Post-COVID Defaults Can Support Section 7 IBC Petition Despite Earlier Defaults: NCLAT Delhi

SREI Equipment Finance Ltd. Vs R S Kamthe Infrastructure Developers Pvt. Ltd. (NCLAT Delhi)

Summary: The National Company Law Appellate Tribunal, Principal Bench, New Delhi, in SREI Equipment Finance Ltd. Vs R S Kamthe Infrastructure Developers Pvt. Ltd., held that the bar under Section 10A of the Insolvency and Bankruptcy Code, 2016 does not prevent a financial creditor from initiating corporate insolvency resolution proceedings under Section 7 on the basis of instalment defaults occurring after the statutory exclusion period, merely because earlier defaults under the same financing agreements arose during that period. The Bench comprising Justice Ashok Bhushan, Chairperson, and Barun Mitra, Member (Technical), allowed the financial creditor’s appeal against the NCLT Mumbai order dated 2 November 2023, which had rejected its Section 7 application as barred by Section 10A. The Appellate Tribunal held that the creditor had expressly relied on 15 April 2021 as the date of default under both financing contracts, and the subsequent unpaid instalments exceeded the statutory threshold. Consequently, the NCLT’s order was set aside, and the insolvency petition was restored for fresh consideration.

The dispute concerned two financing agreements bearing Contract Nos. 178737 and 180822, under which the financial creditor had disbursed ₹2,95,00,000 and ₹2,44,50,000 respectively, as reflected in Part IV of its Section 7 application. The total claim as on 12 August 2022 was ₹7,28,54,918. The repayment schedules showed initial defaults on 15 January 2021 under Contract No. 178737 and 15 February 2021 under Contract No. 180822, both within the period protected by Section 10A. However, additional monthly instalments independently fell due and remained unpaid from 15 April 2021 onwards. The financial creditor specifically identified 15 April 2021 as the relevant default date for both contracts and asserted that its application was founded upon defaults arising after the Section 10A exclusion period. The corporate debtor argued that the initial defaults had arisen during the protected period and that the proceedings were consequently barred. The NCLT accepted that preliminary objection without examining the other defences.

Examining the detailed repayment schedules and the default particulars in Part IV, the NCLAT observed that the creditor was not required to rush to the insolvency forum immediately upon the first missed instalment. The Tribunal relied upon Koncentric Investments Ltd. Vs Standard Chartered Bank, [2022 SCC OnLine NCLAT 1254], which recognised that Section 7 does not mandate filing an insolvency application upon the first default and that subsequent defaults may independently provide the basis for proceedings, subject to the applicable limitation requirements. The Tribunal also followed NuFuture Digital (India) Limited Vs Axis Trustee Services Ltd., decided on 9 May 2023, which held that Section 10A permanently excludes defaults occurring within the statutory COVID period but does not prohibit applications based on defaults arising thereafter. The prohibition concerns the relevant default, not every subsequent default under a financing arrangement merely because an earlier instalment was unpaid during the protected period.

Applying these principles, the NCLAT concluded that the creditor had identified post-Section 10A defaults and that the amounts attributable to those defaults exceeded the statutory threshold. It therefore held that the NCLT had erred in dismissing the application solely under Section 10A. The Tribunal expressly clarified that the restored Section 7 proceedings must be confined to defaults committed after the Section 10A period and that it had not examined the corporate debtor’s other objections. Accordingly, Company Petition (IB) No. 1058/MB/2022 was revived before the NCLT Mumbai for fresh consideration in accordance with law. The ruling reinforces that the date and amount of the particular default relied upon are critical to determining the maintainability of an insolvency application, and the existence of earlier COVID-period defaults does not automatically extinguish the creditor’s right to proceed on later independent defaults.

Cases Discussed

1. Koncentric Investments Ltd. Vs Standard Chartered Bank (NCLAT Delhi); Company Appeal (AT) (Insolvency) No. 911 of 2021; 27/01/2022; [2022 SCC OnLine NCLAT 1254] — Followed for holding that a financial creditor is not obliged to file an application under Section 7 immediately upon the first default. Subsequent defaults may provide an independent basis for an insolvency application, subject to limitation.

2. NuFuture Digital (India) Limited Vs Axis Trustee Services Ltd. (NCLAT Delhi); Company Appeal (AT) (Insolvency) No. 444 of 2023; 09/05/2023 — Followed for holding that Section 10A prohibits insolvency proceedings in respect of defaults occurring within the statutory COVID exclusion period but does not bar a Section 7 application expressly based on defaults occurring after that period.

FULL TEXT OF THE ORDER OF NCLAT DELHI

Heard counsel for the appellant and learned counsel for the respondent.

2. This appeal has been filed by the financial creditor challenging the order dated 02.11.2023 passed by the adjudicating authority (National Company Law Tribunal, Mumbai Bench, Court – V) by which Section 7 application filed by the financial creditor has been rejected as barred by Section 10A of the Insolvency and Bankruptcy Code, 2016 (for short the IBC or the Code).

