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TMI Blog2024 (10) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... its Section 8 notice and Section 9 Application claimed interest in its computation on the license fees as set out in the L L agreement. There are no infirmity with the above analysis of the Adjudicating Authority and do not find merit in the claim of the Appellant for the interest of Rs 1,66,56,022 (rupees one crore, sixty-six lakhs, fifty-six thousand and twenty two only). The Adjudicating Authority correctly interpreted that any default falling within this period cannot form the basis for initiating CIRP. In this case, a portion of the default claimed by the Appellant clearly falls within the protected period under Section 10A. The Corporate Debtor is entitled to seek exclusion of the license fee of Rs 69,30,442/-, which fell due and defaulted by the Corporate Debtor during the prohibited period. It is argued by the Appellant that the default is continuous, occurring before, during and after the prohibited period under Section 10A and therefore, the CIRP petition is maintainable. Looking at the facts in the case, we find that the date of default is proposed to be changed to 31.03.2023 as per the purported settlement agreement vide letters dated 29.08.2021 and 10.03.2023 which shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4th May 2017. The term of the L L agreement was from 15th June 2017 to 30th April 2022. 3.The Appellant issued a statutory demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 ( IBC ), and thereafter filed a Section 9 IBC Application for initiation of CIRP against the Respondent, claiming alleged default of Rs 5,22,95,571/- (rupees five crores, twenty-two lakhs, ninety-five thousand, five hundred and seventy-one only) for the unpaid license fees under the L L agreement, wrongfully raised reimbursements, and interest on the unpaid license fees. 4.The Section 9 Petition filed by the Appellant was at the very outset declared to be non-maintainable by the Hon ble NCLT Mumbai, as the default amount claimed by the Appellant was inflated by inclusion of defaulted license fees amounts, interest, purported reimbursements and default amounts which fell due and payable during the prohibited period under Section 10A of IBC. 5.The Adjudicating Authority excluded a license fee of Rs 69,30,442/- (rupees sixty-nine lakhs, thirty thousand, four hundred and forty-two only) finding that the same fell due and defaulted during the prohibited period, in terms of Section 10A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable was agreed to be the following for the respective years: Year Escalation License Fees per Month 15.06.2017 - 30.04.2018 NA Rs 11,33,000 01.05.2018 - 30.04.2019 7 % Rs 12,12,310 01.05.2019 - 30.04.2020 7 % Rs 12,97,172 01.05.2020 - 30.04.2021 5 % Rs 13,62,030 01.05.2021 - 30.04.2022 5 % Rs 14,30,131 11.In addition to the above the Corporate Debtor was also liable to pay utility dues on time for the duration of their possession of the premises. As part of the responsibilities in the aforesaid Agreement, the Operational Creditor was required to provide the aforesaid premises along with floorings, fittings and fixtures including the air conditioners installed. The Operational Creditor duly complied with all its obligations under the Agreement and peacefully handed over the possession of the premises to the Corporate Debtor. That despite the property being utilised by the Corporate Debtor towards running of its business without let or hinderance from the Operational Creditor, the Corporate Debtor started defaulting on making timely payments towards the license fee as determined under the Agreement. 12.As a result of the default committed by the Corporate Debtor, the Operational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... February 2021 to March 2021; Rs 4 lakhs per month for April 2021 to May 2021; Rs 6 lakhs per month from June 2021 to 15.08.2021; Rs 8 lakhs from 15.08.2021 to March 2022; Rs 9 lakhs from March 2022 till 30.11.2022 and Rs 13 lakhs for December 2022. 19.It is pertinent to point out that the Corporate Debtor again acknowledged its dues by way of undertaking dated 29.08.2021, whereby the Corporate Debtor agreed to clear its outstanding dues of Rs 1,18,82,400/- (rupees one crore, eighteen lakhs, eighty-two thousand and four hundred only) along with GST to the Operational Creditor on or before 31.03.2023 in equal monthly instalments. 20.Again, despite giving an undertaking to clear all past dues, the Corporate Debtor failed to clear its dues. Resultantly, the Operational Creditor was again constrained to issue a notice dated 10.03.2023 whereby the Corporate Debtor was put to notice and called upon to pay Rs 1.06 crores along with 18% interest that continued to be outstanding. Most crucially, the contents of this notice were duly acknowledged and admitted by the Corporate Debtor. 21.Even though the Corporate Debtor agreed to clear all dues of the Operational Creditor on 10.03.2023, shocki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith interest at the rate of 18% pa, but had also agreed to pay the sum by 31.03.2023. Resultantly, the default occurred only on 31.03.2023 and not during the period prohibited under Section 10A of the IBC. This exclusion led to the debt falling below the Rs 1 crore threshold. However, established law states that if a default is committed prior to the Section 10A period and continues into the Section 10A period, the initiation of proceedings is not barred. 