Petition U/S 7 Of IBC Cannot Be Barred For Default Committed Prior To S.10A Period: NCLAT

Brief Facts

This appeal has been filed against an order passed by the Adjudicating Authority by which a petition under 7 of the code was dismissed.

An amount of loan was advanced by the financial Creditor to the corporate debtor with a condition that the corporate debtor would pay interest on the amount on a half yearly basis at the rate of 12% per annum.

The corporate debtor committed default. Thereafter, demand notices were sent by the financial creditor claiming the due payment but no response was given.In proceedings before the Adjudicating Authority, no one appeared on behalf of the respondent. Even in proceedings before this tribunal, the respondent did not contest their case despite giving multiple opportunities therefore the respondent was proceeded ex-parte.

Issue Before Tribunal

Whether the Adjudicating Authority could have calculated a date of default, dehors the agreement between the parties especially when the Respondent chose not to challenge those notices or contest the Petition.

Observations:

The tribunal at the outset observed that it is not necessary that a financial debt can be

provided only by a written agreement. In Agarwal Polysacks Limited Vs. K.K. Agro Foods and Storage Limited 2023, this tribunal has observed that “if the transaction can be proved from other materials on record, requirement of written financial contract is not a pre-condition for proving debt.”

The tribunal observed that default would still exist even if there is no date of default. The Adjudicating Authority was not justified in determining the date of default on its own without going through the date of default provided by the Appellant.As claimed by the Petitioner, the loan was repayable within one year and payment of interest @ 12% per annum was to be made on half yearly basis and, as per the claim of the Petitioner, the first instalments was due on 10.10.2019, which is set to be the first date of default.

The tribunal rejected the argument that the date of default would be considered when the demand or recall notice was issued that is July 20, 2020 and observed that “the petition under section 7 of the code was filed in August, 2023 and the date of default as claimed by the appellant is October 10, 2019 i.e. the date on which the first instalment of half yearly interest became due and payable by the Corporate Debtor to the Appellant.”

It is also contended that the default is continuing even till date, as there is no repayment by the Corporate Debtor either for the interest or principal amount.

This tribunal in 'Narayan Mangal Vs. Vatsalya Builders & Developers Pvt. Ltd. (2023) has held that “If the default is committed prior to Section 10 A period and default continues there is no prohibition in initiating proceedings under Section 7 and we are not persuaded to accept the submission of the counsel for the respondent that the liability of interest which accrued during Section 10 A period should be ignored or should not be computed in the amount while finding the threshold. Liability to pay interest which default committed prior to Section 10 A period continues and is not obliviated by Section 10 A.”

Based on the above, the tribunal noted that present case is squarely covered by the above judgment. It observed that the liability to pay interest had occurred prior to Section 10A period, continues in the 10A period, and also exists beyond the 10A period. Hence, the Appellant cannot be barred under Section 10A to file proceedings under Section 7.

In 'Nitin Chandrakant Desai Vs. Edelweiss Asset Reconstruction Ltd. & Anr (2023) this tribunal has held that “When default has been committed by the Corporate Debtor prior to

Section 10A period, any default committed during the Section 10A period cannot be held to bar the application which is filed on the basis of default prior to Section 10A and subsequent to Section 10A period.”

While applying the above ratio to the facts of the present case, the tribunal observed that date of default has been noted in the NeSL portalon a date which is much prior to Section 10A period. The default, which is much prior to the 10A period, becomes an admitted fact as it is not challenged by the Respondent, since they neither appeared before the Adjudicating Authority nor before this Appellate Tribunal. So, it can be concluded that the default date is much prior to Section 10A period.

Finally, the tribunal observed that “the determination of any other date of default by the Adjudicating Authority, on the basis of the initial demand notice, cannot be justified on the basis of the facts of the case. Therefore, we cannot agree with the finding of the Adjudicating Authority that the date of default falls within the 10A period.”

Accordingly, the present appeal was allowed and the impugned order was set aside.

Case Title: Mobile Constructions Private Limited Versus Apple Land Development Private Limited

Case Number: Company Appeal (AT) (Insolvency) No. 756 of 2024

Judgment Date: 11/12/2024