Financial Creditor can file Application u/s 7 of IBC even after Initiation of Recovery Proceedings before DRT: NCLAT [Read Order]

The New Delhi bench of the National Company Law Appellate Tribunal ( NCLAT ) has held that initiation of recovery proceedings before the DRT does not prohibit financial creditors from filing an application under section 7 of the Insolvency Bankruptcy code( IBC ), 2016.

The suspended director of the corporate debtor, Pawan Kumar, the appellant, contested the decision made by the adjudicating authority that granted an application under section 7 of the code. A group of institutions, including the Central Bank of India and the Oriental Bank of Commerce, issued loans to the corporate debtor. The corporate debtor's accounts were designated as non-performing assets (NPA) by both banks. Additionally, both banks independently submitted applications under section 7 of the code; the Oriental Bank's application was accepted, and the CIRP was started against the CD.

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The DRT received recovery proceedings from both banks. The Central Bank was given a favorable decree. Recovery procedures by announcing the sale of the CD's assets were then started in order to carry out the decree, but they were halted when objections were voiced. The Central Bank contested this order in the Punjab and Haryana High Court. The Recovery Officer then canceled the auction as well. Additionally, the CD sent a writ to the High Court. In the proceedings brought by the Oriental Bank under section 7, the AA issued an interim injunction prohibiting the alienation of the CD's assets.

The High Court also dismissed both writ petitions, upholding the Recovery Officer's decision to cancel the auction sale and ordering the money from the sale to be refunded.The appellant argued that Oriental Bank of Commerce (now Punjab National Bank), the lead bank, had taken action to restructure the debt and that the lead bank had approved a restructuring proposal on July 16, 2018. Additionally, it was argued that only the lead bank, in accordance with the inter-se agreement, could take action to enforce the securities, and that the central bank lack ed the authority to file a Section 7 application.

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The Central Bank argued that the Appellant's claim of Rs. 136 crores had not been recovered. Actually, the Rs. 37.60 crore auction was held on November 5, 2021, and it was canceled on April 24, 2023. Since the High Court upheld the auction buyer's refund, the Central Bank of India has not been able to recover any money, and the appellant won an interim injunction through deception.

Additionally, it was argued that the Appellant's OTS proposal was completely inadequate and that the Adjudicating Authority had correctly admitted the Section Application due to the debt and default. The tribunal pointed out that the High Court had previously upheld the Recovery Officer's auction cancellation decision and ordered the return of the Rs. 37.60 crore auction proceeds. The CD and the bank filed writ petitions, but the court dismissed them, stating that they were no longer valid due to the admission of the section 7 application.

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The bench comprising Justice Ashok Bhushan (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) rejected the contention of the appellant that since proceedings before the DRT had already been initiated, the bank could not file an application under section 7 of the code.

"The fact that a financial creditor has filed a case before the DRT does not preclude them from taking remedy under Section 7, which is a special remedy provided under the IBC," the ruling stated. The tribunal further dismissed the appellant's argument that only the lead bank was permitted to submit an application under section 7 of the code, citing the fact that the lead bank had submitted the application that the adjudicating authority had ultimately accepted.

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The tribunal determined that no arguments had been presented against the contested order admitting the section 7 application, and as a result, the appeal should be dismissed. Additionally, it mandated that the CD provide an OTS plan within two weeks and then file an application under section 12A to have the CIRP application withdrawn. The IRP will, however, proceed with the CD's CIRP in compliance with the legislation if the OTS proposal is rejected.

To Read the full text of the Order CLICK HERE

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