NCLT Can Allow Date Of Default To Be Amended In CIRP Proceedings: NCLAT

The Tribunal also held that for the protection under section 10A of the Insolvency and Bankruptcy Code (IBC) to be applicable, there must be evidence of direct link between the 'default' and the 'COVID-19 impact'. Section 10A was introduced to provide relief to businesses affected by the economic impact of the COVID-19 pandemic by precluding CIRP proceedings for defaults occurring between 25.03.2020 and 25.03.2021. Since the default date i.e. 02.08.2019 predated the moratorium period, section 10A was held to be inapplicable.

Brief Facts

Barracks Retail India Pvt. Ltd. (Corporate Debtor), a garment manufacturing company, was incorporated on 25.01.2016. On 21.03.2017, Bharat Co-operative Bank (Mumbai) Limited sanctioned a term loan of Rs. 5 crores and a cash credit limit of Rs. 25 lakhs, secured by assets including 41 non-agricultural plots. In 2018, the Bank approved an additional loan of Rs. 1.91 crores to facilitate the acquisition of Eye Catch Fashions Pvt. Ltd..The bank arranged a transfer of Rs. 5.25 crore directly to Eye Catch's account to avoid NPA status. The Bank revised financial facilities for Corporate Debtor.

On 01.09.2020, the Bank provided temporary relief under RBI guidelines, but the Corporate Debtor's account was declared NPA on 01.11.2019 due to unpaid interest/overdue principal.

On 19.03.2021, The Bank issued a notice to recall the facilities under Section 13(2) of SARFAESI Act requiring the Corporate Debtor to pay all outstanding under all credit facility accounts within 60 days. The Bank assigned the Corporate Debtor's debt to ASREC (India) Limited (Respondent No. 1) on 25.03.2021.

On 18.02.2023, ASREC filed a Section 7 application under the IBC, citing a default date of 31.10.2020. The date of default was amended to 02.08.2019. The Corporate Debtor had invoked Section 10A of the IBC for COVID-related exemptions.

On 09.01.2024, the Adjudicating Authority admitted the CIRP application of Respondent-1, accepting the amended default date of 02.08.2019. The NCLT relied on the financial records, sanction letters, and debt assignment documents provided by ASREC to substantiate the grounds for default and validate the claim.

The Appellant, Mr. Puneet P. Bhatia, a suspended director of Corporate Debtor challenged the Adjudicating Authority's decision to admit the CIRP. The Appellant contended that the NCLT disregarded evidence and objections, particularly the Section 10A exemption and conflicting default dates. Hence, the Appellant filed the appeal under Section 61 of the IBC for setting aside the impugned order dated 09.01.2024 passed by the NCLT.

Issues

a) Whether the Date of Default can be changed after filing the petition under Section 7 of the Code?

b) Whether the date of default had been correctly identified.

Submissions

Appellant's Submissions

• The petition under section 7 of the IBC is not maintainable as the alleged default fell within the period protected under section 10A, which shields certain defaults occurring during the COVID-19 pandemic from CIRP proceedings. The initial default date of 31.10.2020 falls within the moratorium period under Section 10A, rendering the CIRP application invalid.
• In Plus Corporate Ventures Private Limited v. Transnational Growth Fund Limited, it was held that defaults within the Section 10A period cannot justify initiating CIRP.
• The date of default cited by the respondent arose post-17.03.2020, during the moratorium period, and therefore should be exempt from CIRP initiation as per Section 10A.
• The respondent unilaterally altered the date of default from 31.10.2020 to 02.08.2019 during the proceedings, intending to bypass the protections of the 10A period.
• In Pradeep Madhukar More v. Central Bank of India, it has been held that restructuring dates, once established, remain legally binding on both parties, and any subsequent change must follow due legal process.
• The failure to consider the recall notice dated 07.12.2020, which is critical evidence, has resulted in a legally untenable decision.
• The NCLT has disregarded the impact of the RBI's COVID-19 Regulatory Packages and Section 10A, which were designed to provide temporary relief to businesses facing unprecedented economic hardships due to the pandemic.

Respondent's Submissions

• The default date was subsequently amended to 02.08.2019, predating the Section 10A period. Thus the CIRP application is maintainable.
• Since the date of default is calculated from 90 days prior to the date of NPA, the actual date of default was 02.08.2019.
• In Laxmi Pat Surana v. Union Bank of India, it was observed,

"Ordinarily, upon declaration of the loan account/debt as NPA that date can be reckoned as the date of default to enable the financial creditor to initiate action under Section 7 IBC... Section 7 consciously uses the expression 'default'—not the date of notifying the loan account of the corporate person as NPA."

• RBI being a regulatory authority, determined that compliance with the sanction letters was not met. Hence, the date of NPA became 01.11.2019 and the original date of default would be 02.08.2019 i.e. 90 days prior to the date of NPA.
• The Corporate Debtor neither objected to the amendment sought by Respondent No. 1 on the date of default nor preferred any appeal before the NCLAT against the amendment orders.

Observations

The issues before the Tribunal revolved around the validity of the amended default date, i.e. whether the Date of Default can be changed after filing the petition under Section 7 of the Code and applicability of section 10A of the Code.

On the issue regarding whether the NCLT can allow amendments to the date of default in applications filed under section 7 of the IBC, the court referred to the judgment of the Supreme Court in Dena Bank v. C. Shivakumar Reddy, which held that:

"There is no bar in law to the amendment of pleadings in an application under Section 7 of the IBC or to the filing of additional documents apart from those initially filed along with the application in Form-1"

It was also observed that the Adjudicating Authority might, at its discretion, decline requests to file additional pleadings/documents in cases of inordinate delay but is not barred from allowing amendments to meet the ends of justice. Such amendments however should not manipulate the limitation period but may reflect new acknowledgements of debt or judgments creating a fresh cause of action.

The Tribunal reiterated that a section 7 application is not comparable to a plaint in a civil suit. So, there is no scope for elaborate pleadings.

The Tribunal stated that for the Section 10A protection to apply, the appellant must demonstrate a direct link between the default and the COVID-19 impact. It held that the default was unrelated to COVID-19 and therefore fell outside the scope of section 10A.

Pertinently, the tribunal held that “the NCLT is empowered to allow the parties to amend the pleadings before the final orders in CIRP proceedings are passed”. It went on to hold that the amendment of date of default had been correctly allowed by NCLT.

The Tribunal stated that Section 10A was introduced to provide relief to businesses affected by the economic impact of the COVID-19 pandemic by precluding insolvency proceedings for defaults occurring between 25.03.2020 and 25.03.2021. The default date i.e. 02.08.2019 predated the moratorium period, rendering Section 10A inapplicable.

The Tribunal held that the amendment was duly made during the CIRP proceedings before the NCLT, as per the laid down procedure following the principles of natural justice. Therefore, it dismissed the appeal.

Case Title: Puneet P. Bhatia vs. ASERC (India) Ltd. & Ors.

Case Number: Company Appeal (AT) (Ins.) No. 139 of 2024

Counsel for Appellant: Mr. Sandeep Bajaj, Mr. Soayib Qureshi, Mr. Rishabh Dua, Advocates.

Counsel for Respondents: Mr. Sachin Daga, Advocate for R-1; Mr. Ganesh Remani for IRP.

Date of Judgment: 09.12.2024

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