Punjab National Bank (International) Limited Secures Victory in NCLT: A Landmark Insolvency Ruling
Introduction:
In a significant legal victory for Punjab National Bank (International) Limited (PNBIL), the National Company Law Tribunal (NCLT), Principal Bench, New Delhi, has admitted the bank’s application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), against MBL (MP) Toll Road Company Limited. (SPV of MBL Infrastructure). The case, marked as CP (IB) No. 423/(PB)/2023, revolves around financial default amounting to USD 5.33 million (approximately INR 44.04 crore). Our firm defended PNBIL in this matter, ensuring that the rights of the financial creditor were upheld.
Key Legal Issues and Tribunal’s Findings:
1. Whether the existence of a dispute regarding the Escrow Agreement bars a Section 7 application?
The Corporate Debtor argued that the insolvency proceedings were not maintainable due to an ongoing dispute regarding the Escrow Agreement dated March 22, 2012. The Corporate Debtor alleged that PNBIL, as the escrow agent, failed to release funds appropriately, leading to financial distress.
Tribunal’s Ruling: The NCLT dismissed this argument, emphasizing that a pre-existing dispute is not a valid defense under Section 7 proceedings. Unlike Section 9 (which deals with operational creditors), a Section 7 application only requires the existence of a financial debt and a default. The tribunal ruled that the loan obligations were independent of the Escrow Agreement, and the default on loan repayment was established.
2. Whether the claim against the Corporate Debtor was extinguished due to the approval of MBL Infrastructure’s Resolution Plan?
The Corporate Debtor contended that since its parent company, MBL Infrastructure Ltd., had undergone CIRP and a resolution plan was approved, the claims of PNBIL stood extinguished.
Tribunal’s Ruling: The tribunal rejected this contention, stating that PNBIL had not filed a claim in MBL Infrastructure’s CIRP because the Corporate Debtor had not defaulted at that time. The court further relied on the Supreme Court’s ruling in BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd., holding that the approval of a resolution plan for a guarantor does not automatically extinguish the liability of the principal borrower. Since MBL (MP) Toll Road Company Limited was the principal borrower, its obligations remained intact.
3. Whether the default threshold under Section 7 was met?
PNBIL demonstrated that as of April 5, 2023, the Corporate Debtor had defaulted on repayments amounting to USD 5.33 million. The NCLT noted that even if part payments were made, the outstanding amount exceeded the threshold limit of INR 1 crore under the IBC. The tribunal found clear evidence of debt and default, warranting admission of the CIRP application.
Outcome of the Case
Based on its findings, the NCLT passed the following orders:
- Admission of CIRP: The application under Section 7 was admitted, and the Corporate Insolvency Resolution Process (CIRP) was initiated against MBL (MP) Toll Road Company Limited.
- Moratorium Imposed: In accordance with Section 14 of the IBC, a moratorium was imposed, preventing the initiation or continuation of legal proceedings against the Corporate Debtor.
- Appointment of Interim Resolution Professional (IRP):The tribunal appointed Mr. Piyush Moona as the IRP to take charge of the Corporate Debtor and initiate the resolution process.
- Public Announcement: The IRP was directed to make a public announcement inviting claims from creditors.
Significance of the Judgment
1. Strengthening Creditor Rights
This ruling reinforces the principle that financial creditors have a strong right to initiate CIRP upon proving a default, regardless of any collateral disputes.
2. Clarifying the Impact of Parent Company CIRP on Subsidiaries
The NCLT’s decision clarifies that the approval of a resolution plan for a guarantor does not automatically discharge the principal borrower’s liabilities.
3. Upholding the Objective of IBC
By ensuring that the insolvency process remains creditor-friendly and expedites resolution, the judgment aligns with the core objectives of the IBC—timely resolution and protection of creditors’ interests.
Conclusion
The successful representation of PNBIL in this matter underscores the importance of financial creditors’ rights under the IBC. Our firm takes immense pride in having played a crucial role in securing this landmark victory, reinforcing the sanctity of lending agreements and ensuring that financial institutions receive due redress in cases of default.
This ruling sets a strong precedent for future insolvency cases, affirming that genuine financial defaults will not be overshadowed by peripheral disputes. As always, our firm remains committed to protecting our clients’ interests and upholding the principles of commercial and financial justice.