GVK Energy Ltd Vs Axis Bank Limited (NCLAT Chennai)
In the case of M/s. GVK Energy Ltd Vs. Axis Bank Limited, adjudicated by the NCLAT Chennai, the fundamental question of hierarchy between the Insolvency and Bankruptcy Code (IBC) and the RBI directions was examined. The court was tasked with determining whether RBI guidelines or the IBC would hold precedence when discrepancies arose in their directives.
Axis Bank, along with other lenders, had sanctioned loans to GVK Energy. An inter-creditor agreement (ICA) was formed following RBI directions, wherein GVK Energy committed to quarterly repayments. However, upon default by GVK Energy, Axis Bank filed an application under section 7 of the IBC, which was accepted. GVK Energy contested this decision, arguing that as per the ICA, sanctioned under RBI directions, premature legal action by any lender was impermissible. In a significant ruling, the NCLAT emphasized that the IBC would have an overriding effect, and an RBI circular could not obstruct a financial creditor from pursuing their claims.
The verdict of the NCLAT Chennai in the case of GVK Energy Vs. Axis Bank Limited establishes an essential legal precedent, solidifying the paramountcy of the IBC over RBI directions. The ruling unequivocally communicates that in the event of conflicts, the IBC provisions would take precedence, ensuring the protection of financial creditors’ interests. This judgment provides valuable clarity for financial creditors in their pursuit of remedies under the IBC in the face of default by a corporate debtor.
FULL TEXT OF THE NCLAT JUDGMENT/ORDER
The Appellants have preferred the instant Comp. App (AT) (CH) (INS.) No. 385 of 2022, on being dissatisfied with the ‘impugned order’ dated 10.10.2022 in CP No. 43/7/HDB/2020 (Filed by the ‘1st Respondent Comp. App (AT) (CH) (INS) No. 385 of 2022/ Financial Creditor / Bank / Petitioner’), under Section 7 of the I & B Code, 2016, read with Rule 4 of I & B (AAA) Rules, 2016, passed by the ‘Adjudicating Authority’ (‘National Company Law Tribunal’, Hyderabad Bench-I, Hyderabad).
2. The ‘Adjudicating Authority’ (‘National Company Law Tribunal’, Hyderabad Bench-I, Hyderabad), while passing the ‘impugned order’ dated 10.10.2022 in CP (IB) No. 43/7/HDB/2020 (Filed by the ‘1st Respondent / Financial Creditor / Bank / Petitioner’), under Section 7 of the I & B Code, 2016, read with Rule 4 of I & B (AAA) Rules, 2016, among other things, at Paragraph Nos. 60 to 70, had observed as under:
“60. In the above backdrop, we proceed to decide the Point, by referring at the outset to Direction 9 of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, wherein it is stated that:
“In any case, once a borrower is reported to be in default by any of the lenders mentioned at 3(a), 3(b) and 3(c), lenders shall undertake a prima facie review of the borrower account within thirty days from such default (̏Review Period’’). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery.’’
61. Therefore, it is manifest from the above The Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 (‘RBI Directions, 2019’ for brevity) which came into effect on 07.06.2019, the lenders shall mandatorily undertake a prima facie review of the borrower’s account within 30 days from such default and decide on a resolution strategy and in the event of Lenders deciding to adopt a possible plan, the Lenders to enter into an ‘Inter Creditor Agreement’ providing framework for finalization and implementation of a possible resolution plan.
Since some of the Senior Lenders of the Corporate Debtor entered into an Inter Creditor Agreement, for short ‘ICA; dated 06.07.2019, Ld. Sr. Counsel for the Corporate would contend that the same signifies that the lenders have decided to adopt a possible resolution plan, therefore, Clause in terms of clause 13.2 of the ICA, which says that the standstill provision shall extend during the implementation of the Resolution Plan (which is currently 180 days from the end of the Review period, i.e., upto 19.08.2020, however, the Company Petition having been filed on 19.12.2019, well before the completion of 180 days is not only premature but also in violation of the Stand Still Clause 13 of the ICA dated 06.07.2019 hence not maintainable.
