Union Bank's Section 7 IBC application upheld despite Section 10A defense, pre-existing and post-moratorium defaults justify admission

The NCLAT upheld the admission of a Section 7 IBC application by Union Bank against a corporate debtor, rejecting the argument that Section 10A barred the proceedings. The court found clear acknowledgment of outstanding amounts prior to the Section 10A period and continuous defaults after the moratorium ended. Despite facilities extended during the moratorium period, the debtor defaulted on EMI payments totaling over Rs.1 crore by March 2021. The NCLAT clarified that while defaults during the Section 10A period cannot form the basis for Section 7 proceedings, pre-existing and post-moratorium defaults justify admission. The appeal was dismissed, confirming the corporate debtor's liability for insolvency resolution proceedings.

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Issues Involved:

1. Whether the application under Section 7 was barred by Section 10A of the Insolvency and Bankruptcy Code.
2. Determination of the date of default and its implications on the application.
3. Whether the declaration of the account as Non-Performing Asset (NPA) was valid.
4. The impact of the COVID-19 pandemic and related financial facilities on the default status.
5. The role of the Resolution Professional in computing claims and the exclusion of defaults during the Section 10A period.

Issue-wise Detailed Analysis:

1. Section 10A Bar:

The appellant argued that the Section 7 application was barred by Section 10A, which prohibits initiation of insolvency proceedings for defaults occurring during the COVID-19 pandemic. The appellant contended that the Funded Interest Term Loan (FITL) sanctioned on 16.09.2020 was during the Section 10A period, and any default in this facility should not trigger insolvency proceedings. However, the Tribunal found that defaults occurred both before and after the Section 10A period. The Tribunal noted that the default on 31.03.2021 exceeded the threshold amount of Rs.1 Crore, making the application valid despite the Section 10A bar.

2. Date of Default:

The Tribunal upheld the date of default as 31.03.2021, the date on which the account was declared NPA. It relied on precedents from the Supreme Court, which allow the date of NPA declaration to be considered as the date of default for initiating Section 7 proceedings. The Tribunal emphasized that continuous defaults occurred after the Section 10A period, validating the application under Section 7.

3. Validity of NPA Declaration:

The appellant challenged the NPA declaration, arguing it was not in line with RBI guidelines. The Tribunal, however, found that the NPA declaration on 31.03.2021 was consistent with the guidelines, as the account was overdue as of 01.03.2020, and defaults continued after the Section 10A period. The Tribunal referred to the Supreme Court's judgment in "Laxmi Pat Surana vs. Union Bank of India," which supports using the NPA declaration date as the default date.

4. Impact of COVID-19 Financial Facilities:

The appellant argued that the issuance of a sanction letter on 25.03.2021 indicated no default as of that date. However, the Tribunal noted that the sanction letter was conditional on zero FITL as of 31.03.2021, which was not met. The Tribunal also considered the bank's calculation sheet, showing substantial outstanding amounts across multiple accounts, reinforcing the existence of defaults beyond the Section 10A period.

5. Role of the Resolution Professional:

The Tribunal clarified that the Resolution Professional must exclude defaults during the Section 10A period when computing admitted claims. It emphasized that the adjudicating authority's role at the admission stage is not to determine the exact claim amount, which is the Resolution Professional's responsibility during the collation and admission process. The Tribunal instructed that any amount defaulted during the Section 10A period should not be included in the admitted claim.

Conclusion:

The Tribunal dismissed the appeal, affirming the order admitting the Section 7 application. It found no error in the Adjudicating Authority's decision, given the defaults before and after the Section 10A period, and the substantial amounts due as of the application date. The Tribunal's decision ensures that Section 7 proceedings can proceed, subject to the exclusion of defaults during the Section 10A period from the claims admitted by the Resolution Professional.

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