The National Company Law Tribunal (NCLT), New Delhi bench, has clarified that a pre-existing dispute between a Financial Creditor and Corporate Debtor does not prevent the admission of a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal further held that a claim not forming part of the Resolution Plan of a parent company does not get extinguished if, at the time of the parent company's Corporate Insolvency Resolution Process (CIRP), there was no default by the Corporate Debtor.
The case arose from a financial default by MBL (MP) Toll Road Company Limited (Corporate Debtor), which had availed a loan from Punjab National Bank (International) Limited (Financial Creditor) for a road development project. The Corporate Debtor’s loan account was classified as a Non-Performing Asset (NPA) on 03.03.2023, and the Financial Creditor filed a Section 7 application seeking CIRP for an outstanding debt of USD 53,38,895.44 (Rs. 44.04 crore).
The Corporate Debtor contended that the existence of an arbitration dispute regarding an Escrow Agreement and the incorrect service of the demand notice should bar the Section 7 application. It also argued that the Financial Creditor’s claim should have been included in the CIRP of its holding company, MBL Infrastructure Ltd.
The NCLT rejected these contentions, emphasizing that:
The existence of a pre-existing dispute is irrelevant to a Section 7 petition, as the inquiry is limited to "debt" and "default."
Arbitration proceedings do not preclude IBC proceedings, as jurisdiction over such disputes lies under the Arbitration and Conciliation Act, 1996.
Service of a demand notice is not mandatory for a Section 7 application, unlike under Section 9 of the IBC.
Since the Corporate Debtor was not in default during the CIRP of its parent company, there was no occasion for the Financial Creditor to file a claim at that stage.
The Tribunal relied on BRS Ventures Investments Ltd. v. SREI Infrastructure Finance Ltd., reaffirming that the creditor’s recovery of part of the guaranteed amount does not extinguish the remaining debt recoverable from the principal borrower.
The NCLT admitted the Section 7 application, imposed a moratorium under Section 14(1), and appointed an Interim Resolution Professional (IRP).
Punjab National Bank (International) Limited v. M/s MBL (MP) Toll Road Company Limited
CP (IB) No. 423/(PB)/2023
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