The National Company Law Appellate Tribunal ( NCLAT ) New Delhi has ruled that a financial creditor’s ability to seek redress under Section 7 of the law is not in any way restricted by a dispute that is still unresolved in arbitration. According to the bench, the creation of a Project Management Committee in accordance with a Settlement Agreement that includes representatives from corporate debtors and financial creditors does not release the CD from its repayment responsibilities.
When a default occurred, the IDBI sent out a payback reminder. Later on, the Delhi High Court also received a business suit. The parties came into a settlement agreement during the litigation’s pendency, which resulted in a new payback schedule. In accordance with the Settlement Agreement dated 04.11.2019, the commercial matter that was still ongoing in the Delhi High Court was decided on 21.11.2019. The parties agreed to establish a Project Monitoring Committee (PMC) in relation to the development of the residential project (Shree Vardhman-Victoria) under the restated settlement of 04.11.2019.
Financial creditors were to nominate three members of the Project Management Committee, while corporate debtors were to nominate two members. To keep an eye on the project, the Project Management Committee was considered. Once more, the corporate debtor did not fulfill its payment commitment. The corporate debtor retained responsibility for the project’s conception, construction, marketing, and sale, including payment obligations.
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Even according to the updated repayment plan, the corporate debtor did not pay back the sum on December 31, 2021. The corporate debtor received a default notice from the financial creditor on September 27, 2023. Sandeep Jain, a financial creditor, submitted a Section 7 application to start a CIRP against the corporate debtor. After hearing the parties and returning the debt and default findings, the adjudicating authority admitted the Section 7 application by contested order. This appeal was submitted after “IA No. 1527 of 2024” was also granted and resolved by the aggrieved party.
The appellant argued that the financial creditor had dominant control over the entire project because of its majority position on the Project Monitoring Committee, which was established under a Settlement Agreement signed on November 4, 2019. Additionally, it was contended that the purported default was not due to the corporate debtor because the Financial Creditor had complete control over the funds and the company had no independent control over the project’s cash flow.
Additionally, it was asserted that the company already had an occupancy certificate for the eight buildings and that only minor finishing work was needed before the units could be turned over to the buyers. Due to the Settlement Agreement dated 04.11.2019, Financial Creditors became co-promoters and were equally accountable for project completion and payback.
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The bench of Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) , after analysing the settlement agreement’s provisions, it was noted that the PMC was established to keep an eye on the project, improve sales and collections, and supervise construction. Since the PMC’s role was restricted to enhancing the business’s operations in relation to the project, it cannot be claimed that it also took on the obligors’ repayment obligations.
It was viewed that “The default in repayment of the obligation by obligors cannot in any manner be put on the financial creditor nor constitution of PMC in any manner affect the obligation or absolve the corporate debtor from its default for repayment of the debt.” It further observed that any dispute even pending in the arbitration does not in any manner prohibit the financial creditor to take remedy under Section 7.
The tribunal found that there is unquestionably proof of a debt and default, which the corporate debtor has periodically admitted. According to the financial record, the corporate debtor has not fulfilled its payback commitments. The adjudicating authority has correctly returned the finding of debt and default after taking into account all of the parties’ submissions.
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