62. Learned senior counsel in this regard also placed reliance on Clause 7.3 (a) and (b) of the RBI Circular which provide that:
(a) the Resolution Plan that is approved by the Majority Lenders shall be final and binding on all the Lenders and each Lender (including the Dissenting Lenders) agrees and undertakes to be bound by the approved Resolution Plan;
(b) during the resolution process and during the implementation of the Resolution Plan that has been approved by the Majority Lenders in accordance with this Agreement and the Regulatory Framework, each Lender (including if such Lender is a Dissenting Lender) agrees that it shall not initiate any legal action or proceedings (including proceedings under IBC) against the Borrower or any other person that may jeopardise the successful implementation of the Resolution Plan in accordance with the terms of such Resolution Plan.”
63. Having examined the above along with relevant provisions / clauses in RBI Directions, 2019 and the ICA dated 06.07.2019, supra, we are unable to subscribe to the view of the Ld. Sr. Counsel for the corporate debtor as, Clause 13.2 of the ICA, categorically states that in the event the Lenders decide on implementation of a Resolution Plan the standstill period shall extend during the implementation of the Resolution Plan (which is currently 180 (one hundred and eighty) days from the end of the Review period, thus making the approval of the resolution plan if any within 30 days imperative and only upon such approval the stand still period gets extended to 180 days. Therefore, the sine qua non, for extension of the standstill period from initial 30 days to 180 days, the lenders should decide to implement the Resolution Plan, lest the initial period of 30 days will not get enlarged to 180 days.
64. During the course of hearing, we have specifically inquired with the learned Senior counsel for the financial creditor whether any resolution plan as contemplated under the RBI Directions, supra, has been received from the Corporate Debtor within the initial period of 30 days, to which the learned senior counsel submitted that no resolution plan has been received by the Senior Lenders, however, discussions in this regard have happened with the Senior Lenders, in the JLF Meetings held on 02.07.2019, 15.11.2019 and 21.01.2020. Therefore, it is overwhelmingly clear that no Resolution Plan has been submitted by the Corporate debtor within the initial standstill period of 30 days which had commenced on 07.06.2019, as such enlargement of time of 180 days as pleaded is unsustainable and untenable.
65. Now coming to the other submission of the learned counsel for the Corporate Debtor that the fact that the creditors have entered into Inter-creditor Agreement (ICA) itself is indicative of the fact that the lenders intend to consider implementation of the Resolution Plan, as such it is imperative for the lenders to wait till completion of the standstill period of 180 days for taking recourse to recovery of their dues, it is to be stated that we have already held that the submission of the Resolution Professional that within the initial 30 days’ time is, sine qua non, for enlargement of initial standstill period of 30 to 180 days and in the case on hand as no such Plan has been submitted the question of enlargement of time beyond 30 days does not arise. We may therefore, add herein that the embargo in terms of Clause 13.2 of the ICA in so far as the case on hand is concerned at the best may have prevented the Financial Creditor from initiating recovery proceedings only during the initial 30 days period and not beyond.
66. That apart, it is apt to refer herein to Clause 10 of the ICA which provides for exit from Resolution process in the above back drop of no resolution plan having been received by the lenders, which is as below:
“10.2 At the end of the standstill period specified in Clause 13.2 below, each lender shall be entitled to take necessary actions in accordance with the Regulatory Framework including taking any enforcement action under IBC or otherwise and to this extent, this Agreement shall prevail over the terms of the Amended and Restated Inter Creditor Agreement. It is clarified that no notice or waiting period shall be applicable to any Lender for taking any necessary actions including enforcement action against the borrower after the expiry of the standstill period specified in Clause 13.2 below.”
Moreover Clause 13.3 of the ICA says that:
“The aforesaid standstill provision shall not preclude the lenders from initiating or continuing any action against the borrower or its promoters / directors / officials or other persons for criminal offences.”
Hon’ble NCLAT in re. Amitabh Kumar Jha Vs. Bank of India, supra, held that:
“.. .. The Clauses in the ‘Inter-Creditor Agreement’ would not supersede the rights and obligations of Rupee Lenders in their independent capacity and this is further reinforced by Clause 1.3 of the ‘Inter-Corporate Agreement”.
