NCLAT Dismisses Samrat Restaurant's CIRP Plea: Section 10A Bars Insolvency For COVID-19 Era Defaults

The National Company Law Appellate Tribunal (NCLAT), New Delhi dismissed the insolvency application filed under section 9 of the Insolvency and Bankruptcy Code (IBC) by Samrat Restaurant (Operational Creditor) against Brewcrafts Microbrewing Pvt. Ltd. (Corporate Debtor). The application was dismissed on the ground that a substantial portion of the debt arose during the period of section 10A.Brief FactsThe operational creditor entered into a Leave and Policy (L&L) agreement with corporate debtor on May 4, 2017. The tenure of the agreement was from June 15, 2017 to April 2022. Under the agreement, the corporate debtor was allowed to use the leased premise for its business purposes.The debt amount to the tune of Rs. 1,18,82,400 by August 29, 2021 was admitted by the corporate debtor and promised to pay by March 31,2023 in instalments.The operational creditor sent a statutory demand notice under section 8 of the IBC when the debt was not paid even after this arrangement. Consequently, an application under section 9 of the IBC was filed to initiate the insolvency proceedings against for claiming the amount to the tune of Rs 5.22 crores which included unpaid license fees along with interest.NCLT MumbaiIt was contended before the NCLT that the claimed amount also included the debt occurred during the prohibited period of section 10A. If this debt is excluded, the threshold limit under section 4 of the IBC is not crossed for initiating the insolvency proceedings therefore the application is liable to be rejected.The National Company Law Tribunal Mumbai (NCLT) agreed with the contention and rejected the application on the ground that a significant portion of the debt was covered by section 10A. This section was introduced during unprecedented crisis of COVID-19 pandemic to give a breathing space to the distressed businesses. It prohibited the insolvency proceedings from being initiated during the period falling within the purview of this section. The NCLT concluded that once the prohibited debt is excluded from the total debts, the amount claimed does not cross the threshold limit as prescribed under section 4 of the IBC.Appeal by Operational CreditorThis decision of the NCLT was challenged before the NCLAT. The main argument advanced by the operational creditor was that the One-Time Settlement (OTS) dated March 31, 2023 extended the default date beyond the period protected by the section 10A. It was further contended that based on the letters and correspondences between the operational creditor and the corporate debtor particularly those dated August 29, 2021 and March 10,2023 effectively shifted the default date beyond the protection period therefore it was entitled to initiate the insolvency proceedings against the corporate debtor.NCLAT's AnalysisThe NCLAT after a careful analysis rejected the arguments of the operational creditor. The NCLAT observed that the date of default and acknowledgement of debt are two different concepts under the IBC. Subsequent agreements cannot shift the default date. It reiterated that the default occurred during the operation of section 10A was duly protected by law which cannot be altered. The NCLAT relied on SLB Welfare Association v. PSA IMPEX Pvt. Ltd. (2022) in which it was held that the acknowledgement of debt cannot change the default date for the purpose of initiation of the CIRP. It further observed that OTS agreement and rent reductions provided a temporary relief but that did not efface or supersede the existence of original default that occurred during the period protected by section 10A.It would defeat the purpose of the section if the argument sought to be advanced by the operational creditor is accepted. It observed as under:“56 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 tribunal further held that the interest at the rate of 18% per annum on the outstanding debts cannot be claimed by the operational creditors when there was no clause to this effect in the agreement. This further weakened the case of the operational creditor as the amount claimed excluding the debt arisen during section 10A period and unagreed interest falls short of the threshold limit provided under section 4 of the IBC for initiating the insolvency proceedings. It observed that:“64 The Operational Creditor included interest at an inflated rate of 18% pa, despite no agreement to this effect in the L&L agreement, further inflating the claimed amount. The OTS agreement did not alter the date of default, and the default during the Section 10A period remained protected under law. The Operational Creditor's claim was inflated, and the Adjudicating Authority rightly recalculated the actual unpaid...

NCLAT Dismisses Samrat Restaurant's CIRP Plea: Section 10A Bars Insolvency For COVID-19 Era Defaults

Mohd Malik Chauhan

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