Bar under Section 10A of IBC Applies Only to Defaults Solely Occurring During the Moratorium Period; Continuing Defaults Beyond the Period Not Exempt from CIRP

The High Court held that the bar under Section 10A of the IBC applies only to defaults that occurred solely during the moratorium period, and continuing defaults beyond the said period are not exempt from the initiation of the Corporate Insolvency Resolution Process.

The Madras High Court Division Bench comprising Justice S.S. Sundar and Justice P. Dhanabal, while reviewing multiple writ petitions, held that Section 10-A of the Insolvency and Bankruptcy Code, 2016 bars the initiation of CIRP only in cases where the default occurred solely during the moratorium period (25.03.2020 to 24.03.2021); if the default continued beyond this period, the bar under Section 10-A does not apply, and such applications are maintainable before the NCLT.

The writ petition had been filed by the shareholders and suspended directors of the Corporate Debtor, Evershine Wood Packaging Private Limited, seeking a writ of certiorari to quash the order passed by the National Company Law Tribunal (NCLT), Division Bench-II, Chennai, dated 23.06.2023, in CP (IB) No. 13/2023. By that order, the NCLT had admitted the company petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) and initiated the Corporate Insolvency Resolution Process (CIRP) by appointing an Interim Resolution Professional (IRP). The petitioners approached the High Court despite the availability of a statutory appeal under the IBC, contending that the order was vitiated for want of jurisdiction due to the bar under Section 10-A of the IBC.

The facts on record revealed that the Corporate Debtor, engaged in the timber business, had availed credit facilities from Indian Bank starting in 2017. The Corporate Debtor had executed various security and guarantee documents and had also acknowledged the outstanding liability. Upon committing default, the account was declared a Non-Performing Asset (NPA) with effect from 23.12.2020. Despite irregular payments till October 2021, the default persisted. Consequently, Indian Bank filed an application under Section 7 of the IBC. Though the Corporate Debtor had sent a revised One-Time Settlement (OTS) proposal on 04.03.2023, it was not accepted by the Bank.

In challenging the NCLT’s jurisdiction, the petitioners primarily relied on Section 10-A of the IBC, which barred initiation of CIRP for defaults occurring on or after 25.03.2020 for a specified period due to the COVID-19 pandemic. The petitioners contended that the default occurred during this protected period, citing the date of 23.12.2020 as the relevant date. They argued that since the default occurred during the moratorium period, the application under Section 7 was not maintainable. The Court had earlier admitted the writ petition and granted interim relief, noting that the issue pertained to the maintainability of the CIRP application itself.

Upon issuance of notice, Indian Bank filed a detailed counter affidavit, asserting that the default continued well beyond the moratorium period under Section 10-A, and the liability had increased substantially by the time of filing the petition before the NCLT. The Bank also emphasized that the Corporate Debtor had consistently admitted its liability in all OTS proposals and that the writ petition was an abuse of process aimed at stalling legitimate insolvency proceedings. The Resolution Professional, in his report, indicated that the CIRP was at an advanced stage and forensic audit findings revealed several irregularities by the petitioners.

The High Court held that Section 10-A merely imposed a temporary embargo on initiating CIRP for defaults occurring between 25.03.2020 and 24.03.2021. However, in the present case, although the initial default fell within the moratorium period, the default had admittedly continued thereafter. The Court noted that the bar under Section 10-A would not extend to defaults that persisted beyond the protected period. Relying on the judgment of the Hon’ble Supreme Court in Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited, REEDLAW 2021 SC 02503, the Court observed that the protection under Section 10-A was applicable only to defaults that exclusively occurred during the moratorium period and not to continuing defaults that extended beyond it.

Therefore, the Court concluded that the petitioners could not rely upon Section 10-A to challenge the maintainability of the application filed before the NCLT. Since the default had continued well after the expiration of the moratorium period, the application filed under Section 7 of the IBC was held to be maintainable. Accordingly, the High Court found no infirmity in the order of the NCLT and dismissed the writ petition.

Mr. P.H. Arvind Pandian, Senior Advocate for M/s. Ananda Gomathy represented the Petitioners.

Mr. P.V. Murlidhar, Advocate, appeared for Respondent No. 1.

Mr. B. Thilak Narayanan, Advocate, appeared for Respondent No. 2.

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