2025 (5) TMI 1840 - AT - IBC

NCLAT dismisses Section 7 petition as original default fell within Section 10A cutoff period

Rolta Pvt. Ltd. Versus Varanium Cloud Ltd.

Rolta Pvt. Ltd. Versus Varanium Cloud Ltd. - TMI 1. ISSUES PRESENTED and CONSIDERED- Whether the application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) is maintainable when the date of default falls within the period barred by Section 10A of the Code.- Whether the date of default mentioned in the petition can be amended after the initial application has been dismissed on the ground of Section 10A.- Whether the principle of res judicata or Order 2 Rule 2 of the Civil Procedure Code (CPC) bars the filing of a fresh petition on the same financial debt after dismissal of the first petition.- Whether multiple defaults occurring after the barred period under Section 10A can constitute fresh causes of action permitting fresh applications under Section 7.- The scope and permissibility of amendment in pleadings in insolvency proceedings, particularly with respect to the date of default.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Maintainability of Section 7 Application when Date of Default Falls Within Section 10A PeriodLegal Framework and Precedents: Section 10A of the IBC was introduced as a temporary bar on initiation of insolvency proceedings under Sections 7, 9, or 10 for defaults occurring during the COVID-19 pandemic period (22.03.2020 to 25.03.2021). The Supreme Court in the case of Ramesh Kymal Vs. Siemens Gamesa Renewable Power Pvt. Ltd. held that no proceedings can be initiated for defaults occurring during this period.Court's Interpretation and Reasoning: The Tribunal and the Appellate Tribunal found that the date of default originally mentioned in the petition was 04.02.2021, which falls within the Section 10A barred period. The Tribunal held that the date of default is the date when the debt becomes due and is not paid, and it cannot be shifted based on subsequent demand notices. Since the default date was within the Section 10A period, the petition was dismissed as not maintainable.Key Evidence and Findings: The initial petition stated default as 04.02.2021, five days after the demand notice dated 30.01.2021. Emails and communications showed earlier defaults but the petition did not rely on those dates. The Appellant's subsequent attempt to change the date of default was rejected.Application of Law to Facts: The Court applied the bar under Section 10A strictly, holding that the default date cannot be shifted to circumvent the statutory bar. The subsequent demand notices do not alter the original date of default.Treatment of Competing Arguments: The Appellant argued for the date of default to be taken as the latest demand notice outside the Section 10A period. The Respondent contended that the date of default is fixed and cannot be amended to bypass Section 10A. The Court sided with the Respondent, emphasizing the finality of the original default date.Conclusion: The application under Section 7 is not maintainable if the date of default falls within the Section 10A period, and the date of default cannot be shifted to avoid this bar.Issue 2: Permissibility of Amendment of Date of Default in Insolvency PetitionLegal Framework and Precedents: The Supreme Court in Rajesh Kumar Aggarwal Vs. K.K. Modi held that amendments in pleadings are to be allowed liberally unless they cause injustice or prejudice. North Eastern Railway Administration Vs. Bhagwan Das also emphasized that amendments should be allowed to determine the real controversy unless they cause irreparable injury. Conversely, Modi Spinning & Weaving Mills Co. Ltd. Vs. Ladha Ram & Co. held that inconsistent pleas cannot be allowed if they prejudice the opposing party.Court's Interpretation and Reasoning: The Tribunal acknowledged the liberal approach to amendments but distinguished between clarifications and fundamental alterations. The Appellant sought to amend the date of default to a much earlier date (01.08.2019) to avoid Section 10A bar. The Tribunal found this to be a substantial change, not a mere clarification, especially since no written loan agreement or repayment schedule existed.Key Evidence and Findings: The Appellant relied on emails and alleged oral agreements to support the amended default dates. The Respondent argued that the amendment was an abuse of process to circumvent Section 10A and was based on the same documents originally filed.Application of Law to Facts: The Court allowed the amendment in the related petition against another corporate debtor (Streamcast) but was cautious about allowing such amendments when they alter the fundamental basis of the claim. The Court held that the veracity of the amended facts would be tested at the admission stage, not at the amendment stage.Treatment of Competing Arguments: The Appellant urged liberal allowance of amendments to place correct facts on record. The Respondent contended the amendment was a tactical device to circumvent the law. The Court balanced these views by allowing amendments but reserving final adjudication on merits.Conclusion: Amendments to pleadings, including date of default, are permissible at the pleading stage unless they cause irreparable prejudice, but the correctness of such amendments will be examined at the admission stage.Issue 3: Application of Res Judicata and Order 2 Rule 2 CPC on Filing Fresh PetitionLegal Framework and Precedents: Res judicata bars re-litigation of the same cause of action between the same parties. Order 2 Rule 2 CPC prohibits filing a fresh suit on the same cause of action after dismissal of the earlier suit unless the dismissal was on technical grounds. The Supreme Court in Ramesh Kymal held that a fresh application cannot be filed on the same debt after dismissal on merits.Court's Interpretation and Reasoning: The Tribunal held that since the first petition was dismissed on the ground of Section 10A bar and the appeal was withdrawn without setting aside the order, the dismissal attained finality. Therefore, the fresh petition filed with a changed date of default was barred by res judicata and Order 2 Rule 2 CPC.Key Evidence and Findings: The Appellant had withdrawn the appeal against dismissal of the first petition without