NCLAT New Delhi Sets Aside NCLT Order : Liability Of Interest Accrued During Section 10A Period Not To Be Excluded Aside

The Appellate Tribunal setting aside the NCLT Delhi’s order held that the Corporate Debtor cannot claim the benefit of Section 10A of the Insolvency and Bankruptcy Code (“Code”) providing for an excluded period for filing of CIRP claims since the default has been committed prior to the commencement of the excluded period under Section 10A of the Code. Further, the view that the liability of interest that accrued during the said period should not be computed for triggering CIRP is erroneous.

It also held that as per Section 60 of the Indian Contract Act, 1872 when a debtor makes a payment without specifying how it should be allocated, the creditor has the discretion to decide how to apply it to clear any remaining debts and the creditor can use it to its maximum advantage.

Background Facts:

The Operational Creditor had supplied goods and services to the Corporate Debtor to which no payment was received. Despite multiple reminders and meetings, the Corporate Debtor did not make the full payment promised. As a result, the Operational Creditor issued a demand notice under Section 8 of the Code. However, no response was furnished. On December 15, 2021, the Operational Creditor filed an application under Section 9 of the Code to initiate CIRP.

The NCLT Delhi via its order dated 17.10.2022 had dismissed the application filed under Section 9 of the Code stating that the Operational Creditor failed to prove that the unpaid operational debt exceeded the minimum threshold of Rs.1 crore required for initiation of CIRP.

Contentions of the Operational Creditor:

The Operational argued that as per the payment terms, the Corporate Debtor was liable to pay interest at the rate of 18 p.a. in case the payments were not made within 60 days from the date of the invoice. The invoice in question was dated December 31, 2019, and the payment was due on February 29, 2020.

Although some payments were received from the Corporate Debtor post the invoice, these payments were applied to both invoices and other outstanding invoices. Even after these adjustments, the payment for another invoice remained unpaid. The Operational Creditor contacted the Corporate Debtor to settle the outstanding operational debt, but the Corporate Debtor only made partial payments. Furthermore, a cheque issued by the Corporate Debtor bounced, leading the Operational Creditor to send a Section 8 demand notice, which went unanswered and unchallenged by the Corporate Debtor.

The Operational Creditor admitted that two cheques of Rs.5 lakhs each were issued by the Corporate Debtor, which were applied to other pending invoices. However, since the operational debt related to the invoice still existed, the Operational Creditor believed that there was a valid basis for the Section 9 application.

It claimed the operational debt amounted to Rs.1.15 Crores including a principal amount and an interest amount at 18% annual rate, as per the agreement. Therefore, the threshold limit of Rs. 1 crore was met.

NCLAT Verdict:

The NCLAT allowed the appeal and set aside the NCLT Delhi’s order dated 17.10.2022. It held that the Corporate Debtor cannot claim the benefit of Section 10A of the Code providing for an excluded period for filing of CIRP claims since the default has been committed since 29.02.2020 prior to the commencement of the said period. Further, the view that the liability of interest that accrued during the said period should not be computed for triggering CIRP is erroneous.

Section 10A of the Code provides that no application for initiation of CIRP of a Corporate Debtor shall ever be filed for any default arising on or after 25 March 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf. Moreover, this section shall not apply to any default committed under Sections 7, 8, and 10 of the Code before 25 March 2020.

It placed reliance on the Apex Court’s decision in Ramesh Kymal vs. Siemens Gamesa to discuss the object and intent of Section 10A of the Code. The Tribunal relied upon Narayan Mangal vs. Vatsalya Builders & Developers Pvt. Ltd and observed that Section 10A of the Code signifies that no CIRP application can be initiated for any default in payment committed during the Section 10A period. However, if the default is committed prior to the Section 10A period and continues in the Section 10A period, there is no bar on the initiation of CIRP proceedings.

The Appellate Tribunal by interpreting Section 60 of the Indian Contract Act, 1872 observed that when a debtor makes a payment without specifying how it should be allocated, the creditor has the discretion to decide how to apply it to clear any remaining debts and the creditor can use it to its maximum advantage. Further, it highlighted that it is also common business practice that when a debt includes both principal and accrued interest, any payments made by the debtor are first applied to the interest.

Section 60 of the Indian Contract Act, of 1872 reads as follows:

Section 60. Application of payment where debt to be discharged is not indicated. - Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitations of suits. — Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitations of suits."

It was emphasized that presently, the Operational Creditor received payments and correctly applied them to clear the principal amount or interest on invoices that were still pending payment. The NCLT’s conclusion that the minimum threshold of Rs. 1 crore was not met since the Operational Creditor acted improperly by allocating payments received from the Corporate Debtor to outstanding invoices is unfounded and without any valid basis for disregarding the Operational Creditor’s exercised discretion, which it was entitled to use.

In conclusion, the Appellate Tribunal revived the Section 9 application and remanded it back to the NCLT to be considered again in accordance with the law.

Case Title: Beetel Teletech Ltd. vs. Arcelia IT Services Pvt. Ltd.

Case No.: Company Appeal (AT) (Insolvency) No. 1459 of 2022

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