3. Learned counsel for the appellant challenging the order submits that in Part IV of the Section 7 application, date of default was mentioned with respect to both the contracts as 15.04.2021 and even though first default took place on 15.01.2021, default continued after 10A period was over which was relied in Part IV by the financial creditor. It is submitted that when default is committed subsequent to 10A period, the financial creditor is not precluded from initiating Section 7 application. It is submitted that financial creditor is not supposed to rush and file a Section 7 application on first date of default and adjudicating authority had not adverted to Part IV of Section 7 application in holding that application is barred by Section 10A.

4. Learned counsel for the respondent refuting the submissions of the appellant submitted that the objection with regard to Section 10A was in fact preliminary objection raised by respondent and adjudicating authority after accepting the said objection has dismissed the application as barred by Section 10A and has not gone into other pleas which was raised by the corporate debtor. It is submitted that the default admittedly occurred within the 10A period, which has rightly been taken note of the adjudicating authority.

5. Learned counsel for the appellant in support of his submission has placed reliance on the judgments of this Tribunal which we shall refer to hereinafter.

6. We have considered the submissions of the counsel for the parties and perused the records.

7. We need to first notice Part IV of the application under Section 7. Part IV of the application provides as follows:

“PART – IV

PARTICULARS OF FINANCIAL DEBT

2 AMOUNT CLAIMED TO BE IN DEFAULT AND THE DATE ON WHICH THE DEFAULT OCCURRED (ATTACH THE WORKINGS FOR COMPUTATION OF AMOUNT AND DAYS OF DEFAULT IN TABULAR FORM)

Total Claim Amount as on 12-08-2022: Rs. 7,28,54,918/- (Rupees Seven Crore Twenty-Eight Lakh Fifty-Four Thousand Nine Hundred Eighteen Only)

Contract no. 178737

Contract No. 180822

Date of Default:

The Financial Creditor states that the default is continuing in nature. The Corporate Debtor has failed and neglected to repay the outstanding amounts due and payable to the Financial Creditor. The Financial Creditor states that every month, the payment schedule by way of an instalment is falling due and even though the instalment amounts are to be paid, the Corporate Debtor has failed to pay the instalments and in fact Section 10A of the Insolvency and Bankruptcy Code, 2016 does not extinguish the aspect of ‘Debt’ and ‘Default’ in the eve of Law.”

8. The amount claimed in Part IV was Rs.7,28,54,918/- and with respect to two contracts; contract No. 178737 and 180822, the dates of default were mentioned in tabular form. It is true that the first date of default with regard to contract No. 178737 is 15.01.2021 and first date of default of contract No. 180822 is 15.02.2021 but when we look into the table, default continues on 15.04.2021 and thereafter and the date of default which was taken by the financial creditor is 15.04.2021 with regard to both the contracts. The financial creditor has relied on date of default 15.04.2021 which is subsequent to Section 10A period and default by the corporate debtor has been claimed from 15.04.2021 thereafter and the amount which is in default after 15.04.2021 is much beyond the threshold period. We find substance in the submission of the appellant that the adjudicating authority committed an error in rejecting application as barred by Section 10A.

9. Counsel for the appellant has placed reliance on the judgment of this Tribunal in ‘Koncentric Investments Ltd.’ Vs. ‘Standard Chartered Bank,’ reported in [2022 SCC OnLine NCLAT 1254], where this Tribunal in paragraph 21 of the judgment has categorically laid down that financial creditor is at liberty to file Section 7 application but it is neither mandatory nor necessary that on first default the financial creditor should rush to the insolvency court. In paragraphs 21, 24 & 25, following has been laid down:

“21. The Insolvency and Bankruptcy Code including rules and regulations, does not indicate that it is mandatory for the financial creditor to rush to file section 7 application whenever the first default is committed in payment of interest. Although it had liberty to file an application even if there is default in payment of interest. Section 7(1) of the Code uses the expression when a default has occurred there is no indication under section 7 of the Code that unless an application is filed on the first default committed, no application can be filed when subsequent defaults are committed. The financial creditor is at liberty to file a section 7 application but is neither mandatory nor necessary that on first default the financial creditor should rush to the insolvency court. The financial creditor may await and give more time to the corporate debtor to find out as to whether actually the corporate debtor has become insolvent and unable to repay the debt and even the financial creditor ignores non-payment of interest when the corporate debtor first defaulted it shall not lose its right to file application under section 7 of the Code when default of instalment or whole amount became due. The only statutory requirement is that default as claimed in the application under section 7 should be within three years from the date when application is filed under section 7 of the Code because any default of amount committed before three years of filing of the application shall become a time barred debt and cannot be said to be payable and due within the meaning of section 3(11) and (12) of the Code.

