Reason for Default Irrelevant: NCLT Admits Section 7 Petition Rejecting COVID-19 & Technical Defences [Read Order]

The Mumbai bench of the National Company Law Tribunal (NCLT) admitted a section 7 petition rejecting COVID-19 and technical defences and observed that default of payment is enough, then the reason for such a default becomes irrelevant.

In the instant case Company Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was originally filed on 23.07.2022 by Central Bank of India (the Original Lender) against RBEP Entertainment Private Limited (Corporate Debtor) for default in repayment of a loan facility of Rs. 40 crore. The total default claimed was Rs. 56.19 crore, including principal and interest. The default was stated to have occurred on 29.11.2019, and the Corporate Debtor’s account was classified as a Non-Performing Asset (NPA) on 29.02.2020.

Subsequently, the loan was assigned to Prudent ARC Limited, which was substituted as the Financial Creditor in the petition. The Corporate Debtor had availed long-term working capital credit facilities and executed multiple loan agreements, hypothecation deeds, letters of undertaking, promissory notes, and corporate guarantees to secure the same.

The Corporate Debtor challenged the maintainability of the petition. The corporate debtor alleged that the loan account was regularised in April 2020, disputing the default date of 29.11.2019 cited by the Financial Creditor. It was further claimed that the pandemic caused severe liquidity issues and halted production, requesting 36 months to repay the debt.

It was also argued that bank statements were not accompanied by certificates under Section 2-A of the BBE Act and RBI guidelines, rendering the application defective. It was also contended that Loan and security agreements were allegedly insufficiently stamped under the Maharashtra Stamp Act, making them unenforceable.

The financial creditor argued that bank records confirm default on 29.11.2019; internal accounting entries in 2020 do not alter the default. It was contended that Complete bank statements for 01.04.2018–17.05.2021 were submitted along with statutory certificates under the BBE Act, compliant with RBI circulars.

Also, it was argued that insufficient stamp duty constitutes a technical defect only and does not bar maintainability under Section 7. Existence of debt and default was demonstrated through loan agreements, promissory notes, hypothecation deeds, recall notices, DRT filings, and financial statements.

The tribunal observed that Technical insufficiency in stamping does not prevent maintainability of a Section 7 petition. Also the Tribunal further observed that the cited default date of 29.11.2019 was correct; internal adjustments in 2020 do not change the default status.

The Tribunal noted that under IBC, once a corporate debtor defaults, the reason for default (including inability to pay) is irrelevant for admitting a petition, citing Swiss Ribbons Private Limited v. Union of India. Hence, financial hardships due to the pandemic cannot bar the initiation of CIRP.

The two-member bench of Sanjiv Dutt (Technical Member) and Ashish Kalia (Judicial Member) concluded that the Section 7 petition met all statutory pre-requisites and that the Corporate Debtor’s defences, including COVID-19 hardships and technical objections, were untenable. Also, NPV Insolvency Professionals Private Limited was appointed as the Interim Resolution Professional

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