NCLAT upholds Section 7 IBC application for defaults after March 2021 despite Section 10A moratorium arguments

The NCLAT dismissed an appeal challenging rejection of a Section 7 IBC application by a financial creditor. The corporate debtor argued the application was barred by Section 10A, which prohibits filing applications for defaults occurring between 25th March 2020 to 25th March 2021. The NCLAT held that Section 10A has no application when proceedings are initiated for defaults occurring after the prohibited period. Since the financial creditor's application was based on default dated 31st March 2021 and thereafter, it was not hit by Section 10A. The Adjudicating Authority correctly rejected the debtor's objection.

---

---

Issues Involved:
1. Whether the Section 7 application filed by the Financial Creditor was barred by Section 10A of the I&B Code.
2. Determination of the date of default and its relevance under Section 10A.
3. Validity of the notices issued by the Financial Creditor and their impact on the default date.

Detailed Analysis:

1. Whether the Section 7 application filed by the Financial Creditor was barred by Section 10A of the I&B Code:

The core issue revolves around whether the application under Section 7 of the I&B Code was barred by Section 10A, which prohibits filing for defaults arising on or after March 25, 2020, for a specified period due to the COVID-19 pandemic. The Appellant argued that the default claimed by the Financial Creditor occurred during this period, making the application barred by Section 10A.

The Financial Creditor, however, contended that the default date was March 31, 2021, which falls outside the Section 10A period. The Tribunal noted that the Section 7 application was indeed based on defaults occurring after the Section 10A period, specifically from March 31, 2021, onward. Therefore, the application was not barred by Section 10A.

2. Determination of the date of default and its relevance under Section 10A:

The Appellant claimed that the Financial Creditor's notice dated October 22, 2020, demanded full repayment by January 31, 2021, indicating a default during the Section 10A period. The Financial Creditor argued that the notice did not accelerate the repayment but reserved the right to do so and called for confirmation of payment from a prospective transaction.

The Tribunal examined the notice and found that it did not constitute a mandatory prepayment notice or accelerate the redemption of debentures. It merely sought confirmation of payment from the proceeds of a transaction that did not materialize. Hence, the default date remained March 31, 2021, which is outside the Section 10A period.

3. Validity of the notices issued by the Financial Creditor and their impact on the default date:

The Tribunal reviewed the notices issued by the Financial Creditor, particularly the notice dated October 22, 2020, and the subsequent notice dated July 1, 2022. The October 2020 notice highlighted breaches and reserved the right to accelerate repayment but did not do so. The July 2022 notice reiterated the default and called for repayment due as of May 20, 2022.

The Tribunal concluded that the October 2020 notice did not affect the Financial Creditor's right to file a Section 7 application based on defaults occurring after March 31, 2021. The application was filed for defaults post the Section 10A period, making it valid.

Conclusion:

The Tribunal dismissed the appeal, affirming that the Section 7 application was not barred by Section 10A. The default date was determined to be March 31, 2021, and subsequent defaults, which were outside the Section 10A period. The notices issued by the Financial Creditor were found not to alter the default date or the validity of the Section 7 application.

---