The New Delhi Principal Bench of the National Company Law Appellate Tribunal (NCLAT) has held that where a financial creditor establishes the existence of financial debt and a continuing default, a Section 7 application is maintainable even if the creditor has also obtained an arbitral award and pursued execution proceedings, because those remedies are not mutually exclusive. In the present case, the default was held to have arisen independently upon non-payment pursuant to the valid loan recall notices, and was not dependent solely on the arbitral award.
The Tribunal further held that a contractually defined “material adverse effect” clause can validly support recall of the loan where the lender forms the opinion that circumstances affecting the guarantors impair the obligors’ ability to perform their obligations, particularly where guarantors are expressly included within the definition of “Obligor(s).” Consequently, non-payment within the recall period constituted default for the purpose of Section 7.
It was also held that the pendency of a Section 34 challenge to an arbitral award does not defeat a Section 7 application where the insolvency application is independently founded on an earlier payment default, and that the arbitral award, in any event, gives a fresh period of limitation for initiating CIRP if filed within three years thereof.
The Division Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed that the loan recall notices were not infirm and were issued in accordance with the contractual framework. The Tribunal noted that the loan agreements defined “Material Adverse Effect” broadly and included within “Obligor(s)” not only the borrower but also guarantors and other security providers. Since Rana Kapoor was an admitted guarantor, and criminal investigation and arrest had occurred, the lender was entitled, under Clause 12.1.8 and the consequences of default provision in Clause 12.2, to form the opinion that a material adverse effect had arisen and to recall the loans.
The Tribunal further observed that the Section 7 application against Bliss Abode was not founded only on the arbitral award. It specifically relied on the default that first occurred upon failure to pay the recalled dues by March 14, 2020, and pleaded that such default continued thereafter. Therefore, the appellant’s reliance on Regulation 2A and the contention that a non-final arbitral award could not be the basis of the insolvency application did not assist the appellant, because the award was not the sole basis of the claimed default.
On the argument that Section 7 was being used as an execution mechanism, the Tribunal held that the facts did not disclose abuse of process. It observed that the inquiry under Section 7 is confined to the existence of financial debt and default, and once those are established, admission follows. It also reiterated that there is no general discretionary power to refuse admission once debt and default are proved.
The Tribunal also rejected the limitation objection, and held that in addition to the continuing default after the recall notice, the arbitral award gave a fresh cause of action, and since the Section 7 application had been filed within three years thereafter, it was within limitation. The Tribunal finally concluded that for more than six years no payment had been made by either corporate debtor despite the recalled outstanding debt, and that debt and default stood proved.
Briefly, two appeals were filed by Bindu Kapoor, the suspended director of the corporate debtors, challenging two NCLT admission orders under Section 7 of the IBC in relation to Bliss Abode Pvt Ltd. and Bliss House Pvt Ltd. The underlying facilities had been granted by Indiabulls Housing Finance Limited under multiple loan agreements, backed by personal guarantees of Bindu Kapoor and Rana Kapoor and supported by security documents including a deed of hypothecation, memorandum of entry of title deeds, and a mortgage over specified immovable property. In March 2020, the lender issued recall notices on the basis of an alleged material adverse effect, demanding repayment of the outstanding dues within five days. No payment was made thereafter. The lender also initiated arbitration, which culminated in an arbitral award in its favour. The debt was later assigned to JC Flowers Asset Reconstruction Pvt Ltd., which then filed the two Section 7 applications that came to be admitted by the NCLT.
In the Bliss Abode matter, the Section 7 application pleaded that the event of default arose because the repayment ability of the personal guarantors had been materially affected, including on account of criminal investigations and the arrest of Rana Kapoor, which the lender treated as triggering Clause 12.1.8 read with Clause 12.2 of the loan agreements. The application stated that the first default occurred on March 14, 2020 when the recalled amount was not paid, that the default continued through the arbitral proceedings, and that the award further crystallised the amount due. In the Bliss House matter also, the Section 7 application was based on a separate recall notice dated March 09, 2020 and the continued non-payment of the outstanding dues.
The appellant argued before the NCLAT that there had been no real payment default under the original loan terms; that the recall notices were baseless and were issued merely because Rana Kapoor had been arrested; that the arbitral award was under challenge in a pending Section 34 petition and had therefore not attained finality; that the Section 7 proceedings were an impermissible substitute for execution of the award; and that at least one of the Section 7 applications was barred by limitation. The financial creditor responded that the recall notices were contractually valid under the material adverse effect clause, that default occurred when the borrower failed to pay within the recall period, that execution and insolvency were concurrent remedies, and that the arbitral award gave a fresh period of limitation.
