2026 (2) TMI 541 - AT - IBC

Section 10A suspension of CIRP: exclusion of defaults during immunity period upheld, Section 7 petition dismissed as non maintainable.

Section 10A suspension grants statutory immunity by excluding defaults that arose during the suspended period from computation of debt and default; the ... Section 10A suspension of CIRP - Exclusion of defaults arising during Section 10A for computation of debt and default - Continuing default versus completed default - Maintainability of Section 7 application and threshold u/s 4 - Acknowledgement of liability and classification as financial debt - HELD THAT:- In the present case when the Appellant had clearly pleaded the date of default in the first Section 7 petition, as structured in three instalments, falling due in March, April and May 2020 without any assertion of a continuing default and further this Tribunal had given the liberty to the Appellant to file the second Section 7 petition afresh only after excluding the period of default covered u/s 10A, the attempt of the Appellant to circumvent the Section 10A statutory immunity to the default liability by changing the date of default to 01.04.2021 is plainly untenable. The reliance placed by the Appellant on the judgment of the Hon’ble Apex Court in Laxmi Pat Surana [2021 (3) TMI 1179 - SUPREME COURT] to contend that default cannot be anchored to a single date for it continues until the debt is not paid has no direct bearing on the facts of the present case since in that matter the Hon’ble Supreme Court was deciding on the issue of limitation and in that context had held that the date of NPA is not necessarily the date of default. The Appellant has also unsuccessfully sought the aid of the ratio of the judgment of Madras High Court in Dharamshi K. Patel & Anr. Vs Indian Bank & Anr. [2025 (3) TMI 14 - MADRAS HIGH COURT] as in the present case, the principal default which arose during the Section 10A period was a one-time default and hence under a permanent embargo unlike the interest liability which by its nature being a recurring obligation, the same could be considered even after the end of Section 10A prohibited period. We are of the considered view that any attempt to negate, nullify, invalidate or erode the protection offered by Section 10A cannot be accepted as it would go contrary to the legislative intent behind insertion of Section 10A. That being so we find that the Adjudicating Authority has not committed any error in holding that the portion of the debt liability arising out of the principal amount having coming into default during the Section 10A needs to be ignored and on consideration of the remaining portion falling short of the threshold limit of Rs 1 Cr, the Section 7 petition was rendered non-maintainable and therefore legally impermissible. We are satisfied that the Adjudicating Authority did not commit any error in rejecting the Section 7 application. We find no good grounds to interfere with the impugned order. The Appeal is devoid of merit and is dismissed. We are of the considered view that any attempt to negate, nullify, invalidate or erode the protection offered by Section 10A cannot be accepted as it would go contrary to the legislative intent behind insertion of Section 10A. That being so we find that the Adjudicating Authority has not committed any error in holding that the portion of the debt liability arising out of the principal amount having coming into default during the Section 10A needs to be ignored and on consideration of the remaining portion falling short of the threshold limit of Rs 1 Cr, the Section 7 petition was rendered non-maintainable and therefore legally impermissible. We are satisfied that the Adjudicating Authority did not commit any error in rejecting the Section 7 application. We find no good grounds to interfere with the impugned order. The Appeal is devoid of merit and is dismissed. Issues: (i) Whether the Section 7 application was maintainable where the principal default arose during the period protected by Section 10A of the Insolvency and Bankruptcy Code, 2016, and whether, after excluding the portion of debt and default falling within Section 10A, the remaining default meets the minimum threshold under Section 4 of the Insolvency and Bankruptcy Code, 2016.Analysis: The statutory scheme of Section 10A of the Insolvency and Bankruptcy Code, 2016 provides for suspension of initiation of corporate insolvency resolution process in respect of defaults arising on or after 25 March 2020 for the specified protected period and expressly provides that no application shall ever be filed for defaults occurring during that period. The particulars of financial debt filed in Part IV of the original and the subsequent Section 7 petitions show that the principal instalments fell due in March, April and May 2020, dates that indisputably fall within the Section 10A protected period. The subsequent Section 7 petition, though reworking interest to exclude the Section 10A period, continued to claim the same principal amount, which on the pleadings crystallizes the date(s) of default within the prohibited period. Where a default is pleaded with specific dates that fall within Section 10A, that amount must be excluded for purposes of maintaining a Section 7 application. Once the principal amounts arising during Section 10A are excluded, only the post-Section 10A interest remained, and that amount fell below the statutory threshold prescribed under Section 4 for initiation of CIRP. Reliance on the concept of continuing default does not permit circumventing the statutory embargo created by Section 10A where the date(s) of default have been specifically pleaded within the protected period; the protection afforded by Section 10A would otherwise be nullified.Conclusion: Issue (i) is answered against the Appellant and in favour of the Respondent: the portion of debt which fell due during the Section 10A protected period must be excluded, and after such exclusion the remaining default does not meet the threshold under Section 4, rendering the Section 7 application non-maintainable; the appeal is dismissed.