The ruling below, in re, relied on by the Ld. Sr. Counsel for the Applicant wherein it was held that;
“…… notwithstanding the fact that neither the claims barred by law nor do such Financing Documents clothe the ‘Corporate Debtor’, with a right to disentitle the ̏Financial Creditor’ from enforcing its claim, in its individual capacity, despite being a member of the consortium of lender.” Further, the statutory right across the ambit of Section 7 of the IBC cannot be curtailed or made subservient to any inter-creditor agreement and accordingly the appeal was dismissed.’’
67. The submission of the learned senior counsel for the Financial Creditor that, even if there is violation of the terms of ICA, the parties to the said ICA alone can initiate action against the applicant herein and the Corporate Debtor who admittedly is not a party cannot take shelter under any of the clauses in ICA, is not without force, as the said clause was incorporated to protect the interests inter se, all the lenders, and the Corporate Debtor especially when they fail to submit any resolution plan with the standstill period, cannot have any locus standi, to fall back on the said clause.
68. We are therefore, are not convinced with the submission of the Ld. Sr. Counsel for the Corporate Debtor that the present application as filed is premature, violative of RBI Directions and the clauses in ICA, as such the same is not maintainable.
69. Now coming to the yet another contention of the Corporate Debtor that unless the obligations of the priority lenders are met by the Corporate Debtor the other lenders like the applicant cannot raise their demand for discharge of their loans, and as the present demand having been raised before the priority lenders were discharged, the same is not maintainable, we are not convinced by the said submission in as much what priority lenders can get under the agreement is priority in payment of their dues over other lenders and nothing more. It is pertinent to note that even though the priority lenders’ claims have been satisfied, since no worthwhile payment has been made to other Senior Lenders, including this applicant the applicant has preferred this application.
70. Therefore, in light of the above discussion, upon considering the submissions of the learned senior counsel, we are of the view that the applicant herein has established that neither the directions of the RBI nor the terms of ICA create any legal embargo for repayment of the debt that was admittedly due and payable by the Corporate Debtor. The applicant herein is able to prove existence of a financial debt which is over Rs.1 crore and its default, hence the application as filed by the Financial Creditor is found to be fit for admission. Accordingly the application is allowed. The Corporate Debtor was put under CIRP forthwith.” and place the ‘Corporate Debtor’, under ‘Corporate Insolvency Resolution Process’ forthwith, by admitting the ‘Section 7 Application’ and declared ‘Moratorium’, etc.
Appellants Submissions:
3. According to the Appellants, the ‘Adjudicating Authority’ (‘National Company Law Tribunal’, Hyderabad Bench-I, Hyderabad), had not applied its mind, while ‘Admitting’ the Section 7 Petition ‘CP (IB) No. 43 / 7 / HDB / 2020’, because of the fact that basic requisites of ‘Debt’ and ‘Default’, that are required to be examined and ‘proven’, prior to the ‘admission’ of ‘Petition’, seeking to initiate ‘Insolvency Process’, was not established.
The Learned Senior Counsel for the Appellants contends that other than the existing ‘Term Loans’, the ‘Corporate Debtor’ / ‘GVK Power (Goindwal Sahib) Ltd.’, had required the ‘Additional Funds’, for ‘Working Capital’, and meeting the ‘Operational Expenses’. Indeed, according to the ‘Appellants’, the ‘Project Lenders’, including the ‘1st Respondent’, had agreed for the ‘Corporate Debtor’, to receive the ‘Financial Assistance’, from ‘Deutsche Bank AG, Mumbai Branch and Deutsche Bank International Asia Limited (i.e., the ‘Priority Lenders’).
4. The Learned Counsel for the Appellants submits that, in terms of the ‘Priority Facility Agreement’ dated 30.04.2017, and the ‘Priority Debenture Trust Deed’ dated 30.04.2017, the ‘Corporate Debtor’, was bound to ‘repay’, the \‘Priority Lenders’ in full, before making any payments, to the other ‘Project Lenders’, including the ‘1st Respondent’.