25.The Authority ought to have recognised that the 'one-time settlement' (OTS) is a clear admission of debt by the Corporate Debtor and constitutes an acknowledgment of debt as well as an understanding to pay the same later. The Authority should have noted that the Respondent acknowledged the debt payable to the Appellant through letters/undertakings dated 29.08.2021, 21.11.2022, and OTS dated 10.03.2023, including debt incurred during the prohibition period, which is not barred by Section 10A. In the light of the OTS dated 10.03.2023, the Respondent acknowledged the outstanding debt, making the date of default 31.03.2023 and, thereby, no part of the claim/debt is barred by Section 10A. The Adjudicating Authority should ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be one-time settlement arrangement of any sort whatsoever offered by the Appellant. None of the purported OTS letters included any statement where the Appellant has provided any settlement option to the Respondent, the letters simply were issued as reminders/follow ups to the pending license fees amounts under the L L agreement. The Appellant had in fact submitted to the Hon ble NCLT that its letter dated 10th March 2023 was just a stopgap arrangement, thus, such stop-gap arrangement cannot be an OTS of any sort whatsoever. 29.The Appellant in its Section 8 notice and in its Section 9 Application, has made no reference to the amounts mentioned in purported OTS letters and instead computed its default amount basis the terms of the L L agreement. Under the L L agreement s clause VI (D), the license fees was to be paid by the Respondent to the Appellant on a monthly basis. Thus, the default date for the license fees was calculated on monthly basis by the Appellant itself when it claimed the defaulted amount from the Respondent. The Hon ble NCLT in its Order has correctly relied on this factual position to decide that a sum of Rs 69,30,442/- (rupees sixty-nine thousand, thirty tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igation to pay license fees arises every month including during the prohibited period. 33.The Hon ble NCLAT has also in the case of Bhavit Sheth vs Madan Bajrang Lal Vishnaw and (CA AT Ins No 328 of 2024), where in license fees payment under a L L agreement was in question clearly held that since the claim of operation debt fell within 10A period no Application ever could have been filed for the default of the lease rental during the 10A period. 34.The Appellant in its computation of default has arbitrarily charged interest on the total defaulted amount at the rate of 18% pa, which in the absence of any clause within the L L agreement could not have been included in the computation of default by the Appellant. It has been expressly established in the case of Krishna Enterprises vs Gammon India Ltd (2018 SCC Online NCLAT 360) that claim includes debt . However, debt cannot be said to include interest in all cases. It shall include interest only when the same has been agreed by the parties, otherwise, only the principal amount shall fall within the definition of claim for the purpose of calculating default amount under Section 4. Despite there being no provision for the Application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated claim of other expenses reimbursement receivable from Brewcrafts Microbrewing Pvt Ltd as on 31.03.2023 , amounting to Rs 47,01,629/- (rupees forty-seven lakhs, one thousand six hundred and twenty-nine only).The Hon ble NCLT in its Order has considered the veracity of such arbitrary reimbursement amounts and considered them to be without any actual basis and, thus, under a detailed analysis held that the Appellant had failed to establish its claim for the reimbursement of expenses. 39.The Appellant had wrongfully inflated its claim by including so-called other expenses/reimbursements, interest, wrongfully claimed license fees in the total defaulted amount which was mutually revised (as admitted by the Appellant), and license fees that fell due during the prohibited period of Section 10A of IBC. By means of these intentional wrongful additions to the default amount, the Appellant had attempted to meet the required threshold for the maintainability of its Petition. The Appellant had indulged in suppression of material facts and had included interest to bring subject claim under the threshold of IBC, and to arm twist the Respondent to pay the claim as made. 40.Under the thorough a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by Section 10A of the IBC and that the remaining debt did not meet the mandatory threshold of Rs 1 crore for initiating CIRP. This Appeal challenges the findings of the NCLT and seeks to admit the Corporate Debtor into CIRP. 45.The Appellant had entered into a L L agreement with the Respondent on May 4, 2017. Over time, the Respondent defaulted on its payment obligations under this agreement, and the Appellant sent several notices demanding payment of overdue amounts. On February 6, 2019, the Appellant sent a demand notice for Rs 1.04 crores. 46.The Appellant filed an Application under Section 9 of the IBC, but the NCLT rejected the Application, holding that part of the debt fell within the Section 10A period, thus disqualifying the total debt from meeting the Rs 1 crore threshold. 