2025 (4) TMI 459 - AT - IBC

NCLAT confirms Section 7 application valid based on post-moratorium interest defaults despite principal loan default during moratorium

The NCLAT upheld the Adjudicating Authority's admission of a Section 7 application despite the principal loan default occurring within the Section 10A ... Admission of Section 7 Application - default in repayment of the principal loan amount fell within the Section 10A period or not - HELD THAT:- The present case is founded on the basis that even after end of 10A period, the CD defaulted in its obligation to pay monthly interest and liability of interest from 26.03.2021 to 31.05.2021 was more than Rs.9.38 crores. The Adjudicating Authority having returned a finding that Section 7 Application was entertainable on the basis of default of interest, which is subsequent to the end of 10A period, i.e. with effect from 26.03.2021 to 31.05.2021, there are no error in the order admitting Section 7 Application. The question as to what should be the amount of claim of the Financial Creditor is not to be determined at the time of admission of Section 7 Application and that is the subject matter of collation and verification by the RP in the CIRP. It is made clear that while upholding the decision of the Adjudicating Authority admitting Section 7 Application, no opinion expressed on the amount of claim of the Financial Creditor, which need to be determined in the CIRP in accordance with relevant statutory provisions. Appeal dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:1. Whether the Section 7 Application for initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor (CD) was barred by Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC), given that the default in repayment of the principal loan amount fell within the Section 10A period.2. Whether the default in interest payments, which occurred after the expiration of the Section 10A period, can independently form the basis for admitting the Section 7 Application.3. Whether the Adjudicating Authority erred in admitting the Section 7 Application based on the interest default that occurred after the Section 10A period.ISSUE-WISE DETAILED ANALYSIS1. Legal Framework and PrecedentsSection 10A of the IBC prohibits the filing of applications for initiation of CIRP for defaults occurring during a specified period, which was introduced to provide relief to corporate debtors affected by the COVID-19 pandemic. The relevant legal question is whether defaults in interest payments occurring after this period can be treated separately from the principal loan default that occurred within the Section 10A period.The court referred to precedents including the Supreme Court's decision in Ramesh Kymal vs. Siemens Gamesa Renewable Power Pvt. Ltd. and decisions from the National Company Law Appellate Tribunal (NCLAT) in cases like Harish Raghavji Patel vs. Clearwater Capital Partners Singapore Fund IV Private Limited and Beetel Teletech Ltd. vs. Arcelia IT Services Pvt. Ltd.2. Court's Interpretation and ReasoningThe Tribunal interpreted Section 10A as barring applications for defaults occurring during the specified period but not for defaults occurring afterward. It reasoned that while the principal loan default occurred during the Section 10A period, the interest default occurred afterward and could be treated as a separate event of default.The Tribunal emphasized that the legislative intent behind Section 10A was not to provide permanent immunity to defaulting borrowers but to prevent insolvency proceedings for defaults during the specified period. Post-Section 10A period defaults, especially those exceeding the threshold amount, could validly form the basis for a Section 7 Application.3. Key Evidence and FindingsThe Tribunal noted the details provided in Part-IV of the Section 7 Application, where the Financial Creditor claimed a default in interest payments amounting to Rs.9,38,44,668/- from 26.03.2021 to 31.05.2021. This amount exceeded the threshold of Rs.1 crore required for initiating CIRP under Section 7.4. Application of Law to FactsThe Tribunal applied the law by distinguishing between the default in the principal amount, which occurred within the Section 10A period, and the subsequent interest default. It held that the latter could independently justify the initiation of CIRP, as it occurred after the Section 10A period and exceeded the statutory threshold.5. Treatment of Competing ArgumentsThe Appellant argued that the default in the principal amount, which fell within the Section 10A period, barred the Section 7 Application. The Tribunal rejected this argument, emphasizing the separate and independent nature of the interest default occurring after the Section 10A period.The Respondent's argument that each default, whether in principal or interest, constitutes a separate event was upheld, aligning with the Tribunal's interpretation of the legislative intent behind Section 10A.6. ConclusionsThe Tribunal concluded that the Section 7 Application was rightly admitted based on the interest default that occurred post-Section 10A period. It dismissed the appeal, affirming the Adjudicating Authority's decision to admit the Section 7 Application.SIGNIFICANT HOLDINGSThe Tribunal preserved the principle that defaults in interest payments occurring after the Section 10A period can independently justify the initiation of CIRP under Section 7 of the IBC. It emphasized that the legislative intent behind Section 10A was not to provide blanket immunity for all defaults but to address those occurring during the specified period due to the pandemic.The Tribunal reiterated that the amount of claim by the Financial Creditor is not to be determined at the time of admission of the Section 7 Application but during the CIRP by the Resolution Professional.The final determination was that the appeal was dismissed, and the Section 7 Application was rightly admitted based on the interest default occurring after the Section 10A period, with no order as to costs.