DRT Order Setting aside NPA Classification Does not Negate Existence of Financial Debt: NCLT [Read Order]

The New Delhi bench of the National Company Law Tribunal (NCLT) ruled that the existence of financial debt or the occurrence of default—the two main requirements for admitting a Section 7 petition under the Insolvency & Bankruptcy Code ("the code")—are not negated by a Debt Recovery Tribunal (DRT) order that invalidates an NPA classification.

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The corporate debtor received a loan of Rs. 23,85,32,000 from the applicant, M/S Encore Asset Reconstruction Company Private Limited, a financial creditor. The Financial Creditor sent the Corporate Debtor a Loan Recall Notice requesting full repayment after the Corporate Debtor failed to make payments on the outstanding balance.

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The Financial Creditor declared the Corporate Debtor's account as non-performing assets (NPA) on May 9, 2021, since the Corporate Debtor was still behind on repayment. Then, on July 16, 2021, the Financial Creditor sent a notice to the Corporate Debtor and its Guarantors in accordance with Section 13(2) of the SARFAESI Act, 2002. However, after verifying the amount owed, the Corporate Debtor failed each time in spite of the Financial Creditor's repeated reminders. A request to initiate insolvency proceedings against the corporate debtor was submitted before the NCLT under section  7.

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In order to initiate insolvency proceedings, the corporate debtor argued that the date of classification as non-performing assets (NPA) could not be regarded as the date of default. Furthermore, a "default" happens when a debt becomes due and is not paid, not when the account is designated as non-performing assets (NPA), according to Section 3(12) of the Code.

Additionally, it stated that the DRT had determined that the bank had not complied with RBI criteria while categorizing the account as non-performing and that the date of NPA designation did not align with the bank's own correspondence. The Corporate Debtor argued that the financial creditor had a legitimate cause of action to start insolvency proceedings because the DRT had ruled that the NPA categorization was unlawful.

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It was accepted that an account's simple designation as non-performing assets (NPA) does not amount to "default" under Section 7 of the Code. Instead of depending just on the account's classification as non-performing assets (NPA), the IBC determines default based on an independent evaluation of non-payment of a financial debt.

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The bench of Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Dr. Sanjeev Ranjan (Technical Member), held that an order by the DRT setting aside NPA classification does not negate the existence of financial debt or the occurrence of default. As per Section 238 of the Code, IBC has an overriding effect over all other laws including the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

The tribunal accepted the Section 7 petition and determined that the two main requirements for accepting a Section 7 petition under the IBC are the presence of financial debt or the occurrence of default.

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To Read the full text of the Order CLICK HERE

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M/s ENCORE ASSET RECONSTRUCTION COMPANY PRIVATE LIMITE vs M/s NEW TECH IMPORTS PRIVATE LIMITED , 2025 TAXSCAN (NCLT) 131 , CP No.: IB 823(ND)/2022 , Mr. Sudhir Makkar , Mr. Anuj Mirdha