NCLAT Rules Section 9 IBC Petition Inadmissible for Default During Section 10A Bar and Below ₹1 Crore Threshold
- REEDLAW
- Aug 23
- 4 min read
REEDLAW Legal News Network reports: In a decisive ruling, the National Company Law Appellate Tribunal (NCLAT) declared that a Section 9 application under the Insolvency and Bankruptcy Code (IBC) is inadmissible when the alleged default occurred during the Section 10A moratorium period and, upon recalculation excluding this period, the claim amount falls below the mandatory ₹1 crore threshold. The Tribunal further observed that continuing the Corporate Insolvency Resolution Process (CIRP) after a full settlement constitutes a clear misuse of the Code.
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 Section 9 application cannot be maintained if the default arises during the prohibited period under Section 10A of the IBC. The Bench emphasised that when the claim amount, recalculated after excluding such a period, falls below the statutory threshold of ₹1 crore, the application becomes inadmissible. It further held that continuation of CIRP after the settlement of dues amounts to an abuse of the insolvency framework.
The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the order dated 24.04.2023 passed by the National Company Law Tribunal, Kolkata Bench-II, which had admitted an application under Section 9 filed by the Operational Creditor and initiated Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, Chandrima Fashion Fabrics Private Limited. The Operational Creditor, Srinivasa Cloth Mills, had supplied fabric materials to the Corporate Debtor and raised invoices between April and October 2019. When payments were not received, a demand notice under Section 8 was issued on 25.11.2019, leading to the execution of a Settlement Deed on 31.01.2020. Under this settlement, the Corporate Debtor agreed to pay ₹1,14,84,292/-, and part payments were made. However, alleging breach of the settlement, the Operational Creditor issued another demand notice on 19.06.2020 and subsequently filed a Section 9 application on 17.11.2020 claiming ₹1,14,534,363/-.
During the appellate proceedings, interim orders were passed staying the CIRP and restraining the constitution of the Committee of Creditors (CoC). The Appellant informed that ₹63 lakhs had been paid and later confirmed that the full settlement amount of ₹64,53,250/- was cleared by 17.07.2024. The Operational Creditor acknowledged receipt of the entire settlement amount, and the Resolution Professional confirmed that his fees and expenses had also been paid. Despite this, the Operational Creditor declined to either refund the settlement amount or file Form-FA for withdrawal of the CIRP, citing a delay in payment beyond the agreed timeline of 31.01.2024.
The Appellant argued that the Operational Creditor had waived the timelines by accepting payments after the due dates and that the initiation of CIRP after receiving full payment was a misuse of the IBC process. It was also contended that a substantial part of the alleged default fell within the prohibited period under Section 10A of the IBC, which barred insolvency proceedings for defaults occurring between 25.03.2020 and 28.02.2022. Since most instalments under the settlement fell during this period, the alleged outstanding could not meet the mandatory threshold of ₹1 crore. The Operational Creditor, however, maintained that delayed payment entitled it to revoke the waiver of interest as per the settlement terms.
The Appellate Tribunal examined the payment schedule and noted that, except for one instalment due on 28.02.2020, all other instalments fell within the Section 10A period, rendering the Section 9 application non-maintainable. It held that defaults occurring during the prohibited period could not form the basis for initiating CIRP and, after recalculating the outstanding amount by excluding those instalments, the debt fell below the statutory threshold. The Tribunal further observed that the Operational Creditor’s insistence on continuing CIRP despite receiving the full settlement amount was vexatious and contrary to the spirit of the IBC, which is not intended as a debt recovery tool.
Consequently, the impugned order admitting the Section 9 application was set aside, the CIRP against the Corporate Debtor was terminated, and costs of ₹1 lakh were imposed on the Operational Creditor, payable within thirty days. The Tribunal strongly deprecated the conduct of the Operational Creditor, holding that such actions were against the objective of insolvency resolution envisaged under the IBC.
Mr. Himanshu, Ms. Anju Thomas and Ms. Ranjabati Ray, Advocates, represented the Appellant.
Mr. Gulshan Kr. Sachdeva, Advocate for R-2, along with Mr. Sanjay Khandelwal, IRP, in person, represented the Respondents.
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