Relief for Zee Entertainment: NCLAT Dismisses IDBI’s Insolvency Plea Citing S.10A COVID-Time Default Protection [Read Order]

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) ruled that an insolvency application filed by IDBI Bank Limited against Zee Entertainment Enterprises Ltd. (ZEE) was not maintainable as the alleged default occurred during the COVID-19 suspension period protected under Section 10A of the Insolvency and Bankruptcy Code (IBC), 2016.

IDBI Bank Limited, the appellant, had approached the National Company Law Tribunal (NCLT), Mumbai, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against ZEE based on a corporate guarantee provided by ZEE in favour of Siti Networks Limited, the principal borrower. The bank alleged that ZEE had defaulted on its obligation to maintain the Debt Service Reserve Account (DSRA), thus triggering its liability as a guarantor.

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In its order dated 19 May 2023, the NCLT dismissed IDBI Bank’s application, holding that the default in question occurred on 5 March 2021, which fell within the period covered by the Section 10A suspension introduced during the COVID-19 pandemic. Aggrieved by the order, IDBI Bank filed an appeal before the NCLAT.

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In its appeal, IDBI Bank argued that the default should be traced back to an earlier date when the borrower, Siti Networks, failed to make repayments, and hence, the bar under Section 10A would not apply. The appellant argued that ZEE, as guarantor, was liable from the point of borrower default and that the invocation of the guarantee on 5 March 2021 should not affect the underlying default timeline.

ZEE (the respondent) countered that the liability of a guarantor under a demand guarantee arises only upon the formal invocation of the guarantee. The company submitted that the guarantee was invoked for the first time on 5 March 2021, which was within the Section 10A window. So, no action under Section 7 of the IBC could be initiated.

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The two-member bench comprising Justice Rakesh Kumar (Judicial Member) and Dr. Alok Srivastava (Technical Member) observed that the corporate guarantee provided by ZEE was a demand guarantee, and the default could only be established upon the date of invocation. Since the invocation was on 5 March 2021, within the one-year protection window of Section 10A, the application was barred.

The tribunal held that a guarantor's default cannot be assumed before formal demand, even if the principal borrower defaulted earlier. The tribunal explained that Section 10A creates a complete bar on the filing of insolvency applications for defaults occurring during the COVID-19 window, and such defaults cannot be resurrected even after the suspension period ends.

The NCLAT dismissed the appeal filed by IDBI Bank. The tribunal clarified that if any subsequent default by ZEE occurs after 25 March 2021, IDBI Bank would be at liberty to pursue remedies as permitted under law.

To Read the full text of the Order CLICK HERE

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