2023 (9) TMI 1668 - AT - IBC

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 ... Dismissal of Section 9 application filed by the Operational Creditor - seeking initiation of Corporate Insolvency Resolution Process against the Corporate Debtor - Appellant had failed to establish beyond doubt that the unpaid operational debt was subsisting above the minimum threshold limit of Rs. 1 crore - HELD THAT:- A plain reading of Section 10A signifies that no application/ proceedings under Sections 7, 9 and 10 can be initiated for any default in payment which is committed during Section 10A period. Thus, what is essentially barred is initiation of CIRP proceedings when the Corporate Debtor commits any default during the Section 10A period. However, if the default is committed prior to the Section 10A period and continues in the Section 10A period, this statutory provision does not put any bar on the initiation of CIRP proceedings. The law of Section 10A is well settled. The object and purpose of Section 10A has been explained in the ordinance by which Section 10A was brought into operation - The aim and objective of Section 10A was to protect a Corporate Debtor from the filing of any insolvency application against it for any default committed during the period when Covid-19 pandemic was prevailing. It was never intended to cover any default which occurred before Section 10A period and continuing thereafter. The present is a case where default has been committed by the Corporate Debtor since 29.02.2020 which is prior to commencement of Section 10A period. Hence, this is a case where the default was undisputedly committed before the bar of Section 10A came into play. There being categorical default by the Corporate Debtor prior to Section 10A period, the Corporate Debtor was clearly not entitled to claim the benefit of Section 10A period. Quantum of unpaid operational debt above the minimum threshold limit of Rs. 1 crore or not - HELD THAT:- This finding of the Adjudicating Authority has been challenged by the Appellant on the ground that a creditor is entitled to apply his own discretion to appropriate any on-account payment received from the debtor against any outstanding debt(s) due from the debtor in terms of the Indian Contract Act, 1872 - A plain reading of Section 60 of the Indian Contract Act 1872, shows that if the debtor makes any payment without any appropriation, then the creditor can use his discretion to wipe out any of the remaining debt(s) which is/are due. The right of appropriation lies with the creditor if the debtor does not indicate in what manner the debt is to be discharged. In such circumstances, the creditor has a lot of scope for exercising his right in such a manner so as to put himself in the most advantageous position - Without explaining how this action has Operational Creditor has been in contravention of the statutory provisions contained in the Indian Contract Act, it has therefore been unreasonable on the part of the Adjudicating Authority to hold that there is an inconsistency in the pattern adopted by the present Appellant while adjusting payments received against outstanding dues. Conclusion - There are no hesitation in holding that the finding returned by the Adjudicating Authority that the criterion of minimum threshold limit of Rs 1 crore is not met in the facts of the present case is not tenable. The Section 9 application filed by the Appellant is revived and remanded back to the Adjudicating Authority to be considered again in accordance with law - appeal allowed. ISSUES PRESENTED and CONSIDEREDThe 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 ANALYSISThreshold Limit and Section 10A of IBCThe 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 AdjustmentThe 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 HOLDINGSThe 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.