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IBC: NCLT Rejects Canara Bank’s Insolvency Plea Against GTL

Canara Bank’s insolvency plea against GTL in NCLT was based on RBI’s Feb. 12, 2018, circular, now struck down by Supreme Court.

An air-traffic controller speaks on the telephone inside a control centre at Delhi Airport in India. GTL Ltd. is a network services provider based in Navi Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg)
An air-traffic controller speaks on the telephone inside a control centre at Delhi Airport in India. GTL Ltd. is a network services provider based in Navi Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Mumbai bench of the National Company Law Tribunal has rejected Canara Bank Ltd.’s application to initiate insolvency proceedings against GTL Ltd.

The state-run lender had initiated insolvency proceedings against the telecom infrastructure company following the Reserve Bank of India’s February 2018 circular on stressed assets resolution.

The tribunal relied on the Supreme court’s judgment in the Dharani Sugars case where the apex court had stuck down the circular on constitutional grounds. As a result, all insolvency actions initiated under the circular were also stuck down.

“After all this discussion, it’s considered that this application is an outcome of actions taken under the RBI Circular that has been quashed by the apex court,” the Tribunal said in its order, adding: “Therefore, the petition filed under Section 7 of IBC by Canara Bank, against GTL Limited, for initiating CIRP is rejected.”

Canara Bank had loaned Rs 200 crore to GTL in 2010, which was restructured in 2012 following discussion between the two parties. Canara Bank claimed in its petition that GTL owes it nearly Rs 458 crore, including interest, as on Dec. 31, 2011.

Reasons for Rejection

GTL contended that it ran into financial difficulties due to external factors beyond its control. As a result, it had to enter into multiple loans and multiple fund and non-fund-based working capital facilities from banks, financial institutions as well as external commercial borrowings, aggregating to Rs 3,155 crore.

GTL’s troubles began mounting since 2011 when it entered into multiple debt restructuring schemes with its lenders. The company said it made payments totaling to Rs 1,576 crore to lenders without additional borrowing. As a settlement measure, it discussed repaying the lenders from funds to be recovered from its customers.

GTL proposed revised settlement terms in 2018 with its lenders. The company’s lenders, however, rejected further proposals due to the 180-day time limit prescribed by RBI through its February 2018 circular on stressed assets. Canara Bank, thus, sought initiation of insolvency proceedings against GTL after its committee of creditors agreed to it in its September 2018 meeting.

The bank’s arguments were:

  • An insolvency application was filed against GTL due to its continuous defaults.
  • There was no progress in negotiation with the telecom infrastructure company.
  • No payment plan could fructify till September 2018 when the CoC decided to initiate insolvency proceedings.

GTL, however, contended that:

  • It was one of the parties to the Dharani Sugars case (Dharani Sugars and Chemicals Limited vs. Union of India & Others), in which the apex court had struck down the RBI’s February 2018 circular.
  • Canara Bank’s action to initiate insolvency proceedings against GTL was pursuant to the RBI circular and hence liable to be dismissed.
  • Supreme Court’s judgment applied to Canara Bank’s case as well.

Reading into the minutes of GTL’s lender forum meetings and the timeline of how the insolvency proceedings were initiated, the NCLT rejected Canara Bank’s plea on the following grounds:

  • Evidence tendered before the tribunal showed the bank had filed application based on RBI’s circular.
  • Supreme Court had stated that RBI’s circular was ultra vires, which means beyond the legal powers, and any action for initiating corporate insolvency under the circular must be treated as “not existing”.