National Company Court Refusal to Admit CMRS Insolvency Projects – Should Lenders Be Forced to Settle? – Insolvency / Bankruptcy / Restructuring


India: National Company Court Refusal to Admit CMRS Insolvency Projects – Should Lenders Be Forced to Settle?

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The global economy has faced unprecedented challenges from Covid-19. The RBI and the Indian central government have announced a series of measures to minimize the impact of Covid-19 on financial markets in order to provide liquidity to borrowers. These measures include a moratorium on loan repayments and the stay of insolvency proceedings under the Insolvency and Bankruptcy Code of 2016 (“IBC”) for 6 months or more.1 where the default occurred in the lockdown. However, a balance must be found so that these temporary measures adopted in extraordinary times do not permanently weaken India’s credit culture. A robust economy requires a vibrant credit culture where borrowers are incentivized to repay their debts on time. Debt collection is a crucial part of credit flows in an economy and ultimately the banks that lend are the custodians of depositors / taxpayers’ money.

The recent judgment of the NCLT (Bengaluru Bank) (“NCLT”) in India Asset Growth Fund & ors. v. CMRS Projects Private Limited2 (decided on June 23, 2020) by ignoring a recognized default of a debtor and forcing the financial creditor to accept a unilateral settlement proposal due to the current economic environment, in our opinion harms the credit culture of the country and sends the wrong signal to borrowers. This is particularly acute at a time when there are multiple large-scale corporate frauds, embezzlement, enforcement management investigations that have occurred in companies considered to be “blue chips”. in their respective sectors a few years ago.


CMRS Projects Private Limited (“Debtor Company”) has issued non-convertible debentures underwritten by India Asset Growth Fund and India Asset Growth Fund-II (“Financial Creditors”). Vistra ITCL has been appointed Trustee of the Debentures. The debtor company defaulted on its debt in August 2018 and the parties attempted to negotiate and reach a settlement, which also failed. Therefore, the financial creditors have filed a claim under Article 7 of the IBC for the opening of insolvency proceedings against the debtor company for a default amount of Rs. 18, 0 crores.


The debtor company offered to make a settlement payment of Rs. 12 crore (arguably a 65% recovery rate compared to some other assets may be considered a good recovery rate for some creditors). NCLT ignored the existence of a default (which is the basic requirement for a claim under Article 7 of the IBC) and relied on a unilateral settlement offer from the debtor company (this settlement offer being rejected by financial creditors) to order financial creditors to consider the debtor company’s offer to settle. Interestingly, the NCLT relied on its powers under Rule 11 of the NCLT Rules, 2016 (rather than its duty as a decision-making authority under the IBC) by using the current economic situation to justify its decision. It considered that the foreclosure affected the timetable for the implementation of its proposal by the debtor company, which was beyond its control. He fell back on the objects of the IBC, which states that it is “a law aimed at consolidating and amending all laws relating to the reorganization and resolution of the insolvency of legal persons. , partnerships and individuals within a specified period and for the maximization of the value of the assets of these persons, to promote entrepreneurship, the availability of credit and the balance of interests of all stakeholders , including changing the order of priority of payment of government contributions, etc. The ordinance ruled that initiating the insolvency resolution process of the company would constitute a “civil death” for the debtor company and takes into account the effect on all stakeholders and the general public since l The debtor company had contract workers, home buyers and other sellers. The NCLT agreed that this case is not covered by the IBC Order 2020, as the default occurred before March 25, 2020. However, what it concludes is that the debtor company and the financial creditors must reach a settlement taking into account the current situation. situation in India.


The Supreme Court has in several cases ruled that under Article 7 of the IBC, the contracting authority is not required to be satisfied that a breach has occurred.3 As soon as the contracting authority is satisfied that a defect has occurred, the claim must be allowed. NCLT has completely ignored and ignored the Supreme Court’s rulings and its powers under the IBC.
In addition, the NCLT relied on Rule 11 of the NCLT Rules, 2016, which refers to the inherent powers of the NCLT. However, these powers should be used by the NCLT sparingly and only in the absence of express provisions of the IBC. The Supreme Court in Swiss Ribbons Private Limited v. Union of India4 authorized the NCLTs to invoke their inherent powers under Rule 11 of the NCLT Rules, 2016 for the withdrawal of an application under Section 12A of the IBC, due to the lack of clear guidelines under the IBC. It goes without saying that the powers of the contracting authority are clearly delimited under Article 7 of the IBC and Rule 11 cannot be invoked to reject an application when the default is clearly established.

We also find that the view that the general public / stakeholders will be affected as the debtor company had contract workers, homebuyers and other unsustainable sellers and went beyond the IBC target of its context, since all businesses have customers, suppliers and employees. This would mean that no company would ever be admitted under the IBC.

It is difficult to argue that the NCLT acting as the contracting authority under Article 7 of the IBC has the power to force a creditor to settle with a debtor. As noted above, the IBC has clearly defined the powers and authority of the contracting authority. Except under Article 12A of the IBC, in which the requesting creditor settles with the debtor, the ruling authority does not have the power to authorize the withdrawal of a request filed under the IBC. . Even so, the adjudicating authority cannot impose a unilateral settlement offer on creditors and creditors should be allowed to use their commercial wisdom to accept or reject a settlement offer, which has been completely ignored by the NCLT in this case.

A more fundamental point is ultimately, the debtor company “borrows” money. That is, it is a loan and not an equity, where if the terms of the loans are freely contracted and contracted, are subsequently violated and the amounts are not repaid ( even a year after the issuance of a demand letter), creditors should basically have options. It is well established that the IBC is not a collection mechanism but a mechanism of rehabilitation and control of the Debtor Enterprise must then in our opinion be in the hands of the creditors as a “model of the creditor in possession”. The judiciary should not lose sight of the fact that the collection and resolution of bad debts is essential to maintaining a smooth flow of credit in the financial system. Therefore, the stressed economic conditions due to Covid-19 cannot and should not be a reason for rejecting good faith claims under the IBC, where the defects clearly predate any foreclosure. Ultimately, most creditors looking to use the IBC, whether they are banks, nonbank financial corporations, mutual funds, or investment funds, ultimately have the funds. depositors who must also be protected. It is hoped that the National Company Law Appeal Tribunal will correct this error.


  1. Insolvency and Bankruptcy (Amendment) Code Ordinance 2020 (“IBC Ordinance 2020”)
  2. CP (IB) n ° 233 / BB / 2019
  3. Innoventive Industries Limited v. ICICI Bank & Ors. (Civil call nos 8337-8338 of 2017).
  4. Written petition No.99 of 2018.

The above is a generic analysis and should not be taken as a substitute for specific advice based on the facts of a client’s objectives and specific business agreements entered into. Please contact us at [email protected] with any questions.

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