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Restructuring arrangement & condition of default: a tale of fallacious discernment

Th author is Vishesh Bhardwaj, second year student at National Law University Odisha.


Introduction


The Insolvency and Bankruptcy Code 2016 (“IBC”) was a game-changing overhaul in India for resolving distressed debt. It signalled a shift from previous resolution and recovery methods by establishing a tool to resurrect distressed debtors. At the moment, the resurrection method appears to be inclined toward debt restructuring.


Recently, in the case of Edelweiss Asset Reconstruction vs. Perfect Engine components, NCLAT overruled the decision of the NCLT and wrongly initiated the corporate insolvency resolution process (“CIRP”) u/s 7 of the IBC by ignoring the provisions of a debt restructuring package, and certain facts which were taken into consideration by the NCLT. The author aims to highlight how ignorance of a debt restructuring package derailed the judgement and the reasoning behind it, squandering the stare decisis rule.


Background


State Bank of India (“Original Lender”) had extended various credit facilities to the Corporate Debtor (“CD”) at its request. The CD committed default in repayment of its outstanding dues on 31.03.2009 and the Corporate Debtor’s account was declared as NPA on 30.06.2009 by the Original Lender.


Edelweiss Asset Reconstruction company (“Petitioner”) was substituted as the lender by a deed of assignment from the original lender in March 2014. After the assignment of the debt in favour of the Petitioner, the Petitioner sanctioned a singly consolidated restructuring package in favour of the CD by letter dated 07 November, 2014. The Petitioner granted the First restructuring package on 7 November 2014, which was revoked on 22.09.2016, and the Second restructuring Package on 30.06.2017. The package was revoked on 1.06.2018, contrary to the terms and conditions of the restructuring package.


The Petitioner had also filed an Original Application bearing No. 01/2014 before the Debt Recovery Tribunal (DRT). The Petitioner, even after the approval of the restructuring package, continued to prosecute the said recovery application without placing on record the factum of the restructuring package.


The most critical condition of the said package was that the entire repayment had to be made from ‘operational cashflow’ as provided therein. The present Petition was filed u/s 7 of the IBC on the basis of a default qua the restructuring package and the Petitioner had sought to compute limitation on the basis thereof.


Terms of the package: an incidence of oblivious repudiation


For a contract to be terminated, there needs to be violation of provisions or mutual consent to terminate the contract. If a contract is revoked without any cause of action, then it results in damages. In this instant case, there was no mutual consent or violation of a provision, yet, the restructuring agreement was revoked. The unilateral revocation pursuant to a clause of repayment was strongly objected to by the CD who pointed out that there is no default and payments will have to be made only from operational cash flows.


In the case of Jagbir Singh Sharma v. Municipal Corporation of Delhi, it has been said that if a contract contains provisions related to payment, then the payment will take place as per the contract under a reasonable period of time. As per the package, the default would have occurred if the corporate debtor had not repaid the loan while having operational cash flows.


The NCLAT while hearing the case overlooked the provisions of the restructuring agreement and fundamentals of the law of contracts. The Petitioner, having contractually agreed to be bound by certain terms and conditions of the contract under the restructuring package, in which a mechanism for payment of outstanding dues is prescribed, cannot enforce its statutory rights as the CD has not defaulted as per the contract. The restructuring package envisaged the payment of installment from operational cash flows and therefore, there can be no default attributed to the Corporate Debtor, and the same was not considered by the NCLAT.


Extending limitation: erroneous revival of time-barred debt


The NCLAT mostly relied on the judgement of SC in Laxmi Pat Surana vs. Union Bank of India to reach this reprehensible judgement. The issue with relying on this judgement is that it mostly talks about not construing the date of NPA as the date of default and Section 18 of the Limitation Act. The SC in the Laxmi Pat held that the IBC's purpose wasn't to resurrect or resuscitate time-barred debts; instead, it highlighted that accrual of a new period of limitation in terms of Section 18 is within the Limitation Act itself, and it would not be a matter of granting time-barred debts a new lease. Further, it said that extending the period of limitation for enforcing rights would depend on the contractual arrangement. The provisions of the agreement in the present case suggest that default has not occurred as the repayment provision has been adhered to and hence, the limitation period cannot be extended.


The Petitioner herein has attempted to trigger a fresh round of limitation on the basis of a restructuring package which is not permissible. The balance sheet confirmed that there is no default on behalf of the Corporate Debtor for the years 2016 and 2019, which means that there is no fresh default by the corporate debtor pursuant to the restructuring package. The NCLAT erroneously ignored the audit report which mentions that the appellant did not default on any kind of repayment, and wrongfully extended the limitation period. The right to sue ensues when the Default occurs, the default has occurred over three years prior to the filing of the Petition, therefore, the Petition is barred by Limitation under article 137 of the Limitation Act, 1963.


IBC intends to assist insolvent companies, unable to pay their debts, and regularly default. However, there is no default in this situation, and repayment under the restructuring arrangement is through operational cashflows, and there is no mention of repayment in the event of a deficit in operating cash flow. As there is no acknowledgment of debt which is a prerequisite, S.18 of the Limitation act has been erroneously applied to revive the time-barred debt.


Squandering stare decisis


Stare decisis means “to stand by that which is decided.” It is a legal notion that entails the courts to adhere to the preceding judgments when delivering a verdict on a similar issue. Stare decisis intends that cases with akin facts and conditions are addressed similarly. In general, it requires adjudicating authorities to abide by the legal precedents established by previous judgments. This judgment did not take into account various pronouncements and gave an interpretation of its own to certain legal issues.


Firstly, as per the Indian Contract Act, of 1872, the terms of an agreement need to be adhered to and for a contract to be revoked, there needs to be a cause of action. The same has been said by the SC in the case of Brij Mohan & Ors. vs. Sugra Begum. In the present case, NCLAT overlooked the provisions of the restructuring arrangement and proceeded to initiate CIRP without any default. Default is a prerequisite for initiating CIRP as per section 7 of the IBC. Yet, without any default the petition was admitted, contrary to the IBC and judgments delivered by higher courts.


Secondly, the cause of action arose as of 31.03.2009. However, the Petitioner was filed on 08.08.2020 which makes it time-barred. The SC in B.K. Educational services Private Limited Vs Parag Gupta and Associates categorically held that Article 137 of the Limitation Act, 1963 mentions that “the right to sue accrues when the default occurs”, in this instant case, the default has occurred over three years before the filing of Petition, hence the Petition is barred under Limitation Act, 1963. Yet, the petition was admitted and limitation was extended wrongfully, resulting in non-adherence to precedents, and potential inconsistency in the decision-making process.


Conclusion


The IBC intends to guarantee that the CIRP starts when a default occurs, which is when a debt becomes due but is not paid. While analysing the facts of a case, the adjudicating authorities sometimes overlook the provisions of an agreement and whether the parties' actions were in accordance with it, which is a very important step as one single provision of an agreement can potentially change the outcome of a dispute. Such ignorance not only sets the wrong precedent but also results in inconsistent jurisprudence. In this instant case, no default took place, hence there was no acknowledgment of debt and the insolvency process was initiated erroneously. This reprehensible judgement and precedent need to be corrected at the earliest or it might severely impact the viability of restructuring arrangements.

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