Pointing out an error by an appellate authority, the National Company Law Appellate Tribunal (NCLAT) says that the consortium of four participating banks, including IDBI Bank Ltd, bound themselves while considering their effect in the adjudication of Section 7 (of Insolvency and Bankruptcy Code-IBC) application filed against the guarantor. Especially, IDBI Bank could not have acted unilaterally in declaring an 'event of default' for its loan facility and then seeking repayment from the guarantor, NCLAT says.
In an order issued earlier this month, the bench of justice Ashok Bhushan (chairperson), Dr Alok Srivastava and Barun Mitra (technical members) says, "...the adjudicating authority (National Company Law Tribunal -NCLT, Ahmedabad) has committed gross error in not examining the provisions in the inter-se agreement, security trustee agreement and the deed of guarantee, by which the four participating banks of the Bank of Baroda (BoB) consortium have bound themselves while considering their effect in the adjudication of the section 7 application filed against the guarantor Fivebro International Pvt Ltd (Fivebro) and thereafter admitting it. We, therefore, set aside the impugned order and as a consequence, the corporate debtor Fivebro is freed from the rigours of the corporate insolvency resolution process (CIRP) and moratorium and other related provisions of IBC."
In 2014, Doshion Veolia Water Solutions Pvt Ltd obtained a loan from a consortium of four banks led by BoB, and consisting Union Bank of India, Standard Chartered Bank (StanChart) and IDBI Bank. On 27 June 2014, Fivebro signed a deed of guarantee for the loan with IL&FS Trustee Co Ltd, the security trustee of the consortium of banks. The consortium undertook a restructuring of the loan and approved an increase in debt of up to Rs422.11 crore with actual disbursement of Rs408.64 crore made to Doshion. However, StanChart did not lend its share in the restructured loan to the borrower.
After a default, IDBI Bank sent a letter to Doshion on 20 September 2016, recalling its loan facility and demanding repayment of its loan within 15 days. On 4 November 2016, IDBI Bank sent a letter to Fivebro stating that Doshion failed to repay its loan and that, as guarantor, the company needs to pay Rs72.32 crore, the amount due on 20 September 2016, to the Bank.
After not receiving payment from Doshion and Fivebro, on 11 October 2018, IDBI Bank filed an application under Section 7 of the IBC. On 10 May 2022, NCLT, Ahmedabad, admitted IDBI Bank's application, leading to the initiation of CIRP of Fivebro. The matter then reached NCLAT.
After going through the submissions from both sides, NCLAT bench observed two issues in this case. First, the locus standi of IDBI Bank, which had filed an application under Section 7 of IBC and second, whether non-disbursement of the additional amount after the restructuring of the loan by StanChart changed the nature of the debt package.
NCLAT also noted clause (4) of the security trustee agreement, signed by BoB on behalf of the consortium with IL&FS Trustee Co, regarding enforcement of security and actions under the financing documents. The clause says that any lender proposing to take any decision or action in connection with the matters contained in clause (3) of the agreement must intimate the security trustee by written notice. IL&FS Trustee Co, would then have to inform other lenders within a day of receiving the intimation from a lender (IDBI Bank in this case).
"The action of declaring an event of default is also an action wherein this procedure was to be followed. Thus, it is clear that the event of default cannot be declared by an individual bank under the individual financing documents of the participating banks in the Bank of Baroda consortium and recourse must be taken to the security trustee agreement and the inter-se agreement," the bench says.
In its order, NCLT, Ahmedabad relied on clause 7.5 of the inter-se agreement to hold that any lender is at liberty to take any decision or action on any other matter and is not required to take any approval from other lender.
However, NCLAT says NCLT, Ahmedabad, committed an error by relying on a faulty interpretation and understanding of clause 7.5 of the inter-se agreement. "We find that clauses 7.1 and 7.2 of the inter-se agreement clearly lay down that an 'event of default' is covered under the actions for which the provisions are made in the inter-se agreement and the modality of taking such action is clearly set out in clause 7.2. Even for the enforcement of securities, clause 7.3 of the inter-se agreement clearly provides that the enforcement of any or all of the securities shall be done by the security trustee as per provisions of the security trustee agreement on behalf of all the lenders and as instructed by the majority lenders. Therefore, clause 7.5 has to be read conjointly with clauses 7.1, 7.2 and 7.3 of the inter-se agreement. If that is done, we find that the action taken by the IDBI Bank in declaring 'event of default' is not in consonance with the provisions of inter-se agreement."
The bench of justice Bhushan, Dr Srivastava and Mr Mitra ruled that IDBI Bank was not entitled to act independently in declaring an event of default for its individual loan and recalling the loan advanced by it to Doshion and seeking repayment of the said loan from Fivebro, the guarantor.
(Case No.658/ND/2022 Date: 15 November 2022)