Contractual Cure Periods Do Not Shift the Date of Default for Section 10A Purposes: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) Principal Bench at New Delhi, has upheld the admission of a Section 7 application under the Insolvency and Bankruptcy Code, 2016, holding that a financial default which crystallised prior to 25 March, 2020, is not protected by the statutory bar under Section 10A, even where the underlying loan documents provided a contractual cure period.

The Tribunal clarified that once a default occurs and the cure period expires without full payment, subsequent payments or lender conduct cannot retrospectively erase the fact of default.

The appeal arose from an order of the NationalCompany Law Tribunal admitting a Section 7 petition and initiating the corporate insolvency resolution process against a hospitality company, Majestic Hotels Limited. The suspended director of the corporate debtor challenged the admission primarily on the ground that the alleged default fell within the period protected by Section 10A, which bars insolvency proceedings for defaults arising on or after 25 March, 2020, due to the COVID-19 pandemic.

The factual background showed that the corporate debtor had availed multiple loan facilities over the years for the construction and operation of a hotel project. These loans were eventually assigned to an asset reconstruction company. In December 2017, the parties entered into a settlement-cum-restructuring arrangement under which the outstanding dues were to be repaid in monthly installments, subject to a 45-day cure period for delayed payments.

The controversy stemmed from an installment due in January 2020. While part payment was made, the entire instalment amount was not cleared by the due date or within the 45-day cure period, which expired on 16 March 2020. The financial creditor later cancelled the settlement and initiated recovery proceedings, followed by the filing of a Section 7 application in March 2022.

Before the Appellate Tribunal, the appellant contended that no default had occurred prior to the expiry of the cure period and any default thereafter was protected by Section 10A. It was argued that payments made between January and March 2020, as well as the lender’s disbursal of an additional loan tranche on 19 March 2020, demonstrated that the default stood cured or was never treated as an event of default. Reliance was also placed on balance sheet entries to argue that the alleged default related to the quarter ending March 2020 and not January 2020 specifically.

Rejecting these submissions, the NCLAT held that the contractual cure period merely provided an opportunity to rectify the delay and did not postpone the occurrence of default. Once the borrower failed to clear the entire instalment within the cure period, an event of default occurred automatically under the terms of the settlement agreement and the consent decree passed by the Debt Recovery Tribunal. The Tribunal observed that such default crystallised on 16 March, 2020, which was prior to the cut-off date of 25 March, 2020, under Section 10A.

The Appellate Tribunal further held that subsequent payments made after the expiry of the cure period could not revive a settlement that had already lapsed by operation of contract. On the applicability of Section 10A, the Tribunal relied on the Supreme Court’s decision in Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt. Ltd., reiterating that the statutory bar applies only to defaults arising on or after 25 March, 2020, and does not grant immunity to defaults that occurred prior to that date, even if their consequences continued thereafter.

Holding that the existence of financial debt and default stood clearly established, and that the Section 7 application was complete, the NCLAT concluded that the Adjudicating Authority had no discretion but to admit the petition. Accordingly, the appeal was dismissed and the initiation of CIRP was upheld.

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