2023 (12) TMI 317 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - default committed prior to Section 10A period and continues in the Section 10 A period - Failure to pay the interest on the unsecured loan which period was prior to the Section 10A period and the default had continued thereafter in the Section 10A period. The principal finding of the impugned order is that the Section 7 application was not maintainable by holding the date of default to be February 2021 which was during the prohibited period under Section 10A of the IBC. HELD THAT - A plain reading of Section 10A signifies that no application/ proceedings under Sections 7, 9 and 10 can be initiated for any default in payment which is committed during Section 10A period. The object and purpose of Section 10A has been explained in the ordinance by which Section 10A was brought into operation. What is essentially barred is initiation of CIRP proceedings when the Corporate Debtor commits any default during the Section 10A period. However, if the default is committed prior to the Section 10A period and continues in the Section 10A period, this statutory provision does not put any bar on the initiation of CIRP proceedings - the aim and objective of Section 10A was to protect a Corporate Debtor from the filing of any insolvency application against it for any default committed during the period when Covid-19 pandemic was prevailing. It was never intended to cover any default which occurred before Section 10A period and continuing thereafter. The present is a case where prima facie the default has been committed by the Corporate Debtor since 2018 which is prior to commencement of Section 10A period. Hence, this is a case where the default was undisputedly committed before the bar of Section 10A came into play. There being categorical default by the Respondent prior to Section 10A period, the Corporate Debtor was clearly not entitled to claim the benefit of Section 10A period. Since the liability to pay interest arose prior to Section 10A period since the default was committed prior to Section 10A period, we are of the considered opinion that the view taken by the Adjudicating Authority that the Section 7 application being premised on a letter calling for loan repayment which was dated 01.02.2021 and this date falling during the prohibited period under Section 10A renders the petition non-maintainable is misconceived and untenable in the eyes of law. There are no hesitation in holding that the finding returned by the Adjudicating Authority that the Section 7 application was not maintainable as the alleged default occurred during the section 10A period is not tenable. The impugned order is, therefore, set aside - appeal allowed.

Summary

Issues Involved:
1. Maintainability of Section 7 application under IBC.
2. Determination of the date of default.
3. Applicability of Section 10A of IBC.

Issue-wise Summary:

1. Maintainability of Section 7 application under IBC:
The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against an order dismissing a Section 7 application for initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Adjudicating Authority dismissed the application on the grounds that the default date fell within the prohibited period under Section 10A of IBC, making the application non-maintainable.

2. Determination of the date of default:
The Appellant contended that default occurred in October 2017 when the Respondent failed to pay interest on the unsecured loan. The Respondent argued that there was no agreement outlining the terms of repayment and that the amount advanced was speculative investment, not financial debt. The Adjudicating Authority held that the default could only be considered to have occurred in February 2021, based on the loan recall notice dated 01.02.2021, which fell under the prohibited period of Section 10A.

3. Applicability of Section 10A of IBC:
The Tribunal clarified that Section 10A bars initiation of CIRP for defaults occurring during the specified period due to the COVID-19 pandemic. However, if the default occurred before this period and continued into it, the initiation of CIRP is not barred. The Tribunal found that the default by the Corporate Debtor occurred before the Section 10A period and continued thereafter. Thus, the Adjudicating Authority's view that the Section 7 application was not maintainable due to the default date falling within the Section 10A period was deemed misconceived.

Conclusion:
The Tribunal allowed the appeal, set aside the impugned order, and remanded the Section 7 application back to the Adjudicating Authority for consideration on merits, emphasizing that the Adjudicating Authority had not addressed the core issue of debt and default.