5. It is represented on behalf of the Appellants, that it was agreed that the ‘Loan Facility’, lent or to be lent and advanced by the ‘Priority Lenders’, shall be a ‘Priority Facility’, and that the ‘Priority Lenders’, shall at all times, be entitled to a ‘Priority in Payment’ and ‘Priority Security Interest’, over the ‘Cash Flows’, and the ‘Accounts’, among other ‘Entitlements’.
7. It is the stand of the Appellants that, as per ‘Clause 20.23’ of the ‘Priority Facility Agreement’, the ‘Corporate Debtor’, shall not make any accelerated, voluntary or non-scheduled repayment of any of its ‘Financial Indebtedness’, before the ‘Loan’, and also ‘Outstanding Monies’, were ‘repaid in full’, to the ‘Priority Lenders’, or make any change in the ‘Facility Documentation’, for any ‘Financial Indebtedness’, which would have the effect of accelerating the repayment of such ‘Financial Indebtedness’.
8. The Learned Counsel for the Appellants points out that, as per the said ‘Priority Debenture Trust Deed’, the ‘Corporate Debtor’, is under an ‘Obligation’, to clear all the ‘Outstanding Sums’, which are due to the ‘Priority Lenders’, in full, prior to making any payments, to the other ‘Project Lenders’, and ‘Clauses 4.1.5 and 5.6’ of the said ‘Deed’, clearly mentions and emphasise on this vital aspect. Moreover, as the ‘Corporate Debtor’, is also a ‘Party’, to the aforesaid ‘Agreements’, the ‘Priority Rights’, agreed were not ‘Inter se’, the ‘Lenders’, but also saddling a ‘Liability’ or ‘Duty’, on the ‘Corporate Debtor’, to pay to the ‘Priority Lenders’, in full, in ‘Priority’, over the ‘Other Lenders’.
9. The Learned Counsel for the Appellants points out that the ‘Reserve Bank of India’, had issued the ‘Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019’ (̏RBI Directions of 2019”) dated 07.06.2019, for the purpose of providing a framework for early Recognition, Reporting and Time Bound ‘Resolution of Stressed Assets’.
10. The Learned Counsel for the Appellants comes out with a stand that the ‘Lenders’, including the ‘1st Respondent/ Bank / Financial Creditor / Petitioner’, were required to undertake a prima facie review of the Corporate Debtor’s Account, within 30 days, and according to the Corporate Debtor, the ‘Review Period’, came into effect from 07.06.2019.
11. It is the version of the Appellants that, on 02.07.2019, the ‘Consortium of Lenders’, had decided that the ‘Resolution Plan’, outside the scope of the I & B Code, 2016, would be a better option and had agreed to execute an ‘Inter Creditor Agreement’, after taking internal approvals from their respective managements. As a matter of fact, on 06.07.2019, an ‘Inter Creditor Agreement’, was executed between the ‘Project Lenders’ and ‘Priority Lenders’ and the ‘E & Y’, was appointed by the ‘Corporate Debtor’, as the ‘Process Advisor’, to help prepare a suitable ‘Resolution Plan’.
12. The Learned Counsel for the Appellants points out that as per Clause 7.3 (b), read in consonance with the ingredients of Clause 13 (Stand Still Clause) of the ICA dated 06.07.2019, during the ‘Resolution Process’, no ‘Lender’, including the ‘Dissenting Lender’, can initiate any ‘Legal action’, against the ‘Corporate Debtor’, including a Civil action or the initiation of the proceedings, under the I & B Code, 2016. That apart, the stand-still period from 06.07.2019 is for 180 days, which would have ended on 06.01.2020, prior to that, Section 7 Petition, was filed by the ‘1st Respondent / Bank’, in a premature fashion.
13. The Learned Counsel for the Appellants takes an emphatic plea that pursuant to the ‘Inter Creditor Agreement’, dated 06.07.2019, that was entered into in tune, with the ‘Reserve Bank of India Directions of 2019’, dated 07.06.2019, the ‘1st Respondent / Bank’, had while taking part in all the ‘Joint Lenders Meetings’, and negotiating for better ‘OTS Proposals’, from the ‘Corporate Debtor’, issued a ‘Recall of Credit Facilities Notice’, dated 17.12.2019, calling upon the ‘Corporate Debtor’, to pay the ‘Outstanding Sum’ of INR 442,20,14,321.40/- immediately, together with Interest’, ‘Additional Interest(s)’, ‘Compound Interest’, ‘Liquidated Damages’, and other ‘Charges’.