contesting merits, thereby not challenging the order dated 10.04.2023. The fresh petition contained the same financial debt and was essentially a re-litigation with altered facts.Application of Law to Facts: The Court applied the principle that withdrawal of appeal without setting aside the order equates to acceptance of the dismissal. Hence, filing a fresh petition on the same cause of action with altered facts was impermissible.Treatment of Competing Arguments: The Appellant argued that the first petition was dismissed on a technical bar (Section 10A) and not merits, hence res judicata should not apply. The Respondent submitted that the order was final and binding. The Court relied on the principle that finality is achieved unless the order is set aside.Conclusion: The principle of res judicata and Order 2 Rule 2 CPC bar filing a fresh petition on the same cause of action after dismissal of the first petition, unless the dismissal order is set aside.Issue 4: Fresh Defaults Outside Section 10A Period Constituting New Cause of ActionLegal Framework and Precedents: The Supreme Court has recognized that each missed installment or fresh default can constitute a new cause of action, permitting fresh insolvency proceedings. This principle was applied in Small Industries Development Bank of India (SIDBI) Vs. Sambandh Finserve Pvt. Ltd. where multiple defaults on term loans with repayment schedules were involved.Court's Interpretation and Reasoning: The Court distinguished the present case from SIDBI. In SIDBI, there was a written loan agreement with repayment installments and security, and each missed installment was a fresh default. In the present case, there was no written agreement, no installment-based repayment schedule, and the entire loan was payable on demand.Key Evidence and Findings: The loan was disbursed in tranches in July 2019 with repayment demanded on 30.01.2021. The Appellant's first petition relied on default dated 04.02.2021. The alleged earlier defaults were not pleaded initially and the loan was repayable on demand.Application of Law to Facts: Since the loan was repayable on demand and no installment schedule existed, the Court held that multiple defaults as in SIDBI do not arise. The first default date remains fixed and cannot be recharacterized as multiple defaults.Treatment of Competing Arguments: The Appellant sought to rely on SIDBI to argue maintainability of fresh petition based on fresh defaults outside Section 10A. The Respondent countered that SIDBI is factually distinguishable. The Court agreed with the Respondent.Conclusion: Fresh defaults constituting new causes of action justify fresh petitions only where the loan agreement provides for installments or separate repayment obligations. In absence thereof, the initial default date governs maintainability.Issue 5: Scope of Amendment in Insolvency ProceedingsLegal Framework and Precedents: The Supreme Court in Rajesh Kumar Aggarwal and Dena Bank Vs. C. Shivakumar Reddy has held that amendments in insolvency petitions are permissible and courts should not delve into merits at the amendment stage. Amendments are allowed to ensure real questions in controversy are decided.Court's Interpretation and Reasoning: The Court reiterated the liberal approach to amendments but emphasized that amendments should not be allowed to cause injustice or be used to circumvent statutory provisions like Section 10A.Key Evidence and Findings: The Appellant sought amendment of default dates to earlier periods. The Respondent argued this was an abuse of process. The Court allowed amendment but made clear that the merits and correctness of the amended facts would be tested at admission.Application of Law to Facts: The Court allowed amendment in a related petition against a different corporate debtor and indicated the same approach would apply generally, subject to prejudice and merits.Treatment of Competing Arguments: The Appellant relied on the liberal amendment principle. The Respondent cautioned against abuse of process. The Court balanced these views.Conclusion: Amendments are allowed liberally in insolvency proceedings, but the correctness of amendments and their impact on maintainability will be adjudicated at admission or final hearing.3. SIGNIFICANT HOLDINGS'The date of default is the date when the debt becomes due and is not paid. The date of default cannot be shifted merely because another Demand Notice was served later on the Corporate Debtor.''Section 10A of the IBC bars initiation of proceedings under Sections 7, 9 or 10 for defaults occurring during the specified COVID-19 period. Any petition filed with default date within this period is not maintainable.''The principle of res judicata and Order 2 Rule 2 CPC bar filing a fresh petition on the same cause of action after dismissal of the first petition, unless the dismissal order is set aside.''Where a loan agreement provides for repayment in installments, each missed installment may constitute a fresh default and cause of action for filing a fresh petition. However, in absence of such terms, the initial default date governs.''Amendments to pleadings in insolvency proceedings are to be allowed liberally to determine real controversies, provided they do not cause irreparable prejudice or are used to circumvent statutory provisions. The correctness of such amendments is to be decided at admission or final hearing.''The Appellate Tribunal's grant of liberty to file a fresh petition after withdrawal of appeal does not amount to setting aside the earlier dismissal order; hence, the earlier order remains binding.'Final determinations:The petition under Section 7 filed with default date within Section 10A period is not maintainable.The date of default once pleaded cannot be altered to circumvent the statutory bar unless amendment is sought and allowed before admission.The principle of res judicata applies to bar fresh petitions on the same cause of action after dismissal of earlier petition, unless order is set aside.Fresh defaults outside Section 10A period can constitute new cause of action only if the loan agreement provides for separate repayment obligations.Amendments in insolvency petitions are allowed liberally but subject to final adjudication on merits and maintainability.