Default occurred beyond outer limit of S.10A of IBC, Insolvency Application can be files Afresh: NCLAT [Read Order]

The New Delhi bench of the National Company Law Appellate Tribunal (NCLAT) has held that when a default occurs beyond outer limit of Section 10A of Insolvency and Bankruptcy Code 2016 (‘IBC’), a fresh insolvency application can be filed under Section 7 of the Code.

Gangadhar A. Kotian, Suspended Director of Bombay Rayon Clothing Ltd filed an appeal under Section 61(1) of Insolvency and Bankruptcy Code 2016 (‘IBC’) against the Order dated 24.04.2025 (‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-II). By the impugned order, the Adjudicating Authority has admitted the Section 7 application of IBC filed by Catalyst Trusteeship Ltd Financial Creditor.

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A Debenture Trustee Agreement (‘DTA’) was executed on 12.10.2017 between Principal Borrower-Reynold Shirting Limited and Respondent No.1 in its capacity as the Debenture Trustee/Financial Creditor for 1700 Non-Convertible Debentures (‘NCD’). Pursuant to the DTA, a Debenture Trust Deed (‘DTD’) was signed on 14.10.2017 between the Principal Borrower and the Debenture TrusteeFinancial Creditor.

A Guarantee Agreement was executed by the Corporate Debtor-Bombay Rayon Clothing Ltd. in favour of the Financial Creditor on 14.10.2017. The Principal Borrower defaulted in the repayment obligation following which the Respondent No.1 on 16.06.2020 classified the NCDs as NPA which fell during the Section 10A prohibited period.

An Assignment Agreement was executed between ECL Finance Limited and CFM ARC on 14.08.2020 by which the underlying securities interest/rights were assigned to CFM ARC. On 16.09.2020, Respondent No.1 called upon the Principal Borrower and the other obligors including the Corporate Debtor to pay the entire outstanding amount of Rs. 206.15 cr. which also fell during the Section 10A period.

Another Assignment Agreement was executed between CFM ARC and Edelweiss Asset Reconstruction Company Limited (‘EARCL’). During the pendency of First Petition, EARCL restructured the dues of the Principal Borrower by a Restructuring Agreement dated 27.12.2022. By this Restructuring Agreement, the default amount of Rs.252.37 Cr. was restructured and the liability of the Principal Borrower was restructured to Rs. 162.50 cr which was payable in five instalments including Rs.5 crores as upfront payment within five days of the signing of Restructuring Agreement.

In pursuance of the terms of Restructuring Agreement of 27.12.2022, the “First Petition” was withdrawn on 11.01.2023. The Principal Borrower paid the upfront payment of Rs.5 crores but defaulted in the payment of second instalment which fell due on 25.03.2023. The Financial Creditor issued a letter dated 20.06.2023 calling upon the Principal Borrower and the obligors including the Corporate Debtor-Corporate Guarantor to cure the default by 26.06.2023 failing which the restructuring letter would stand cancelled.

Though the Financial Creditor had invoked the Corporate Guarantee earlier on 16.06.2020, the Financial Creditor issued another recall-cuminvocation of guarantee on 23.01.2024 on the obligors including the Corporate Debtor-Corporate Guarantor and by this letter also revoked the restructuring letter. As no response was received from the Corporate Debtor-Corporate Guarantor, on 10.06.2024 the Respondent No.1 filed a Section 7 application against the Corporate Debtor vide CP (IB) No. 646 of 2024 (“Second Petition”). The Adjudicating Authority admitted the Section 7 application initiating CIRP of the Corporate Debtor.

The Tribunal found that the termination of restructuring was not automatic but was dependent on the exercise of this choice by the Respondent No.1-Financial Creditor to revoke the restructuring in the event of failure to comply with the restructure terms. The restructure terms provided for independent events of default and such a default having undisputedly occurred, we are of the view that the Financial CreditorRespondent No.1 had exercised the option clearly available to them to file a fresh Section 7 petition with the amount of debt modified from the first Section 7 petition and a fresh date of default.

The Adjudicating Authority therefore did not commit any infirmity in holding that the invocation of the guarantee by the Respondent No. 1-Financial Creditor on 23.01.2024 stemmed directly from a default under the restructured terms.

since in this case the Corporate Debtor by express consent had restructured its liability under the Restructure Letter and the default arose upon the failure of the Corporate Debtor to comply to the terms of the Restructure

Letter of making good the payment of the second tranche which was due on 25 March 2023 in terms of the Restructure Letter.

The Adjudicating Authority has also correctly held that the factual matrix of the Maneesh judgment supra relied upon by the Corporate Debtor does not come to their aid since in that case cancellation of restructuring was automatic with no scope for a fresh cause of action. The above judgement was in its own facts and does not render any help to the Appellant in the present case.

A three-member bench of Justice Ashok Bhushan, Chairperson , Barun Mitra, Member (Technical) and Arun Baroka, Member (Technical) agreed with the Adjudicating Authority that no provision under Section 10A of the IBC prohibits parties from entering into a valid debt restructuring arrangement during or after the Section 10A suspension period. The impugned order has correctly noted at paragraph 4.9 that Section 10A was introduced to provide temporary relief during the COVID-19 pandemic which did not curtail the substantive contractual rights of parties to restructure their debts.

It was evident that “the relevant default occurred on 25 March 2023 which was well beyond the outer limit of Section 10A, which squarely brings the claim within the permissible scope of Section 7 of the IBC. The Appellant has expressly admitted debt and default in their pleadings at page 21-22 of APB and the guarantee being a continuing nature, admission of the Section 7 application by the Adjudicating Authority is well justified. “

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