DRT’s order invalidating NPA status doesn’t nullify financial debt or default under IBC: NCLT

Under the Insolvency and Bankruptcy Code, 2016 (IBC), the NCLT New Delhi Bench has clarified that an order of the Debt Recovery Tribunal (DRT) setting aside the classification of an account as a Non-Performing Asset (NPA) does not negate the existence of a financial debt or the occurrence of default—both being essential requirements for the admission of a Section 7 application. The Tribunal emphasized that the determination of "default" under the IBC must be based on an independent assessment of non-payment of financial debt, and not solely on the procedural findings of the DRT under the SARFAESI Act, 2002.

The appeal arose out of a Section 7 application filed by M/s Encore Asset Reconstruction Company Private Limited, a financial creditor, against the corporate debtor M/s New Tech Imports Private Limited. The financial creditor had disbursed a loan of ₹23.85 crores, which the corporate debtor failed to repay. Despite the issuance of a Loan Recall Notice and subsequent notice under Section 13(2) of the SARFAESI Act, the corporate debtor remained in default. Consequently, the financial creditor filed a Section 7 application for initiation of insolvency proceedings.

The corporate debtor contended that the classification of the account as NPA on 09.05.2021 could not be considered the date of default for IBC purposes, especially since the DRT had found procedural inconsistencies in the NPA classification and set it aside. It was argued that such a finding nullified the basis for initiating IBC proceedings.

The Tribunal rejected this contention, reiterating that mere classification or its reversal under SARFAESI does not extinguish the existence of financial debt or default. It relied on the NCLAT ruling in Edelweiss Asset Reconstruction Co. Ltd. v. Perfect Engine Components Pvt. Ltd. (2022), which held that the classification of an account as NPA, while relevant, does not conclusively determine default under the IBC. Further reliance was placed on Shri M.K. Dhir & Ors. v. Punjab National Bank & Anr., wherein it was held that DRT decisions on procedural lapses in NPA classification do not impact the assessment of financial debt or default under the Code.

The Tribunal also reaffirmed the overriding effect of the IBC under Section 238, clarifying that proceedings and determinations under other laws, including the SARFAESI Act, do not prevail over the IBC framework. 

M/s Encore Asset Reconstruction Company Private Limited v. M/s New Tech Imports Private Limited

CP (IB) No. 823 (ND)/2022