NCLAT upholds rejection of insolvency petition as debt falls below Rs 1 crore threshold after removing inflated claims

NCLAT dismissed the appeal challenging NCLT's rejection of Section 9 application under IBC. The tribunal held that claimed interest of Rs 1,66,56,022 was invalid as no interest provision existed in the license agreement. Additionally, Rs 69,30,442 in license fees defaulted during COVID-19 prohibited period under Section 10A were properly excluded. After removing inflated claims, improper interest calculations, and amounts falling within prohibited period, actual outstanding default was Rs 35,02,857, below the mandatory Rs 1 crore threshold for CIRP initiation. The continuous default argument was rejected as artificially created through inflated claims.

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Issues Involved:

1. Applicability of Section 10A of the Insolvency and Bankruptcy Code (IBC) regarding the prohibited period.
2. Calculation of the default amount and whether it meets the Rs 1 crore threshold for initiating the Corporate Insolvency Resolution Process (CIRP).
3. Inclusion of interest and other expenses in the claimed default amount.
4. Validity of the One-Time Settlement (OTS) agreements and their impact on the date of default.

Issue-wise Detailed Analysis:

1. Applicability of Section 10A of IBC:

The primary issue revolved around whether the debt claimed by the Appellant fell within the period protected by Section 10A of the IBC, which prohibits the initiation of CIRP for defaults occurring between March 25, 2020, and March 25, 2021. The Adjudicating Authority found that a portion of the default amounting to Rs 69,30,442/- occurred during this prohibited period. The Appellant argued that subsequent agreements extended the payment obligations beyond the Section 10A period, thus making the default occur outside the scope of Section 10A. However, the Authority concluded that any default within this period could not form the basis for initiating CIRP, as the legislative intent was to provide temporary relief during the COVID-19 pandemic.

2. Calculation of the Default Amount:

The Appellant claimed a default amount of Rs 5,22,95,571/-, which included inflated interest and other expenses. The Adjudicating Authority recalculated the actual unpaid amount, excluding the portion protected under Section 10A and improperly calculated interest and reimbursements. The recalculated default amounted to Rs 35,02,857/-, far below the Rs 1 crore threshold required under Section 4 of the IBC to initiate CIRP. The Authority's recalculations were deemed legally sound and consistent with established insolvency law principles.

3. Inclusion of Interest and Other Expenses:

The Appellant included interest at an inflated rate of 18% per annum, despite no agreement to this effect in the Leave and License (L&L) agreement. The Adjudicating Authority found no contractual basis for such interest, referencing the case of Krishna Enterprises vs Gammon India Ltd, which established that interest must be agreed upon by the parties to be included in the default amount. Additionally, the Appellant's claim for other expenses amounting to Rs 47,01,629/- was found to be arbitrary and unsubstantiated, leading to its exclusion from the default calculation.

4. Validity of the OTS Agreements:

The Appellant argued that the OTS agreements shifted the date of default to March 31, 2023, thereby placing the default outside the Section 10A period. However, the Adjudicating Authority found these agreements to be temporary modifications of payment terms rather than extinguishing the original default. The Authority noted that the date of default and acknowledgment are separate events, and subsequent agreements do not alter the original default date. The Tribunal emphasized that the protection offered by Section 10A should not be undermined by such interpretations.

Conclusion:

The Tribunal upheld the Adjudicating Authority's decision, finding that the Appellant's inclusion of inflated interest, unsubstantiated reimbursements, and amounts falling under the Section 10A period constituted an abuse of the insolvency process. The Appeal was dismissed as the outstanding default did not meet the Rs 1 crore threshold required for initiating CIRP. The Tribunal emphasized the importance of adhering to established legal principles and the legislative intent behind Section 10A.

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