Default Occurs on Expiry of Contractual Cure Period; Section 10A Cannot Shield Pre-25 March 2020 Defaults
- REEDLAW
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REEDLAW Legal News Network reports: In a pivotal ruling, the NCLAT upheld the NCLT’s admission of a Section 7 petition, holding that a financial default crystallises upon the expiry of the contractual cure period, and statutory protection under Section 10A cannot shield defaults occurring before 25 March 2020.
The Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Indevar Pandey (Technical Member) dismissed the appeal filed by the suspended director of the Corporate Debtor, affirming the NCLT, Chandigarh Bench’s order admitting the Financial Creditor’s Section 7 petition. The Tribunal found that the contractual cure period had lapsed prior to the COVID-19 Section 10A moratorium, the default was complete and subsisting, and subsequent payments or discretionary disbursements did not negate the default, thereby triggering the Corporate Insolvency Resolution Process (CIRP).
The Appellant, the suspended director of a Corporate Debtor engaged in the hospitality sector, challenged the NCLT, Chandigarh Bench’s order admitting a Section 7 petition filed by the Financial Creditor and initiating Corporate Insolvency Resolution Process (CIRP). The challenge was primarily predicated on the grounds that no subsisting financial default had occurred, the alleged default fell within the protection period under Section 10A of the Insolvency and Bankruptcy Code, 2016 introduced during the COVID-19 pandemic, and the Adjudicating Authority had failed to appreciate the continuous payments, restructuring arrangements, and contractual cure periods agreed between the parties prior to initiation of proceedings. The Corporate Debtor had historically availed multiple loans from financial institutions, which were subsequently acquired by the Financial Creditor through assignment deeds. The loans were restructured under a settlement-cum-restructuring arrangement with a contractual cure period of 45 days for delayed instalments, and additional working capital facilities to maintain operational liquidity. A consent decree from the DRT validated the settlement terms, and the Corporate Debtor made multiple payments towards the January 2020 instalment within the contractual cure period.
The Appellant contended that the Section 7 petition was barred under Section 10A, emphasising that the date of default as per the Financial Creditor’s own records was January 2020, and any delay in payments was within the permissible cure period ending on 16.03.2020, prior to the commencement of the Section 10A moratorium on 25.03.2020. The Appellant highlighted that additional disbursements under WCTL-III were made after the alleged default, demonstrating that the Financial Creditor had not treated the delay as an event of default. Reliance was placed on decisions including Indiabulls Housing Finance Limited v. Revital Realty Private Limited, REEDLAW 2023 NCLAT Del 05573, emphasizing that the Code aims to preserve viable corporate entities rather than trigger insolvency proceedings at the first instance of default, and Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited, REEDLAW 2021 SC 02503, which clarified that the date of default in the petition governs applicability of Section 10A. Additional precedents cited included IDBI Bank Ltd. v. The Entertainment Enterprises Ltd., CA (IB) (Ins) No. 939 of 2023, JC Flowers Asset Reconstruction Pvt. Ltd. v. Leisure Ltd., CA (IB) (Ins) No. 2103 of 2024, and Carissa Investments LLC v. Indu Techzone Private Limited and Others, REEDLAW 2023 NCLAT Chn 08545, all underscoring that Section 7 petitions filed for defaults within the Section 10A period are barred irrespective of subsequent instalments.
The Financial Creditor, in response, submitted that the default in the January 2020 instalment was complete and subsisting, and the cure period under the MoU did not extend to nullifying the default once the 45-day period lapsed on 16.03.2020. It was argued that the Corporate Debtor failed to make full payment by the end of the cure period, triggering an automatic “event of default” under the MoU and the DRT consent decree dated 26.10.2018, thereby making all outstanding dues immediately payable. The Financial Creditor also noted that subsequent disbursements were discretionary and independent, not amounting to waiver or condonation of the default. Reliance was placed on settled Supreme Court jurisprudence in Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 and E.S. Krishnamurthy and Others v. Bharath Hi Tech Builders Private Limited, REEDLAW 2021 SC 12544, which held that once a financial debt exists and default is established, the Adjudicating Authority is bound to admit the petition. It was further submitted that Section 10A was not applicable as the default occurred prior to 25.03.2020, in line with Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited, REEDLAW 2021 SC 02503.
Upon analysis, the Tribunal observed that the Financial Creditor’s claim of continuous default from January 2020 was supported by the Corporate Debtor’s own balance sheets and the admitted shortfall under the MoU. The contractual cure period ended prior to the Section 10A moratorium, and subsequent payments did not retrospectively nullify the default. The disbursement of WCTL-III instalments post-default did not amount to waiver or estoppel, as these were discretionary under the loan agreements. Accordingly, the Tribunal upheld the NCLT’s order admitting the Section 7 petition, holding that the default was complete and subsisting, and the statutory protection under Section 10A was inapplicable. The Tribunal relied on precedents emphasising that defaults arising prior to 25.03.2020 are actionable, and the CIRP could not be barred by the COVID-19 moratorium provisions, ensuring alignment with settled jurisprudence protecting both contractual and legislative rights of Financial Creditors.
Mr. Gaurav Mitra, Mr. Aalok Jagga, Mr. Nipun Gautam, APS Madaan, Mr. Sahil Lohan and Lavanya Pathak, Advocates, represented the Appellant.
Mr. Krishnendu Datta, Sr. Advocate with Mr. Dhruv Dewan, Ms. Sanjukta Roy and Ms. Alina Merin Mathew, Advocates, appeared for the Respondent No. 2.
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