Introduction

The case of Rakshit Dhirajlal Doshi v. IDBI Bank Ltd. and Ors. adjudicated by the National Company Law Appellate Tribunal (NCLAT) on November 15, 2022, marks a significant development in the realm of consortium lending and insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). This case scrutinizes the procedural adherence of consortium members in declaring defaults and initiating Corporate Insolvency Resolution Processes (CIRP), thereby reinforcing the importance of collective action as per agreed-upon consortium agreements.

Summary of the Judgment

The appellant, Mr. Rakshit Dhirajlal Doshi, a suspended director of Fivebro International Private Limited (FIPL), contested the admittance of a section 7 application filed by IDBI Bank Limited under the IBC. The application sought to initiate CIRP against FIPL, a corporate debtor, following alleged defaults in loan repayments guaranteed by FIPL.

The crux of the appellant's argument revolved around the contention that IDBI Bank lacked the locus standi to unilaterally declare an event of default and file the section 7 application without adhering to the procedural mandates stipulated in the consortium's Inter-se Agreement and the Security Trustee Agreement. The appellant further highlighted that the consortium agreement required collective decision-making, which IDBI Bank purportedly bypassed.

Upon review, the NCLAT found that IDBI Bank indeed acted independently in declaring the default and initiating the insolvency proceedings without following the prescribed consortium protocols. Consequently, the appellate tribunal set aside the impugned order, thereby extinguishing the CIRP initiated against FIPL.

Analysis

Precedents Cited

The judgment references several key legal precedents to bolster its stance:

• Keshavlal Harilal Setalvad v. Pratapsing Moholabhai Sheth (1932): Emphasized that substantial changes in a contract discharge the original surety unless further obligations are explicitly undertaken.
• State Bank of India v. V. Ramakrishnan & Ors. (AIR 2018 SC 3876): Affirmed that continuing guarantees under IBC are not res ipsa loquitur (assumed without explicit terms) and remain operative for individual guarantors.
• IDBI Bank Ltd. v. Manoj Gaur [(IB-29) (PB) /2022]: Held that lenders must act collectively per Security Trustee Agreements and cannot unilaterally initiate insolvency proceedings.
• Innoventive Industries Ltd. v. ICICI Bank and Anr. (2018 1 SCC 407): Established that NCLT's role in section 7 applications is confined to verifying the existence of a valid debt and default, without delving into contractual intricacies.

Legal Reasoning

The tribunal's reasoning hinged on several pivotal points:

• Consortium and Trustee Agreements: The Inter-se Agreement and Security Trustee Agreement explicitly mandated that any declaration of default and initiation of insolvency processes must follow a collective and coordinated approach. IDBI Bank's unilateral action contravened these agreements.
• Locus Standi: IDBI Bank lacked the standing to act independently as the agreements designated the Security Trustee as the authorized entity to represent all consortium members in enforcement actions.
• Procedural Compliance: The tribunal underscored the necessity for lenders in a consortium to adhere strictly to agreed-upon protocols, ensuring uniformity and fairness in enforcement actions.
• Distinguishing Facts from Precedents: While the appellant cited the Setalvad case to argue discharge of guarantee due to restructuring failure, the tribunal differentiated the present case's context of consortium banking from the individual surety scenario in Setalvad.

Impact

This judgment has far-reaching implications for consortium lending and insolvency proceedings:

• Reinforcement of Protocols: It emphasizes the binding nature of consortium and trustee agreements, ensuring that lenders cannot circumvent collective decision-making processes.
• Protection of Corporate Debtors: By invalidating improper insolvency filings, the judgment safeguards corporate debtors from unwarranted and procedurally flawed CIRP initiations.
• Guidance for Financial Institutions: Banks and financial institutions will need to meticulously adhere to their internal and consortium agreements when dealing with defaults and insolvency, mitigating the risk of legal challenges.
• Clarity in Section 7 Applications: The ruling clarifies the extent of NCLT's examination in section 7 cases, affirming that procedural adherence takes precedence over procedural efficiencies or unilateral lender actions.

Complex Concepts Simplified

Conclusion

The NCLAT's decision in Rakshit Dhirajlal Doshi v. IDBI Bank Ltd. and Ors. serves as a pivotal reinforcement of the sanctity of consortium and trustee agreements in the lending landscape. By invalidating the unilateral actions of IDBI Bank, the tribunal has underscored the imperative for collective adherence to agreed protocols, ensuring fairness and procedural integrity in insolvency proceedings. Financial institutions must now exercise heightened diligence in following consortium mandates, thereby fostering a more structured and equitable approach to handling defaults and insolvencies. This judgment not only safeguards the interests of corporate debtors like FIPL but also sets a clear precedent for future consortium lending scenarios under the ambit of the IBC.