NCLAT upholds CIRP initiation under Section 7 as pre-existing defaults before moratorium period validate application despite Section 10A challenge

The NCLAT dismissed an appeal challenging NCLT's admission of a Section 7 application for CIRP initiation. The appellant argued the application was barred under Section 10A of IBC since the loan recall notice was issued during the moratorium period. However, the tribunal held that admitted defaults of Rs.10,51,94,998/- existed prior to the Section 10A period until February 2020, exceeding the threshold limit. The tribunal clarified that Section 10A bars applications only when default occurs during the moratorium period, not when pre-existing defaults continue into that period. The appeal was dismissed as the application was not hit by Section 10A.

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Issues Involved:
1. Bar under Section 10A of the Insolvency and Bankruptcy Code, 2016.
2. Default and repayment obligations under the Loan Agreement.
3. Validity of the Financial Creditor's Application under Section 7.

Summary:

Bar under Section 10A of the Insolvency and Bankruptcy Code, 2016:
The Appellants argued that the loan recall notice dated 28.08.2020 fell within the period of Section 10A of the Code, thus barring the Application under Section 7. They contended that the Financial Creditor could not file a petition for the entire loan amount for defaults committed during the 10A period. However, the Tribunal found that defaults had occurred prior to the 10A period, specifically noting that the default amount up to February 2020 was Rs.10,51,94,998/-. The Tribunal referenced the judgment in Narayan Manga vs. Vatsalya Builders & Developers Pvt. Ltd., which clarified that Section 10A does not apply to defaults committed before the 10A period. Therefore, the Application under Section 7 was not barred by Section 10A.

Default and repayment obligations under the Loan Agreement:
The Financial Creditor argued that the Corporate Debtor defaulted on interest payments from June 2018, with the first default occurring on 11.07.2018. Clause 8.1 of the Loan Agreement stated that two consecutive defaults in interest payment constitute an event of default, making the entire loan due and payable. The Tribunal found that the Corporate Debtor had indeed defaulted on multiple occasions before the 10A period, and the entire loan became due as per the Loan Agreement's terms. The Tribunal dismissed the Appellant's reliance on Clause 8.3, which required the Borrower, not the Financial Creditor, to notify the event of default.

Validity of the Financial Creditor's Application under Section 7:
The Tribunal noted that the Financial Creditor's Application under Section 7 was filed based on continuous defaults by the Corporate Debtor, which began before the 10A period. The Tribunal emphasized that the default amount prior to the 10A period exceeded the threshold for filing a Section 7 Application. Consequently, the Tribunal upheld the Adjudicating Authority's order admitting the Section 7 Applications and dismissed the Appeals, finding no merit in the Appellant's arguments.

Conclusion:
The Tribunal concluded that the Financial Creditor's Application under Section 7 was valid and not barred by Section 10A, as the defaults occurred prior to the 10A period. The Appeals were dismissed, and the Adjudicating Authority's order admitting the Section 7 Applications was upheld.

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