24. In the above case, the amount was declared the non-performing asset of the borrower on January 30, 2010 which was mentioned in column 2 of part IV has been accepted by the hon’ble Supreme Court itself and the application was filed on February 13, 2019 hence the court held that the application was barred by time. In the above case, recall notice was issued on February 19, 2019 demanding total amount including interest and principle and amount was calculated from the date of default. The Insolvency and Bankruptcy Code proceedings are proceedings which are intended to be proceeding for resolution of the insolvency of the corporate debtor, it is for the purpose that when a corporate debtor becomes insolvent, proceeding for resolution of insolvency may be commenced. If we accept the submissions of learned senior counsel for the appellant that on every first default even if it small fraction of loan, the financial creditor has to rush to the Insolvency and Bankruptcy Code for initiating insolvency proceeding the same shall not be in accordance with the object of the Code. The Code is not recovery proceeding so as to on fraction of default a creditor rush to the Insolvency and Bankruptcy Code. The financial creditor can very well give little more time to borrower or to itself for coming to the conclusion that the corporate debtor has apparently become insolvent although at the risk of forfeiting its right to claim amount which is barred by time.

25. To accept the submissions made by learned senior counsel for the appellant, we have to read one additional word under section 7 before the word “default” under sub-section (1) of section 7 of the Code, i.e., the word first. The submission of the appellants is that when first default is committed by a debtor, the creditor has necessarily and mandatorily to initiate application under section 7 failing which the right of creditor to file an application under section 7 of the Code shall be defeated by law of limitation. It is well settled principle of statutory interpretation that in a statute the court cannot read an additional word which has not been used by legislator. The definition of default in sub-section (12) of section 3 itself comprises several events, i.e., non-payment of debt when whole or any part or instalment of the amount of debt has become due. The default may be of different nature on some default the entire amount may become due like when account is declared non-performing asset, there may be some default by happening of which only fraction of amount became due like in present case non-payment of interest on June 30, 2015 only interest part became due. The Insolvency and Bankruptcy Code does not comprehend that on first default committed by any debtor, all creditors should rush to the Insolvency and Bankruptcy Code. The core objective of the Insolvency and Bankruptcy Code is resolution of insolvency of a corporate debtor. All provisions have been made; the entire scheme of the Insolvency and Bankruptcy Code has been contemplated to achieve the aforesaid object. Where debtor is unable to pay a fraction of debt which becomes due there is no presumption that debtor has become insolvent and, in an event, the creditor awaits for some more time like default by non-payment of first instalment or entire due as in the present case the right of creditor shall not be foreclosed. What is intended by scheme of statute is that no application under section 7 can be filed for default from which date the due claim has become time-barred. Time-barred debt cannot be revived by any proceeding under section 7 which has time and again been reiterated by hon’ble Supreme Court of India. We are thus not persuaded to read an additional word “first” before the expression “default” under sub-section (1) of section 7 as contended by learned senior counsel for the appellant.”

10. To the same effect, counsel for the appellant has relied on the another judgment in the matter of ‘NuFuture Digital (India) Limited’ Vs. ‘Axis Trustee Services Ltd.’ in [Comp. App. (AT) (Ins.) No. 444/2023], decided on 09.05.2023, wherein paragraph 20, this Tribunal laid down following:

“20. Present is a case where date of default is claimed as 31.03.2021 in Part IV of the application and the application is filed including the default amount as per the Debenture Trust Deed, Schedule V, the default from 31.03.2021 onwards. We have noticed Para 5 of Reply to the application where it was clearly stated that while the total claim would be higher, the present Petition is filed only with respect to the default committed after the 10A period was over i.e. for the default on 31st March 2021 and thereafter. What is prohibited by Section 10A is that no application shall ever be filed for the default which occurred during the period of Section 10A i.e. from 25th March, 2020 to 25th March, 2021. Section 10A has no application when an action is initiated for default which occurred subsequent to 10A period. Section 7 application as well as Reply filed to I.A. No. 34/2022 clearly indicate that Section 7 application which was filed by the Financial Creditor wad confined to the default committed by the Appellant on 31.03.2021 and thereafter. In Para 7 of the Reply total calculations have been mentioned for arriving at the default amount of Rs.210,46,66,250/-. The defaulted amount included for the calculation are the defaulted amount beginning from 31.03.2021 till end of December, 2023. No defaulted amount included in the Section 7 application is for the period covered by Section 10A, hence, there is no occasion to hold that Section 7 application is barred by Section 10A”

11. The above judgments clearly support the submissions of the appellant that when the Section 7 application is based on default committed subsequent to Section 10A period and the amount claimed subsequent to Section 10A period is well beyond threshold, application cannot be rejected on the ground that it is barred by Section 10A application. We only clarify that Section 7 application filed by the appellant has to confine to the default committed subsequent to Section 10A period.

12. In view of the aforesaid, we are of the view that order of the adjudicating authority rejecting the application as barred by Section 10A cannot be sustained. The impugned order dated 02.11.2023 is set aside. It is held that application is not barred by Section 10A.

13. In result, the appeal is allowed and the impugned order is set aside. C.P. (IB) No. 1058/MB/2022 is revived before the adjudicating authority for afresh consideration in accordance with law. We make it clear that we have not entered into any other contentions, except the submissions on Section 10A.