NCLAT Delhi: Under Section 10A of IBC- Benefit can be Claimed only when Default Exists During the Prohibited Period

NCLAT Delhi: Under Section 10A of IBC- Benefit can be Claimed only when Default Exists During the Prohibited Period

The National Company Law Appellate Tribunal (in short NCLAT), Principal Bench, while hearing an appeal filed in the matter of Vishal Agarwal vs. ICICI Prudential Real Estate AIF-I and another ruled that benefit under Section 10A of Insolvency and Bankruptcy Code, 2016 (in short IBC) can only be claimed when there is clear default during the prohibited period.

The division bench comprising of Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), upheld the order dated 27th July, 2022 passed by the Adjudicating Authority by which application filed under Section 7 by the Financial Creditor had been admitted.

The factual matrix of the case is that ICICI Prudential Real Estate AIF-I- respondent/Financial Creditor) and Gagan I-Land Township Private Limited appellant/Corporate Debtor had entered into a Debenture Subscription Agreement (hereinafter referred to Agreement). Under the agreement, it was stipulated that any default in payment of interest by the Corporate Debtor to the Financial Creditor would constitute a default. 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 9th September, 2019.

The Financial Creditor had filed a petition under Section 7 of the IBC, to initiate Corporate Insolvency Resolution Process (for short CIRP) against the Corporate Debtor. On 27th July, 2022 the Adjudicating Authority initiated CIRP against the Corporate Debtor. It was found that the period covered under Section 10A of IBC was 25th March 2020 to 25th March 2021 and 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 principal submission which was pressed by learned counsel for the appellant/corporate debtor that as per the Debenture Subscription Agreement, clause 6, the date of default for repayment occurred on 31st August, 2020, which was during the prohibitory period under Section 10A of the IBC. Hence, the application itself was not maintainable and the Adjudicating Authority ought to have rejected the application. He further submitted that the Corporate Debtor could not file his reply and thereafter an application was filed before the Adjudicating seeking liberty to file reply, which was not considered.

The financial creditor refuted to the contentions of the corporate debtor 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.

The Corporate Debtor filed an appeal before the NCLAT against the Order dated 27th July, 2022. During the pendency of the appeal, the Corporate Debtor submitted One Time Settlement (for short OTS) proposal to the Financial Creditor, which was rejected by the latter.

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 31st August, 2020.

The Bench held, "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 25th March, 2020."

The Appellate Tribunal highlighted that under Section 10A can only be claimed if the default has occurred during the prohibited 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.