S.10A of IBC Doesn't Bar CIRP Applications Where Default Continues Beyond Moratorium Period: Madras HC [Read Order]

According to the Madras High Court, situations in which the default persists after the moratorium term is not covered by the proviso to Section 10-A of the Insolvency and Bankruptcy Code (IBC), 2016. According to the court, Section 10-A merely places a temporary hold on the start of the Corporate Insolvency Resolution Process (CIRP).

Since 2017, Evershine Wood Packaging Private Limited, the corporate debtor, has operated a timber business and taken use of a number of credit options offered by Indian Bank. Due to the corporate debtor's failure to make loan or debt payments, a demand notice was sent out on November 10, 2021.

On March 31, 2021, the Corporate Debtor's accounts were designated as a Non-Profitable Asset (NPA) with effect from December 23, 2020. Up until October 25, 2021, the corporate debtor made a few payments. After that, the default persisted. In order to start CIRP, the Financial Creditor, Indian Bank, submitted an application under Section 7 of the IBC. A writ petition was filed before the court. The Court admitted the writ petition and recorded that the section 7 application was not maintainable before NCLT because the default occurred between 25.03.2020 and 24.03.2021.

Read More: S.10A of IBC cannot be considered Valid Defence on Establishment of Valid Default Date: NCLAT

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The writ petition was brought by the suspended directors and shareholders of the corporate debtor in an attempt to overturn the NCLT's contested decision to admit the section 7 company petition. The petitioners argued that the corporate debtor's operations were impacted by COVID-19.

The court observed that Section 10-A of the IBC, 2016 just serves as a temporary moratorium that halts the start of CIRP. For a period of six months, Section 10-A forbids a corporate debtor from applying to initiate CIRP for any default that occurs on or after March 25, 2020. It added that even after the moratorium period, the default persisted even though it started after the time frame given in Section 10-A. It was also decided that "the embargo in Section 10-A must be given a purposeful interpretation that will further the goal that was intended to be accomplished by enacting the provision."

For a period of six months, Section 10-A prohibits a corporate debtor's application to initiate CIRP for any default that occurs on or after March 25, 2020.According to the court's interpretation of Section 10-A's proviso, the prohibition on submitting CIRP applications only applies to defaults that take place within the moratorium period. Therefore, the bar does not apply to continued defaults that continue after this time.

The proviso to Section 10-A stipulates that no application shall ever be submitted for the beginning of CIRP of the Corporate Debtor for the default happening during the moratorium period, according to the single bench made up of Justices S.S. Sundar and P. Dhanabal. It was decided that if the default persists after the moratorium time, the proviso cannot be extended.

While dismissing the appeal,  the court held that there was no extraordinary circumstance warranting the Court to entertain a writ petition when there is an alternative remedy.

To Read the full text of the Order CLICK HERE

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