14. The grievance of the Appellants is that, the 1st Respondent / Bank, had filed a Section 7 Petition (under the I & B Code, 2016), before the ‘Adjudicating Authority’ (‘National Company Law Tribunal’, Hyderabad Bench-I, Hyderabad), dated 20.12.2019, in an arbitrary manner, when there was ‘No Default’, in place, at the time of preferring the Section 7 Application, under the ‘Code’, given the holistic reading of the ‘Priority Facility Agreement’, the ‘Priority Debenture Trust Deed’, the ‘Inter Creditor Agreements’, dated 30.04.2017 and 06.07.2019 together, there was a clear stipulation that the ‘Priority Lenders’, have to be repaid in Full, before the ‘Other Lenders’, can be entitled to receive payments.
15. The Learned Counsel for the Appellants, relies on the Judgment dated 31.08.2017 of the Hon’ble Supreme Court, in the matter of Innoventive Industries Limited V. ICICI Bank & Anr. (vide Civil Appeal Nos. 8337 – 8338 of 2017), to the effect that the existence of both ‘Debt’ and ‘Default’, has to be mandatorily proved, prior to the ‘Section 7 Application’, can be ‘admitted’, by the ‘Adjudicating Authority’ (‘Tribunal’).
16. Besides the above, the Learned Counsel for the Appellants, adverts to the Judgment dated 31.08.2017 of the Hon’ble Supreme Court, in the matter of ‘Innoventive Industries Limited V. ICICI Bank & Anr.’ (vide Civil Appeal Nos. 8337 – 8338 of 2017), wherein at Paragraph 30, it is observed as under:
30. “……. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.”
17. Advancing his argument, the Learned Counsel for the Appellants points out that post the filing of ‘Section 7 Petition / Application’, by the ‘1st Respondent / Bank’, the ‘IDBI Trusteeship Services Limited’ (‘Bond Trustee’), had filed a ‘Commercial Suit’, before the Hon’ble High Court of Bombay, for release of a sum of Rs.292.70 crores from the ‘Trust and Retention Account’ (̏TRA”) for repayment of debt, payable by the ‘Corporate Debtor’, to the ‘Priority Lender – II’, from the TRA Account, to enable the ‘Corporate Debtor’, to pay the ‘Outstanding Dues’, to ‘Priority Lender’. Further, the Hon’ble High Court of Bombay, had passed an ‘Order’ on 26.06.2020, restraining all the ‘Lenders’, from withdrawing any sum from the ‘TRA’ of the ‘Corporate Debtor’.
18. According to the Appellants, the Hon’ble High Court of Bombay through its Order dated 19.08.2020, had recognised and upheld the ‘Priority Rights’, to payments by the ‘Corporate Debtor’, to the ‘Priority Lenders’, in the instant case, thereby, concretely establishing the fact that the ‘1st Respondent / Bank’, would be entitled to recover its ‘Outstanding Dues’, only after the ‘Priority Lenders’, were repaid in ‘Full’.
19. The stand taken on behalf of the Appellants is that, an ‘Acceleration Notice’, was issued by the ‘Priority Lenders’, but, not at the instance of any action / omission, on the part of the ‘Corporate Debtor’, but, due to the ‘illegal distribution of monies’, available in the ‘TRA Account’, by the ‘IDBI Bank’, in breach of the ‘Priority Rights’ of the ‘Priority Lenders’.
20. Added further, that it is pointed out on behalf of the Appellants that, when the ‘Priority Lenders’, had assailed the said illegal acts of ‘IDBI Bank’ (a ‘Lead Lender’), the Hon’ble High Court, had directed the said sums, to be deposited back into the ‘TRA Account’, within 48 hours, and later, as all the ‘Lenders’, including ‘Axis Bank’, had settled the issue among themselves and pursuant to which, IDBI Trusteeship, had paid a sum of INR 292 Crores, to the ‘Priority Lender’, as a ‘Full and Final Settlement’, and this was not questioned by any ‘Lender’, including the ‘1st Respondent / Bank’.
