Application For CIRP Not Maintainable If Default Occurred During Protected Period U/S 10A Of IBC

Background

The appeal arises out of a dispute between the operational creditor, Srinivas Cloth Mills, and the corporate debtor, Chandrima Fashion Fabrics Private Limited, concerning the application for CIRP under Section 9 of the IBC. The operational creditor, but the corporate debtor, failed to make the payment. As a result, a Section 8 Demand Notice was issued by the operational creditor. Later on, a settlement deed was executed between both parties regarding the payment of the due amount.

Under the settlement deed, payment was required to be made in a staggered manner from February to December 2020. The operational creditor claimed that several payments were not made within the agreed timelines. However, the majority of the missed payments fell within the period covered by Section 10A of the IBC, which provided a temporary suspension on the initiation of CIRP due to the COVID-19 pandemic. The corporate debtor's failure to make these payments led to the issuance of another Section 8 Demand Notice by the operational creditor, citing a breach of the agreement. Finally, the operational creditor filed a Section 9 application before the adjudicating authority for initiation of the CIRP.

The Adjudicating Authority (NCLT, Kolkata) did not address the issue of whether the default occurred after March 2020, which fell within the protected period under Section 10A, could be considered for initiating insolvency proceedings. The NCLT admitted the Section 9 application and initiated the CIRP of the corporate debtor. Aggrieved by the decision, the appeal was filed before the NCLAT by the suspended director.

NCLAT's Judgment

The main contention before the NCLAT was whether the Section 9 application filed by the operational creditor was maintainable, given that the default had occurred during the period protected under Section 10A of the IBC.

While examining the provisions of Section 10A of the IBC, the bench discussed the Hon'ble Supreme Court's ruling in the case of Ramesh Kymal v. Siemens Gamesha Renewable Power Pvt. Ltd. and held that it's a well-settled law that no application for initiation of CIRP under Section 9 can be initiated for a default that is committed during the Section 10A period. The NCLAT observed that the legislative intent of introducing Section 10A into the scheme of IBC was to protect the corporate debtor from being shoved into the morass of insolvency in the extenuating circumstances inflicted by the Covid-19 pandemic.

The NCLAT found that a significant portion of the alleged defaults fell within the protected period from March to December 2020, and those defaults were specifically shielded by Section 10A. The bench also observed that under Section 3(12) of the IBC, a default is defined as a failure to pay debt when it becomes due and payable. However, any default occurring during the period protected under Section 10A cannot be considered as part of debt for the purpose of initiating CIRP proceedings.

Case Title: Manish Mukim v. Ms. Rakhi and Anr.

Case Number: Company Appeal (AT) (Insolvency) No. 617 of 2023

Tribunal: National Company Law Appellate Tribunal, Principal Bench, New Delhi

Judge: Justice Ashok Bhushan (Chairperson), Barun Mitra (Member (Technical)), and Arun Baroka (Member (Technical))

For Appellant: Mr. Himanshu, Ms. Anju Thomas, Ms. Ranjabati Ray, Advocates

For Respondent: Mr. Gulshan Kr. Sachdeva, Advocate for R-2, along with Mr. Sanjay Khandelwal, IRP, in person.

Date of Judgement: 05.03.2025

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