2026 (2) TMI 1218 - AT - IBC

Non-payment of monthly interest as default enables a Section 7 insolvency petition; petition admitted and lower order set aside.

Whether failure to pay monthly interest constituted a default under loan documents is the central issue; the contractual provision granting a lender ... Default u/s 7 - interpretation of loan agreement - default by the corporate debtor under the loan agreements - monthly interest payable in advance as event of default - construction of Clauses 7 and 9 - term of loan vis-a -vis payment obligation - admission of petition u/s 7 - remand for further proceedings - HELD THAT:- Admittedly there has been a default in payment of the monthly interest after three months. Now the simple question that arose is if the respondent failed to make payment of monthly interest will then the appellant be bound to wait till completion of 30 months to seek payment of his principal. The answer would be emphatic NO. The simple interpretation of documents above reveals as soon as there is default in payment of interest by the Respondent, the default shall occur. Clause 9 only refers to the fact if unpaid interest along with principal is still not paid within 30 months then after 60 days the lenders/appellant shall get right to sell the mortgaged property. Nevertheless, admittedly the interest was never paid since March, 2019, thus even if the loan was sanctioned for a term of 30 months yet on default the lender had every right to cancel the agreement(s) and to demand the entire principal amount with interest. Hence there was no reason to dismiss the petition under Section 7 IBC as the agreement(s) notes the amounts were lent and were for time value of money. Admittedly there was failure on the part of Respondent to repay the loan (or interest after the notice; hence there existed a cause for the appellant to file a petition under Section 7 of IBC. On reasons aforesaid the appeal is admitted and the impugned order is hereby set aside. Petition under Section 7 of IBC thus stands admitted. Matter be now listed before the Ld. NCLT on 24-02-2025 for further proceedings. Issues: Whether there was a default by the corporate debtor under the loan agreements and whether the petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by the financial creditor was maintainable.Analysis: The loan agreements and promissory notes provided for interest at 24% per annum compounded monthly, payable monthly in advance from the date of first payment. Clause 7 and Clause 8 made the loan repayable after six months, while Clause 9 dealt with the lender's remedy on non-repayment after thirty months and a further 60-day period. Clause 2 mandated monthly payment of interest. The ledger and account statement show interest was not paid after March 2019 and a cheque for repayment was dishonoured. The Tribunal's reading that default could only occur after 30 months misconstrued the contract: Clause 9 prescribes a remedy on continued non-payment after 30 months but does not negate the occurrence of default upon failure to pay monthly interest. On the facts, there was an admitted failure to pay monthly interest, and the lender was entitled to treat the loan as in default and to seek repayment, thereby giving rise to a cause of action under Section 7 of the Insolvency and Bankruptcy Code, 2016. The impugned order dismissing the Section 7 petition on the ground that the debt was not due was therefore incorrect.Conclusion: The appeal is allowed; the impugned NCLT order dated 15.11.2022 is set aside and the petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 is admitted. The decision is in favour of the appellant.