Section 7 CIRP Barred Under Section 10A: Date of Default Stated in Demand Notice Is Determinative
- REEDLAW
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REEDLAW Legal News Network reports:Â In a significant ruling addressing COVID-19-related moratoriums, the Appellate Tribunal held that a Section 7 application under the Insolvency and Bankruptcy Code, 2016, is barred under Section 10A where the date of default, as admitted in the demand notice and pleadings by the financial creditor, falls within the COVID-19 exclusion period. The Tribunal clarified that such a date cannot be altered through oral extensions or subsequent demands, reaffirming the determinative nature of the date stated in the notice for the purposes of filing insolvency proceedings.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Yogesh Khanna (Judicial Member)Â and Mr. Ajai Das Mehrotra (Technical Member), while adjudicating a company appeal, held that a Section 7 application under the Insolvency and Bankruptcy Code, 2016 is barred under Section 10A where the date of default, as admitted by the financial creditor in the demand notice and pleadings, falls within the COVID-19 exclusion period. The Tribunal further clarified that this date is determinative and cannot be altered by alleging oral extensions or subsequent demands, thereby precluding the initiation of insolvency proceedings in such circumstances.
The Appellate Tribunal examined an appeal arising from the dismissal of an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor. The application had been dismissed by the Adjudicating Authority on the ground that the alleged date of default fell within the period barred under Section 10A of the Code. The appeal constituted the second round of litigation, the earlier rejection having been set aside by the Tribunal with a direction to revive the application for fresh consideration, without expressing any opinion on the merits.
The Appellant asserted that an interest-free loan had been advanced from his personal account to the Corporate Debtor in July 2020 for a period of three months, and that the time for repayment had been extended orally on request of the Corporate Debtor. It was contended that default occurred only upon issuance of a legal notice in September 2021, and therefore, the date of default was beyond the exclusion period prescribed under Section 10A. The Corporate Debtor, on the other hand, disputed the very nature of the transaction, contending that the amount received was not a loan but an adjustment of interest payable on earlier loans extended by the Corporate Debtor to entities controlled by the Appellant, and that the amount had been duly accounted for as income in its books.
While noting the serious dispute between the parties regarding the nature of the transaction and the existence of financial debt, the Tribunal confined its examination to the limited issue on which the application had been dismissed, namely, whether the date of default attracted the bar under Section 10A. On perusal of the application under Section 7, the demand notice and accompanying documents, the Tribunal found that even as per the Appellant’s own pleadings, The loan was disbursed on 21.07.2020 for a period of three months, and the debt was stated to have fallen due on 22.10.2020. The Tribunal observed that there was no documentary evidence to support the Appellant’s plea of extension of the repayment period, and the same had been expressly denied by the Corporate Debtor.
Relying upon the decision of the Hon’ble Supreme Court in Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited, REEDLAW 2021 SC 02503, it was reiterated that the date of default as specified by the creditor in the statutory notice or pleadings must govern the proceedings, and attempts to alter or shift the date of default at a later stage were impermissible. The Tribunal further noted that Section 10A imposed a complete embargo on initiation of insolvency proceedings for defaults occurring during the notified COVID-19 period, and that the provision was required to be construed purposively to advance the legislative intent of shielding corporate persons from insolvency triggered by pandemic-related distress.
The Tribunal also referred to coordinate bench decisions, reiterating that creditors could not be permitted to circumvent the statutory protection under Section 10A by relying on subsequent conduct or alleged extensions. Since the date of default, as admitted by the Appellant, fell squarely within the exclusion period prescribed under Section 10A, the Tribunal held that the application under Section 7 was not maintainable in law. Finding no infirmity in the order of the Adjudicating Authority, the appeal was dismissed, leaving all other contentious issues between the parties open and unexamined.
Mr. Peeyoosh Kalra and Mr. Yashwant Singh Baghel, Advocates, represented the Appellant.
Ms. Gaurika Sood and Mr. Nirmit Jadwani, Advocates, appeared for the Respondent.
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