India: Order Of Appointment Of Liquidator Will Not Create Any Bar On The Applicability Of The Insolvency And Bankruptcy Code, 2016 : NCLT

Last Updated: 3 April 2019
Article by Manas Shukla and Shah Usman

Recently, the NCLT, Delhi vide its order dated 28.03.2019 admitted an application filed under Section 7 of Insolvency and Bankruptcy Code ("Code") by Punjab National Bank ("PNB") being one of the financial creditors against M/s Hanung Toys and Textiles Limited. 1

It was the case of the financial creditor that it had sanctioned Working Capital facility and Term Loan to the corporate debtor in consortium of banks comprising of PNB, Bank of Baroda, SBI, Syndicate Bank, Union Bank of India, ICICI Bank and Oriental Bank of Commerce in the year 2006. The said facilities were enhanced from time to time at the request of the corporate debtor and various loan and security documents were executed. The account of the corporate debtor was declared as Non-Performing Asset on 31.12.2013. At the time of filing of the application a sum of Rs. 1361,29,67,540.12 (Rs. 1361 Crore) was due from the corporate debtor.

The corporate debtor filed an application challenging the maintainability of the application filed under Section 7, mainly on two grounds:

  1. That vide order dated 12.07.2018, a company petition was admitted by the High Court of Delhi and the official liquidator was appointed for the present corporate debtor. It was further argued that the said winding up proceedings were at an advanced stage of liquidation and as such no resolution or revival purpose would be served as most of the properties belonging to the corporate debtor have already been sold and the amounts procured from the sale have been duly appropriated.
  1. That the credit facilities were granted by consortium of banks, as such without impleading other consortium banks and without their approval the present application is not proper.

It was contended on behalf of the financial creditor that in view of the orders passed by the Supreme Court in Jaipur Metals and Electricals Employees Organisation vs. Jaipur Metals and Electricals Ltd. and Ors.2 and Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd.3, there is no bar on the filing of present application under Section 7 of the Code. It was further contended that in terms of Section 7(1) of the Code, a financial creditor may either by itself or jointly with other financial creditor, file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. As such there is no obligation on part of the applicant bank to join the consortium of banks.


With regard to the first objection raised by the corporate debtor, the Adjudicating Authority referred to the orders passed by the Supreme Court of India in the matter of Jaipur Metals and Electricals Employees Organisation vs. Jaipur Metals and Electricals Ltd. and Ors.4 and in Forech India Ltd. vs. Edelweiss Assets Reconstruction Co. Ltd.5 and held:

"Section 7 application filed under the Code is an independent proceeding and must run its entire course, which has nothing to do with the pendency of winding up proceedings before High Court. In view of the precedent laid down by the Hon'ble Supreme Court, pendency of winding up petition before High Court will not be a bar for initiation of proceedings under Section 7 of the Code.

...the order of admission or the order of appointment of liquidator will not create any bar on the applicability of the provisions of IBC to the proceedings instituted under the Code. Till the company is ordered to be wound up i.e. the final dissolution order is passed; Adjudicating Authority can entertain a petition filed under the Code."

As regards the objection regarding impleadment of other consortium members, the Adjudicating Authority whilst emphasizing on Section 7(1) of the Code, held that there is no obligation on part of the applicant bank to join the consortium of banks.

The Adjudicating Authority further relied on the orders passed by the NCLAT in the matter of Asian Natural Resources (India) v. IDBI Bank Limited6 and held that an inter-se agreement between the financial creditors cannot override the express provisions of the Code nor can take away the right of the creditor to file application under Section 7 of the Code. Further, Section 238 of the Code will have an overriding effect on anything contained in any instrument. Accordingly, the applicant bank being the financial creditor can file individual application under Section 7 of the Code, once there is a debt and default.

In view of the above, it has been made clear that the pendency of the winding up proceedings before the High Court will not bar the proceedings under the Code and that it is not mandatory for a financial creditor to join consortium of banks or take consent of the other banks in the consortium while filing an application under Section 7 of the Code.   

*The matter was argued by the authors on behalf of the financial creditor before the NCLT, Delhi.


1 CP(IB) 953 (PB)/2018

2 2018 (15) SCALE 836

3 CA No. 818 of 2018

4 2018 (15) SCALE 836

5 CA No. 818 OF 2018

6 CA (AT) (Insolvency) No.  of 2017 dated 11.08.2017

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