Benefit U/S 10A Of IBC Can Only Be Claimed When Default Occurs During Prohibited Period: NCLAT Delhi

Background Facts

ICICI Prudential Real Estate AIF-I (“Financial Creditor”) and Gagan I-Land Township Pvt. Ltd. (“Corporate Debtor”) entered into a Debenture Subscription Agreement (“Agreement”). Any default in payment of interest by the Corporate Debtor to the Financial Creditor would constitute a default under the terms of the Agreement. The Corporate Debtor failed to pay interest to the Financial Creditor for quarters ending September 2019 and December 2019. The default in payment of interest was categorically admitted by the Corporate Debtor in its Letter dated 09.09.2019.

The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. On 27.07.2022 the Adjudicating Authority initiated CIRP against the Corporate Debtor. It was observed that the period covered under Section 10A of IBC is 25.03.2020 to 25.03.2021; the default was committed by the Corporate Debtor in September 2019 prior to the outbreak of the COVID – 19 pandemic. Therefore, such default not being committed during prohibited period, cannot take shelter under Section 10A of IBC.

The Corporate Debtor filed an appeal before the NCLAT against the Order dated 27.07.2022. During the pendency of the appeal, the Corporate Debtor submitted One Time Settlement (“OTS”) proposal to the Financial Creditor, which was rejected by the latter.

Relevant Law

Section 10A of IBC

“Section 10A. Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified2 in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation. – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”

(*The prohibited period was extended to 25.03.2021 vide MCA Notifications)

Contentions Of Parties

The Corporate Debtor argued that the date of default was 31.08.2020, which was covered in the prohibitory period under Section 10A of IBC. Hence, the Section 7 petition was not maintainable.

The Financial Creditor argued that the Corporate Debtor had in writing admitted the default in payment of interest of quarter ending September 2019 and December 2019. Therefore, the Adjudicating Authority rightly admitted the petition.

NCLAT Verdict

The Bench observed that since Corporate Debtor admitted default in payment of interest for the quarters ending September 2019 and December 2019, it cannot contend that default was committed only on 31.08.2020.

“Insofar as application being barred by 10A, benefit under Section 10A can be claimed by the application only when there is clear default during the prohibited period. The said benefit cannot be claimed by the Appellant by ignoring the admission of default which was prior to 25.03.2020.”

It was held that benefit under Section 10A can only be claimed if the default has occurred during the prohibitory period. Further, the Corporate Debtor had taken four adjournments for proposing OTS, which indicates that debt and default is not disputed. The Bench upheld the Adjudicating Authority’s decision and dismissed the appeal.

Case Title: Vishal Agarwal v ICICI Prudential Real Estate AIF-I & Anr.

Case No.: Company Appeal (AT) (Insolvency) No. 1016 of 2022.

Counsel For Appellant: Mr. Rudreshwar Singh, Mr. Diwakar Singh, Mr. Aayush Agarwala and Mr. Saurabh Jain, Advocates.

Counsel For Respondents: Mr. Arind Nayar, Sr. Advocate with Mr. Shahan Ulla and Mr. Akshay Joshi, Advocates for R-1. Mr. Manish Paliwal and Ms. Megha Yadav, Advocates for R-2.

Click Here To Read/Download the Order