Blog

1. Introduction
The law under the Insolvency Code1 is constantly evolving since its inception. Earlier, a view was being taken that National Company Law Tribunal (‘NCLT’) has no discretion while adjudicating an insolvency petition filed for financial defaults. In the matter of Innoventive Industries Ltd.2, the Supreme Court held that in case of default of debt, the insolvency petition has to be mandatorily admitted.
However, the law completely changed with the coming of the Judgment of the Supreme Court in the matter of Vidarbha Industries Power Ltd.3 wherein it was held that Section 7(5) of Insolvency Code gives discretion to NCLT to admit or reject an Insolvency Petition filed by a financial creditor while considering the facts of the case.
Recently, the NCLT, Principal Bench delivered a landmark judgment in the matter of Ansal API Infrastructure Ltd.4 wherein it has held that the Bank which is a part of pooled debt mechanism, cannot proceed unilaterally and singularly against the Company under Insolvency Code without going through the Consortium or the Asset Manager.

2. Issues under controversy The stand of the Bank was that the Corporate Debtor Company had approached Pooled Municipal Debt Obligation (‘PMDO’) Lenders for a loan
and that PMDO had sanctioned a Termloan to the Corporate Debtor, whereinafter a ‘Common Loan Agreement was executed between the Company and the PMDO Lenders and
IL&FS Urban Infrastructure Managers Ltd. was appointed as the Asset Manager. It was the contention of the Union Bank that the loan was rescheduled by the PMDO lenders viz.
the pooled consortium under the Flexible Structuring Scheme (FSS) but due to the failure and non-compliance of the contractual obligations by the Company, its loan account was classified as a Non-Performing Asset (NPA) and SARFAESI notice was issued by the Security Trustee to the Company. Subsequently, the Union Bank of India filed an Insolvency Petition under Section 7 of the Insolvency Code.

3. Contentions of the Corporate Debtor Company and the NCLT The contention of the Corporate Debtor was that since there was a pooled consortium and the disbursal of funds was done by IL&FS Urban Infrastructure Managers Ltd., the Asset Manager by collecting funds from various banks and financial institutions, the bank in question, who was one amongst the group of financing banks/institutions, was not entitled to initiate proceedings under Section 7 of the Insolvency Code.
The NCLT on considering the factual matrix held that firstly, there was a pooled consortium and secondly, there was no direct disbursal of the loan being made by Union Bank to the Corporate Debtor and the NCLT, therefore, held that in the absence of any direct disbursal and also in view of the agreements executed between the Asset Manager and the pooled consortium lenders, the only party which qualified to file an Insolvency Petition under Section 7 was the Asset Manager or the Security Trustee or the PMDO Lenders (a consortium of banks).

4. Impact of Ansal API Infrastructure Ltd. on the Insolvency Laws The Impact of this judgement on Insolvency laws is going to be huge. It can be considered as a paradigm shift in reference to the proceedings under Section 7 of the Insolvency Code. It firstly holds that the Corporation Bank (now merged with Union Bank of
India), being a member of the pooled consortium of M/s Ansal API Infrastructure Ltd. cannot singularly initiate any insolvency proceedings.
Secondly, NCLT was of the view that the bank has not made any direct disbursal of the loan nor has entered into any agreements directly with the Corporate Debtor, therefore, did not qualify as a Financial Creditor5 under the Insolvency Code.
Thirdly, it is indeed a judgment of its own kind, as it has shifted the insolvency jurisprudence and proves to be a marked departure from the Judgments wherein Section 7 Petitions filed by Banks/Financial Institutions were being admitted as a matter of routine. Fourthly, it is also an important Judgment from the perspective of the
lending by the ‘pooled consortium’, wherein one of the members of the consortium may attempt to wriggle out and take action under the Insolvency Code and drag a Company into the woods of insolvency by breaking the equilibrium. It is also a ray of respite for the defending corporates to prove their stand that a single lender out of the pooled consortium cannot act in a wild manner and drive any entity into insolvency at its own whims and fancies.

The Insolvency and Bankruptcy Code, 2016
2 Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407
3 Vidarbha Industries Power Ltd. vs Axis Bank Ltd. 2022 SCC OnLine SC 841
4 Union Bank of India vs. Ansal API
Infrastructure Limited (Judgment dated
19.12.2022 in CP No. 1641/PB/2018).
5 Section 5(7) of the Insolvency Code defines aFinancial Creditor to be any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred

Arvind Kumar Gupta
Advocate
Supreme Court of India