21. The contention of the Appellants, is that, the above facts go to prove that the ‘Corporate Debtor’, could have made the payments to the ‘1st Respondent / Bank’, only after the ‘Priority Lenders’, were ‘Repaid’ in ‘Full’, and any deviation from the same, was ‘disallowed’, as can be inferred from the fact that the Hon’ble High Court of Bombay, had in fact, expressly observed and held that no ‘Lenders’, shall be permitted to take any money from any Account, under the ‘TRA’ Agreement, until further orders, were passed in the matter, which firmly established that there was ‘No Default’, with reference to the ‘1st Respondent / Bank’, at the time of ‘Filing’ of a ‘Petition / Application’, under Section 7 of the I & B Code, 2016, on 20.12.2019.
22. The Learned Counsel for the Appellants points out that the ‘Punjab State Electricity Regulatory Commission’ (‘PSERC’), through its ‘Order’, dated 17.01.2020, had approved the ‘Capital Cost’ of the ‘Project’ of the ‘Corporate Debtor’, to the tune of INR 3,058.37/- Crores, only against the ‘Total Capital Cost’, that was incurred and claimed, by the ‘Corporate Debtor’, Viz. INR 4,267.38/- Crores.
23. The Learned Counsel for the Appellants submits that, the aforesaid ‘Capital Cost’, is to be paid by the ‘Punjab State Electricity Regulatory Commission’, to the ‘Corporate Debtor’, over a period of time and that the said monies, so paid, will be used for the payments to be made to the ‘Lenders’. Also that, the ‘Corporate Debtor’, had preferred an ‘Appeal’, against the ‘Order’ dated 17.01.2020 of ‘Punjab State Electricity Regulatory Commission’, before the ‘Appellate Tribunal’ for Electricity and the said ‘Appeal No. 41 of 2020’, is presently, pending for an ‘Adjudication’.
24. According to the Appellants, if the ‘Capital Cost’, as claimed by the ‘Corporate Debtor’, is declared by ‘APTEL’, as payable, then, in terms of the ‘PPA’ and applicable ‘Punjab State Electricity Regulatory Commission Tariff Regulations’, a ‘Corporate Debtor’, will be entitled for an interest at 13.50% per annum (SBI rate of interest + 350 base points), from the date the said amount is incurred, till the date the said amount is paid.
25. The Learned Counsel for the Appellants contends that the aforesaid amount includes, the ‘Principal Sum’, lent by the ‘Senior Lenders’ itself, including the ‘1st Respondent / Bank’, as well as the ‘Interest’, during ‘Construction’ (‘IDC’) ‘paid / payable’, by the ‘Corporate Debtor’, to the said ‘Lenders’, for the ‘Project Construction Period’, and in reality, the said ‘Sum’, is payable to, by the ‘Punjab State Power Corporation Limited’, in terms of the ‘Punjab State Electricity Regulatory Commission Tariff Regulations’. Apart from that, the said ‘Sum’ of INR 4,267.38/- Crores, is only the completed ‘Capital Cost’ of the ‘Project’, and the said Cost, will be treated as ‘Fixed Cost’ / ‘Capacity Charge’ of the ‘Project’, which is one component of the Tariff, payable by the ‘PSCPL’, and the other component of the Tariff, being the ‘Variable Cost’, which is also the part of the ‘Appeal’, pending ‘Adjudication’, by the ‘APTEL’. Therefore, INR 6,000/- Crores is shown as the ‘Liability’ of the ‘Corporate Debtor’, in its ‘Balance Sheet’, which is to be repaid to the ‘Lenders’, over a period of time, but, not at a stretch.
26. The Learned Counsel for the Appellants, brings it to the notice of this ‘Tribunal’ that the ‘details of monies’, paid by the ‘Corporate Debtor’, to the ‘Project Lenders’, including the ‘1st Respondent / Bank’, is mentioned in the Chart, given below:
