Section 10A IBC does not bar CIRP proceedings for pre-existing defaults continuing during pandemic period

NCLAT Principal Bench ruled that Section 10A of IBC does not bar initiation of CIRP proceedings when default occurred prior to the Section 10A period and continued thereafter. The corporate debtor had defaulted on interest payments since 2018, before Section 10A came into effect. The Adjudicating Authority's finding that the Section 7 application was non-maintainable because the demand notice was dated February 2021 (during prohibited period) was held misconceived. Section 10A only prohibits proceedings for defaults committed during the pandemic period, not pre-existing defaults. The impugned order was set aside and appeal allowed.

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Issues Involved:
1. Maintainability of Section 7 application under IBC.
2. Determination of the date of default.
3. Applicability of Section 10A of IBC.

Issue-wise Summary:

1. Maintainability of Section 7 application under IBC:
The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against an order dismissing a Section 7 application for initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Adjudicating Authority dismissed the application on the grounds that the default date fell within the prohibited period under Section 10A of IBC, making the application non-maintainable.

2. Determination of the date of default:
The Appellant contended that default occurred in October 2017 when the Respondent failed to pay interest on the unsecured loan. The Respondent argued that there was no agreement outlining the terms of repayment and that the amount advanced was speculative investment, not financial debt. The Adjudicating Authority held that the default could only be considered to have occurred in February 2021, based on the loan recall notice dated 01.02.2021, which fell under the prohibited period of Section 10A.

3. Applicability of Section 10A of IBC:
The Tribunal clarified that Section 10A bars initiation of CIRP for defaults occurring during the specified period due to the COVID-19 pandemic. However, if the default occurred before this period and continued into it, the initiation of CIRP is not barred. The Tribunal found that the default by the Corporate Debtor occurred before the Section 10A period and continued thereafter. Thus, the Adjudicating Authority's view that the Section 7 application was not maintainable due to the default date falling within the Section 10A period was deemed misconceived.

Conclusion:
The Tribunal allowed the appeal, set aside the impugned order, and remanded the Section 7 application back to the Adjudicating Authority for consideration on merits, emphasizing that the Adjudicating Authority had not addressed the core issue of debt and default.

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