section 7 of the Code.
The Appellate Authority, thus, was of the view that the three loans which were assigned by Altico in favour of Respondent No.2 were severable and even if the Facility Agreement dated 14th May 2018, which was sought to be given effect to be excluded from consideration, the assignment cannot be held to be illegal with regard to other two transactions that were Debenture Trust Deeds dated 04.12.2015 and 24.11.2016. There being default under the above two transactions being INR 111,55,88,511 + INR 2,73,76,59,666 as mentioned in Column 2 of Part-IV of the Section 7 Application and default being more than Rs.1 crore, the Application has rightly been admitted by the Adjudicating Authority. The Appellate Authority found no error had been committed by the AA in admitting the Section 7 Application. The Appeal was dismissed.