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 remedy after thirty months does not negate that monthly interest obligations, if unpaid, create an immediate default and give rise to a cause of action under the insolvency statute. The tribunal's interpretation that default could arise only after thirty months misconstrued the contract. On the facts, interest ceased after March 2019 and repayment was dishonoured, so the lender was entitled to treat the loan as in default and to pursue a petition under Section 7, leading to admission of the petition and setting aside of the prior dismissal.

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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.

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