47.The Appellant has raised several arguments challenging the NCLT s decision: a) The NCLT wrongly excluded part of the defaulted amount that was covered by Section 10A, leading to the incorrect conclusion that the total debt did not meet the Rs 1 crore threshold. b) The parties had entered into agreements that extended the payment obligations until after the Section 10A period. Therefore, the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be treated as the debt which is the liability in respect of the claim which can be made from the Corporate Debtor. Therefore, in the light of observations made by the Hon ble NCLAT in the above-mentioned case and in the absence of any contractual agreement in the given case pertaining to interest on outstanding license fees, the sum of Rs 1,66,56,022/-, claimed as interest, cannot be considered a valid component of the claim. (emphasis supplied) 50.Reliance is placed by the Respondent on Krishna Enterprises (supra) in which it was held that debt cannot be said to include interest in all cases. It shall include interest only when the same has been agreed by the parties, otherwise, only the principal amount shall fall within the definition of claim for the purpose of calculating default amount. Despite there being no provision for the Application of interest in the L L agreement, the Appellant in its Section 8 notice and Section 9 Application claimed interest in its computation on the license fees as set out in the L L agreement. We do not find any infirmity with the above analysis of the Adjudicating Authority and do not find merit in the claim of the Appellant for the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he default is committed prior to the Section 10A period and continues, there is no prohibition in initiating proceedings under Section 7. It is however noticed that in the aforesaid case, the default occurred prior to the Section 10A period and interest was only charged during the Prohibited Period, but in the present case, the obligation to pay the license fee arises every month including during the Prohibited Period. Thus, the decision of Narayan Mangal (supra) is not applicable in the facts of the present case. The objective of Section 10A of the Code was to protect a corporate debtor from the filing of any insolvency application against it for any default committed during the period when Covid pandemic was prevailing and the records reveal that the business of the Corporate Debtor suffered due to Covid Pandemic and major defaults are relating to the license fee fallen due during the lockdown period. This fact was even acknowledged by the Applicant resulting in the reduction of license fees. Considering the above, the Corporate Debtor is entitled to seek exclusion of the license fee which fell due and defaulted by the Corporate Debtor during the Prohibited Period, for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement. OTS agreements and rent reductions due to Covid, only reflect a temporary modification of payment terms, but they do not extinguish the original default that occurred during the Section 10A period. The purpose of Section 10A was to prevent companies from being pushed into insolvency due to temporary financial distress caused by the COVID-19 pandemic. The Appellant s interpretation that subsequent agreements should nullify the protection offered by Section 10A would undermine the legislative intent and open the door for Creditors to circumvent the protections offered by law. The Tribunal cannot accept an interpretation that erodes the protection that Section 10A was specifically designed to offer. The argument of the Appellant that if a default is committed prior to the Section 10A period and continues into the Section 10A period, the initiation of proceedings is not barred and is applicable in the instant case. But the facts of the case as discussed in the case speak otherwise. This is a gross misrepresentation of the facts. 57.It is argued by the Appellant that the default is continuous, occurring before, during and after the prohibited period under Section 10A and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered Leave and License Agreement executed between the involved parties on May 4th, 2017, the licensee (i.e. the Corporate Debtor) assumed the responsibility to cover and settle all charges related to electricity consumption, water, and other utilities within the licensed premises. This obligation is extended to promptly paying the bills submitted by the licensor on or before their due date or within three days of bill receipt, whichever occurred earlier. It is noted that the Applicant provided debit notes as evidence for reimbursement of certain charges, as outlined in the preceding table, through a rejoinder. However, there exists no record of electricity, water, or drainage bills, along with corresponding payment receipts, indicating that these bills were indeed settled by the Operational Creditor and subsequently claimed for reimbursement from the Corporate Debtor. The Corporate Debtor, in its reply to affidavit, explicitly denied any outstanding bills of such nature having been paid by the Applicant. Furthermore, it strains credulity to accept the contention that these bills remained unpaid since the financial year 2017-18 and that the Operational Creditor consistently as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of IBC 9. Total license payable [5-8] 35,02,857 Less than threshold of Rs 1 crore 61.Overall, we find that Adjudicating Authority has correctly excluded the following amounts: Rs 1,66,56,022/- (rupees one crore, sixty-six lakhs, fifty-six thousand and twenty-two only), which was wrongly claimed by the Appellant towards interest, Rs 47,01,629/- (rupees forty-seven lakhs, one thousand, six hundred and twenty-nine only) towards arbitrary and unsubstantiated reimbursements, Rs 69,30,442/- (rupees sixty-nine lakhs, thirty thousand, four hundred and forty-two only) was excluded which fell due during the prohibited period under Section 10A of IBC. 62.After examining the facts of the case, it is noted by the Adjudicating Authority that the outstanding license fees should have been Rs 1,04,33,299/- (rupees one crore, four lakhs, thirty-three thousand, two hundred and ninety-nine only), which gets further reduced by Rs 69,30,442/- which fell due during the prohibited period under the Section 10A of IBC. 63.Consequentially, the total amount of outstanding default that the Appellant has against the Respondent stands at Rs 35,02,857/- (rupees thirty-five lakhs, two thousand, eight hundred and f ..... 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