Pre-March 2020 Default Not Protected by S.10A Despite Contractual Cure Period: NCLAT upholds CIRP Admission [Read Order]

The Principal Bench of National Company Appellate Tribunal (NCLAT) at New Delhi upheld CIRP admission, holding that a contractual cure period did not defer the date of default for Section 10A of the Insolvency and Bankruptcy Code, 2016 .

Default occurred when payment became due and remained unpaid, not on expiry of the grace period. As the January 2020 instalment was unpaid from 01.02.2020, the default pre-dated the Section 10A bar effective 25.03.2020.

The Appeal was filed by the Appellant against NCLT Chandigarh's order dated 03.07.2024 in CP (IB) No.180/CHD/PB/2022, which admitted Respondents No. 2 petition under Section 7 of the IBC, 2016, initiating CIRP and appointed Respondent No.1 as Interim Resolution Professional.

The Section 10A of the Insolvency and Bankruptcy Code, 2016 explained that: Suspension of initiation of corporate insolvency resolution process.

“Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.”

The Appellant/Corporate Debtor, Kewal Krishan Sharma, the Suspended Director of M/s Majestic Hotels Limited, engaged in the hospitality business which operated "Majestic Park Plaza" in Ludhiana, had multiple term loans from TFCI and IFCI between 1991-1996 for construction, expansion, and modernization. The accounts were declared NPA by IFCI (30.06.2012) and TFCI (30.09.2012) due to defaults.

On 12.12.2017, U.V. Asset Reconstruction Company Limited (UVARC)/Financial Creditor acquired the loans from IFCI and TFCI for Rs. 16.24 crores. An agreement was executed on 27.12.2017 by Memorandum of Understanding (MoU) dated 29.12.2017, which settled the debt at Rs. 19.09 crores including Rs. 16.25 crores settlement amount plus Rs. 2.84 crores interest-free

A 45-day cure period was observed before declaring an event of default. The Appellant failed to pay the instalment of Rs. 95,91,034/- which was due on 31.01.2020. Though payments totaling Rs. 2,06,92,356/- were made between 01.01.2020 and 09.04.2020, no further payments were made thereafter. UVARC cancelled the settlement on 08.12.2020, issued SARFAESI notices in 2021, and filed a Section 7 petition on 24.03.2022.

The NCLT admitted the petition on 03.07.2024, holding that default existed from January 2020 and Section 10A protection did not apply. The Appellant appealed under Section 61(1) of the IBC, contending that no default existed before 25.03.2020 due to the contractual cure period and that continuous payments cured any delay.

The Counsel for the Appellant, Gaurav Mitra, Aalok Jagga, Nipun Gautam, APS Madaan, Sahil Lohan and Lavanya Pathak, argued that the Section 7 petition was barred under Section 10A as the January 2020 default, when read with the contractual 45-day cure period expiring on 16.03.2020, fell within the COVID-19 moratorium commencing 25.03.2020.

Further, the Counsel stated that the Financial Creditor failed to produce certified accounts, wrongly appropriated payments contrary to Clause 4 requiring application toward January dues during the cure period, and that the NCLT misinterpreted the balance sheet entry. The cure period was meant to rectify delays without permanently characterizing them as defaults and relied on Indiabulls Housing Finance Ltd. v. Revital Realty Pvt. Ltd., CA (AT)(Ins) No. 994 of 2022, arguing that insolvency should not be triggered when the Corporate Debtor remained solvent.

On the other hand, the Counsel for the Respondent No. 2, submitted that after complete reconciliation, the January 2020 instalment remained unpaid, constituting default from 01.02.2020 under Section 3(12). Non-payment by 16.03.2020 (expiry of 45-day cure period) triggered automatic "event of default" under Clause 6 of the MoU, causing the settlement to lapse and the entire outstanding of Rs. 565.61 crores to become immediately due per the DRT Order dated 26.10.2018.

The Tribunal consisted of Justice Ashok Bhushan, Chairperson and Technical Member, Indevar Pandey, heard and reviewed the matter.

The Tribunal, after considering the submissions made, held that default occurs when payment becomes due and remains unpaid, not upon expiry of a cure period. The January 2020 instalment became due on 31.01.2020, and default arose on 01.02.2020 under Section 3(12)—before the Section 10A moratorium (25.03.2020).

The Tribunal also stated that the 45-day cure period provided time to rectify default before triggering contractual consequences but did not postpone the legal occurrence of default. Non-payment by 16.03.2020 automatically triggered Clause 6 of the MoU and the DRT decree, causing the settlement to lapse and Rs. 565.61 crores to become due.

Further, the Tribunal held that default occurred on 16.03.2020, prior to Section 10A's operation from 25.03.2020, observing that financial debt and continuing default were established; and under Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, and E.S. Krishnamurthy (supra), the Adjudicating Authority had no discretion but to admit the petition once debt and default were proven.

Accordingly, the Tribunal dismissed the appeal filed by the Appellant.

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