Fresh Section 7 IBC Application Maintainable on Post-Restructuring Default Despite Prior Default Falling Within Section 10A: NCLAT
- REEDLAW
- Jul 13
- 3 min read
NCLAT held that a fresh application under Section 7 of the IBC is maintainable on account of a default committed under restructured terms, even if the original default occurred during the Section 10A suspension period.
On 9 July 2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, while adjudicating a company appeal, held that a continuing guarantee remains enforceable until the entire debt is repaid, and a subsequent default under a validly restructured agreement constitutes a fresh cause of action. Such a default, occurring after the expiry of the Section 10A suspension period, is not barred by Section 10A of the IBC—even if the original default fell within the protected window. The Tribunal affirmed that a lawful restructuring supersedes prior defaults, thereby entitling the financial creditor to initiate a fresh Section 7 application based on post-restructuring default.
The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, by the suspended director of Bombay Rayon Clothing Ltd., challenging the admission of a Section 7 application against the Corporate Debtor. The application was filed by Catalyst Trusteeship Ltd., acting as Financial Creditor and Debenture Trustee, seeking initiation of CIRP based on the default arising from a restructured debt facility. The appeal primarily argued that the default was barred by Section 10A of the IBC, as the original invocation of the guarantee and the classification of the Principal Borrower's account as NPA had occurred during the COVID-19 suspension period.
The case involved a Debenture Trust Agreement (DTA) and Debenture Trust Deed (DTD) executed in 2017 between Reynold Shirting Ltd. (Principal Borrower) and the Financial Creditor, and a separate Guarantee Agreement executed by the Corporate Debtor. The original default dated back to June–September 2020, which fell within the Section 10A period. The Financial Creditor filed a Section 7 petition in 2022, but it was withdrawn after a Restructuring Agreement was entered into on 27.12.2022. The Corporate Debtor voluntarily participated in the restructuring, acknowledged joint liability, and agreed to repay a revised sum of ₹162.5 crore in instalments. However, the Principal Borrower defaulted on the second instalment due on 25.03.2023. A fresh recall-cum-invocation of the corporate guarantee was issued on 23.01.2024, and a new Section 7 application was filed thereafter, which was admitted by the Adjudicating Authority.
The Appellant contended that the restructuring did not alter the original date of default and that once a guarantee was invoked, it could not be repeatedly invoked to establish a new cause of action. It was also argued that the IRP appointed was biased due to past employment with the Financial Creditor. The NCLAT rejected these arguments, holding that the Guarantee Agreement was a continuing guarantee and that the Restructure Letter of 27.12.2022 had expressly superseded earlier arrangements, thereby creating fresh and enforceable obligations. The default of 25.03.2023 was treated as a distinct and subsequent event of default not covered under the Section 10A moratorium. The Appellate Tribunal further noted that the invocation of the guarantee in January 2024 was valid and based on default of the restructured terms, thus forming a fresh cause of action.
The NCLAT also found no merit in the allegation of bias against the IRP, relying on the Supreme Court’s judgment in State Bank of India v. Metenere Limited, REEDLAW 2020 SC 08531, which clarified that prior employment alone does not disqualify an IRP in the absence of a current conflict of interest. The Tribunal held that the Adjudicating Authority had rightly accepted the Financial Creditor’s application and there was no illegality in initiating CIRP on the basis of post-restructuring default. Accordingly, the appeal was dismissed, affirming the Adjudicating Authority’s order, with no order as to costs.
Mr. Krishnendu Dutta, Sr. Advocate, with Mr. Shashank Patnaik, Mr. Karan Grover and Mr. Yash Tandon, Advocates, represented the Appellant.
Mr. Abhijeet Sinha, Sr. Advocate with Mr. Pranay Chitale and Ms. Smiti Verma, Advocates, appeared for the Respondent No. 1.
Mr. Ayush J. Rajani, Advocate, appeared for the Respondent No. 2/RP.
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