Payment default leads to insolvency resolution process under Insolvency and Bankruptcy Code

The tribunal found that the corporate debtor's failure to pay interest and instalments periodically constituted a default under the Insolvency and Bankruptcy Code. Despite the debtor's argument that the cheque was for security, the tribunal held that its dishonour indicated a payment default. Consequently, the tribunal admitted the corporate debtor to the corporate insolvency resolution process, declaring a moratorium and appointing an interim resolution professional to manage the company's operations and assets. The financial creditor was directed to cover the IRP's expenses, with additional funds as necessary, and the decision was communicated to all relevant parties, finalizing the debtor's admission to the resolution process.

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Issues:
Application under section 7 of the Insolvency and Bankruptcy Code, 2016 against corporate debtor for default in payment of financial debt.

Analysis:
The financial creditor filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016, alleging default by the corporate debtor in paying a financial debt of Rs. 11,37,800. The financial creditor, a non-banking financial company, had lent Rs. 10 lakhs to the corporate debtor, which was dishonoured by the corporate debtor's banker. The corporate debtor contended that there was no default as the cheque was handed over as security, not for repayment. The corporate debtor argued that the loan was repayable over five years and no default occurred. However, the tribunal found that the corporate debtor failed to pay interest or instalments periodically, constituting a default as per the Code's definition.

The tribunal noted that the corporate debtor made a partial payment towards interest but subsequently defaulted on further payments. The tribunal referred to Section 3(12) of the Insolvency and Bankruptcy Code, 2016, defining default as non-payment of debt when due and payable. The tribunal held that the corporate debtor's actions constituted a default in paying the debt. The financial creditor had established that the debt was due and payable beyond the minimum limit required for such applications.

The tribunal rejected the argument that the cheque was a security measure, stating that the dishonoured cheque indicated default in payment. The tribunal concluded that the corporate debtor's issuance of the cheque was sufficient to presume it was for repayment. Based on the evidence, the tribunal found that the corporate debtor had defaulted in payment. The tribunal admitted the corporate debtor into the corporate insolvency resolution process and declared a moratorium under Section 14 of the Code, appointing an interim resolution professional. The tribunal directed the IRP to manage the company's operations and protect its assets during the resolution process. The financial creditor was instructed to provide an advance for the IRP's expenses, with further funds to be provided as needed. The tribunal ordered communication of the decision to all relevant parties and official bodies, finalizing the admission of the corporate debtor into the resolution process.

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