NCLAT allows operational creditor appeal after Section 9 dismissal, rules Section 10A moratorium doesn't protect pre-COVID defaults

NCLAT allowed appeal by operational creditor against dismissal of Section 9 application for initiating CIRP. Court held that Section 10A moratorium does not bar proceedings for defaults committed before the COVID-19 period, even if continuing thereafter. Since corporate debtor defaulted from February 2020 (pre-Section 10A), moratorium protection was unavailable. Regarding debt quantum, NCLAT ruled that creditors have discretionary appropriation rights under Section 60 of Indian Contract Act when debtors make unspecified payments. Adjudicating authority erred in finding minimum threshold of Rs 1 crore not met. Matter remanded for fresh consideration.

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ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the National Company Law Appellate Tribunal (NCLAT) in this judgment include:

• Whether the Section 9 application filed by the Operational Creditor was maintainable, considering the threshold limit of Rs. 1 crore under the Insolvency and Bankruptcy Code, 2016 (IBC).
• Whether the interest accrued during the Section 10A suspension period should be included in calculating the operational debt for the purpose of meeting the threshold limit.
• Whether the Operational Creditor's discretion in adjusting payments received from the Corporate Debtor against various outstanding invoices was consistent with legal principles.

ISSUE-WISE DETAILED ANALYSIS

Threshold Limit and Section 10A of IBC

The primary issue was whether the unpaid operational debt exceeded the minimum threshold limit of Rs. 1 crore, considering the interest accrued during the Section 10A period. The relevant legal framework includes Section 9 of the IBC, which allows an operational creditor to initiate CIRP against a corporate debtor for defaults, and Section 10A, which suspends such proceedings for defaults arising during a specified period due to the COVID-19 pandemic.

The Court interpreted Section 10A to mean that defaults occurring before the suspension period could still be considered for CIRP initiation. The Tribunal referred to precedents, particularly the Supreme Court's decision in "Ramesh Kymal vs. M/s Siemens Gamesa Renewable," which clarified that defaults prior to the Section 10A period are not barred from CIRP proceedings.

The Court found that the default in question occurred on 29.02.2020, before the Section 10A period began. Therefore, the interest accrued on the principal amount prior to and during the Section 10A period should be included in calculating the operational debt, thus meeting the threshold limit.

Creditor's Discretion in Payment Adjustment

The second issue addressed was the manner in which the Operational Creditor adjusted payments received from the Corporate Debtor. The Adjudicating Authority had questioned the consistency of the creditor's approach in applying payments to various invoices.

The Court relied on Section 60 of the Indian Contract Act, 1872, which allows creditors to apply payments at their discretion when the debtor does not specify the debt to be discharged. The Tribunal found that the Operational Creditor's actions were consistent with this legal principle, as the debtor did not indicate how payments should be applied. The creditor's discretion in adjusting payments was deemed lawful, and the Adjudicating Authority's finding of inconsistency was not supported by any statutory provision.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

• The default by the Corporate Debtor occurred before the Section 10A suspension period, and therefore, the interest accrued during the suspension period should be included in calculating the operational debt for meeting the threshold limit.
• The Operational Creditor's discretion in adjusting payments was consistent with Section 60 of the Indian Contract Act, 1872, and there was no inconsistency in the creditor's approach.
• The Adjudicating Authority's dismissal of the Section 9 application was unsustainable, and the decision was set aside.

The final determination was to allow the appeal, revive the Section 9 application, and remand the case back to the Adjudicating Authority for reconsideration in accordance with the law, without influencing the merits of the case. No order as to costs was made.

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