Proviso To S.10A Of IBC Doesn't Bar CIRP Applications Where Default Continues Beyond Moratorium Period: Madras High Court

The court noted that Section 10-A only imposes a moratorium temporarily suspending the initiation of the Corporate Insolvency Resolution Process (CIRP). Section 10-A bars an application for initiation of CIRP of a Corporate Debtor, for any default arising on or after 25.03.2020 for a period of six months.

In interpreting the proviso to Section 10-A, the court held that the bar on filing CIRP applications applies only to defaults that occur within the moratorium period. Thus, if a default persists beyond this period, the bar does not extend to such continuing defaults.

Brief Facts

The Corporate Debtor, Evershine Wood Packaging Private Limited has been carrying on the business of timber and availed various credit facilities with Indian Bank from 2017. The Corporate Debtor committed default in payment of loan/debt and hence, a Demand Notice was issued on 10.11.2021.

The Accounts of Corporate Debtor were declared Non-Profitable Asset (NPA) on 31.03.2021 w.e.f. 23.12.2020. The Corporate Debtor paid some amounts till 25.10.2021. The default continued thereafter. The Financial Creditor, Indian Bank, filed an application under Section 7 of IBC for initiating CIRP.

A writ petition was filed before the court. The Court admitted the writ petition and recorded that the section 7 application was not maintainable before NCLT because the default occurred between 25.03.2020 and 24.03.2021.

The shareholders and suspended Directors of Corporate Debtor filed the writ petition seeking to quash the impugned order by NCLT which admitted the section 7 company petition. The Petitioners contended that due to Covid 19, the business of the corporate Debtor was affected.

Observations

The court noted that Section 10-A of IBC, 2016 is only a moratorium temporarily suspending the initiation of CIRP. Section 10-A prohibits an application for initiation of CIRP of a Corporate Debtor, for any default arising on or after 25.03.2020 for a period of six months.

It further noted that though the default commenced after the period specified in Section 10-A, it continued even after the moratorium period.

The Court referred to the judgment of the Supreme Court in Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt. Ltd. which observed as follows:

"The expression 'shall ever be filed' is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25-3-2020 for a period of six months, extendable up to one year as notified."

It was further held: “the embargo contained in Section 10-A must receive a purposive construction which will advance the object which was sought to be achieved by enacting the provision."

The court referred to the observations of NCLT New Delhi in Company Appeal (AT) (Insolvency) No.1725/2024:

“The provision cannot be read to mean that after the period is over the application can be filed. If such interpretation is accepted, the whole purpose and object shall be defeated. The purpose and object of introduction of Section 10A was to give relief to Corporate Debtor who committed default during the period which is covered by Section 10A. ….The debt is not wiped out is only for the purpose that other proceedings are not prohibited but Sections 7, 9 and 10 applications are clearly barred.”

The court observed that the proviso to Section 10-A mandates that no application shall ever be filed for initiation of CIRP of the Corporate Debtor for the default occurring during the moratorium period. It held that the proviso cannot be extended where the default is continued beyond the moratorium period.

The court held that there was no extraordinary circumstance warranting the Court to entertain a writ petition when there is an alternative remedy. It dismissed the writ petition.

Case Title: Dharamshi K. Patel & Anr. vs. Indian Bank & Ors.

Citation: 2025 LiveLaw (Mad) 37

Case Number: WP.No,712/2024 and WMP.Nos.730 & 732/2024

For Petitioners : Mr. P.H.Arvind Pandian, Senior counsel for Ananda Gomathy

For R1 : Mr. P.V.Murlidhar

For R2 : Mr. B.Thilak Narayanan

Date of Order: 23.01.2025