Sec. 10A Inapplicable To Defaults Committed Prior To 25.03.2020; NCLAT Chennai Says Explanation To Sec. 10A Removes All Doubts
The National Company Law Appellate Tribunal (“NCLAT”), Chennai Bench, comprising of Justice M. Venugopal (Judicial Member) and Ms. Shreesha Merla (Technical Member), while adjudicating an appeal filed in Carissa Investments LLC v Indu Techzone Pvt. Ltd. & Ors., has held that the Explanation to Section 10A of IBC removes any doubt by clarifying that the prohibition to initiate...
The National Company Law Appellate Tribunal (“NCLAT”), Chennai Bench, comprising of Justice M. Venugopal (Judicial Member) and Ms. Shreesha Merla (Technical Member), while adjudicating an appeal filed in Carissa Investments LLC v Indu Techzone Pvt. Ltd. & Ors., has held that the Explanation to Section 10A of IBC removes any doubt by clarifying that the prohibition to initiate CIRP would be inapplicable to defaults committed prior to 25.03.2020.
“The object of the legislation was to suspend the operation of Sections 7, 9 and 10 in respect of defaults arising on or after March 25th 2020 when the lockdown was disrupting normal business operation. This Tribunal is of the considered view that the ‘Explanation’ removes any doubt by clarifying that the provisions of the Section shall not apply in respect of any default committed prior to 25.03.2020.”
Background Facts
Indu Projects Ltd. (“Corporate Debtor”) had availed a loan of Rs. 60 Crores from M/s IDFC Ltd. (Original Lender). On 13.10.2013, the loan account of Corporate Debtor was declared as Non-Performing Asset (NPA). In 2013, the debt was assigned to EARC by the Original Lender.
On 12.03.2018, a Settlement Agreement was executed between the Corporate Debtor and EARC, wherein the Corporate Debtor undertook to pay Rs.15,00,12,830/- in three tranches, the third payment being due on 31.03.2020. However, the Corporate Debtor could not honour the Settlement Agreement within time. Thereafter, EARC assigned the debt to M/s. Prudent ARC Limited.
M/s. Prudent ARC Limited (“Financial Creditor”) filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. on 07.02.2022, the NCLT admitted the petition and initiated CIRP against the Corporate Debtor.
Carissa Investments LLC (“Appellant”) being a shareholder of Corporate Debtor, filed an appeal before NCLAT against the order dated 07.02.2022.
Section 10A was inserted in IBC in view of the COVID-19 pandemic and this provision prohibited initiation of CIRP with respect to defaults occurring between 25.03.2020 to 24.03.2021.
The Financial Creditor argued that for a default occurring on or after 25.03.2020, embargo is in place for a period for six months and is extendable up to one year from 25.03.2020. The restriction does not prevent the initiation of CIRP against the Corporate Debtor in the event that the default continues even after the period of one year from 25.03.2020.
Relevant Law
Section 10A of IBC
Section 10A: Suspension of initiation of corporate insolvency resolution process.
10A. Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified2 in this behalf:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.
Explanation. – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.
NCLT Verdict
The Bench placed reliance on the Supreme Court judgment in Ramesh Kymal v M/s. Siemens Gamesa Renewable Power Pvt. Ltd., Civil Appeal No.4050 of 2020, wherein it was held that, “the embargo contained in Section 10A must receive a purposive construction which will advance the object which was sought to be achieved by enacting the provision”.
The Bench observed that admittedly as per the Settlement Agreement entered between the Corporate Debtor and the Lenders, the third instalment of the payment was ‘due and payable’ on 31.03.2020. Further, the Explanation to Section 10A removes any doubt by clarifying that the prohibition under Section 10A would be inapplicable to defaults committed prior to 25.03.2020.
“The object of the legislation was to suspend the operation of Sections 7, 9 and 10 in respect of defaults arising on or after March 25th 2020 when the lockdown was disrupting normal business operation. This Tribunal is of the considered view that the ‘Explanation’ removes any doubt by clarifying that the provisions of the Section shall not apply in respect of any default committed prior to 25.03.2020.”
Since the default has occurred after 25.03.2020, i.e. on 31.03.2020, therefore the prohibition under Section 10A is squarely applicable. The Bench has set aside the NCLT order dated 07.02.2022 and also the CIRP against the Corporate Debtor.
Case Title: Carissa Investments LLC v Indu Techzone Pvt. Ltd. & Ors.
Case No.: Company Appeal (AT) (CH) (Ins) No.124/2022
Counsel For Appellant: Mr. E. Om Prakash, Senior Advocate For Ms. Ashwini Vaidialingam, Advocate
Counsel For Respondents: Mr. P.H. Arvindh Pandian, Advocate For Mr. Anirudh Krishnan, Advocate, For R2