2024 (10) TMI 399 - AT - IBC

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

Samrat Restaurant Versus Brew crafts Microbrewing Private Limited

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 ... Initiation of CIRP - continous default - Rs 1 crore threshold - Dismissal of Appellant's Application under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016 - Applicability of Section 10A of the Insolvency and Bankruptcy Code (IBC) regarding the prohibited period - HELD THAT:- Reliance is placed by the Respondent on Krishna Enterprises [2018 (7) TMI 1963 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] in which it was held that ‘debt’ cannot be said to include ‘interest’ in all cases. It shall include interest only when the same has been agreed by the parties, otherwise, only the principal amount shall fall within the definition of ‘claim’ for the purpose of calculating default amount. Despite there being no provision for the Application of interest in the L&L agreement, the Appellant in its Section 8 notice and Section 9 Application claimed interest in its computation on the license fees as set out in the L&L agreement. There are no infirmity with the above analysis of the Adjudicating Authority and do not find merit in the claim of the Appellant for the interest of Rs 1,66,56,022 (rupees one crore, sixty-six lakhs, fifty-six thousand and twenty two only). The Adjudicating Authority correctly interpreted that any default falling within this period cannot form the basis for initiating CIRP. In this case, a portion of the default claimed by the Appellant clearly falls within the protected period under Section 10A. The Corporate Debtor is entitled to seek exclusion of the license fee of Rs 69,30,442/-, which fell due and defaulted by the Corporate Debtor during the prohibited period. It is argued by the Appellant that the default is continuous, occurring before, during and after the prohibited period under Section 10A and therefore, the CIRP petition is maintainable. Looking at the facts in the case, we find that the date of default is proposed to be changed to 31.03.2023 as per the purported settlement agreement vide letters dated 29.08.2021 and 10.03.2023 which shifts the date of default for the purposes of Section 9 to 31.03.2023 - continuous default is being artificially created by inflating claims, omitting to consider the revised license fees during the COVID period, arbitrary and unsubstantiated claim of ‘other expenses reimbursement and incorrectly claiming interest on default in payments. Therefore, the argument that it is a continuous default cannot be accepted. The total amount of outstanding default that the Appellant has against the Respondent stands at Rs 35,02,857/-, which is below the threshold limit of Rs 1 crore prescribed under Section 4 of IBC, making the Section 9 Petition filed by the Appellant not maintainable. The IBC mandates that for a Corporate Debtor to be admitted into CIRP under Section 9, the defaulted amount must meet the threshold of Rs 1 crore. In recalculating the actual unpaid amount, excluding the portion protected under Section 10A and the improperly calculated interest and reimbursements, the NCLT correctly determined that the outstanding default amounted to Rs 35,02,857/-, far below the threshold requirement. This finding is legally sound and consistent with established principles of insolvency law. This Tribunal finds that the Adjudicating Authority correctly interpreted and applied Section 10A of the IBC and rightly concluded that the outstanding default did not meet the Rs 1 crore threshold - the Appeal is devoid of merit and deserves to be dismissed - appeal dismissed. 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.