COVID-Induced Financial Distress No Excuse For Default: NCLT Mumbai Admits Insolvency Plea Against Reliance Big Entertainment
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench, has held that financial distress or inability to pay — even if caused by the COVID-19 pandemic — cannot be treated as a valid defence once default under the Insolvency and Bankruptcy Code, 2016 (IBC) is established. The bench comprising Judicial Member Shri Ashish Kalia and Technical Member Shri Sanjiv Dutt admitted a Section 7 petition filed by Prudent ARC Limited, assignee of the Central Bank of India, against RBEP Entertainment Pvt. Ltd. (formerly known as Reliance Big Entertainment Pvt. Ltd.), for default on a ₹40 crore loan.
The Tribunal observed that the Code had shifted the legal focus from “inability to pay debt” to the “existence of default,” holding that once default is proved, the reason for non-payment — including COVID-induced financial distress — becomes irrelevant. “The Code marks a shift from 'inability to pay debt' to 'determination of default'. Once default is proved, the reason for non-payment — including financial distress or COVID-induced losses — is irrelevant,” the bench stated.
Background
The Central Bank of India had extended a loan of ₹40 crore to the corporate debtor, which was later classified as a Non-Performing Asset (NPA). A recall notice was issued demanding ₹44.75 crore (including interest), followed by recovery proceedings before the Debt Recovery Tribunal (DRT). Subsequently, the debt was assigned to Prudent ARC Ltd., which approached the NCLT under Section 7 of the IBC seeking initiation of the Corporate Insolvency Resolution Process (CIRP). The creditor submitted a valuation report indicating that the fair value of the corporate debtor was ₹38.09 lakhs and the liquidation value ₹30.47 lakhs, both significantly below the outstanding debt.
The corporate debtor contended that the default date mentioned was incorrect as the account was allegedly regularised later. It also argued that the application was filed by a Deputy Manager without a valid Board Resolution, that bank statements were uncertified, and that loan documents were not properly stamped under the Maharashtra Stamp Act, 1958. Additionally, it cited the COVID-19 pandemic as the reason for its inability to pay, seeking 36 months’ time to stabilise its business operations.
Findings of the Tribunal
Rejecting the corporate debtor’s defences, the Tribunal held that the Deputy Manager was duly authorised under a Power of Attorney to file the Section 7 application and that the bank statements were properly certified under the Bankers’ Books Evidence Act. On the question of insufficient stamping, the bench cited the Supreme Court’s ruling in Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, observing that stamp deficiencies are technical in nature and cannot be used to defeat substantive justice under the IBC.
“The purpose of the Stamp Act is to protect the interests of revenue and not to arm litigants with a weapon of technicality by which they can delay adjudication. Insufficiently stamped documents suffer only from a technical deficiency which cannot be a ground to reject an application under Section 7 of the Code,” the bench noted. The Tribunal further held that the date of default was 29 November 2019, consistent with the CRILC report maintained by the RBI, and that the alleged “regularisation” was merely an internal accounting adjustment and not a genuine repayment.
COVID-19 Argument Rejected
The Tribunal categorically rejected the debtor’s plea for leniency due to COVID-induced financial distress, holding that the IBC does not recognise “inability to pay” as a defence once default is proven. Citing the NCLAT’s ruling in Milind Kashiram Jadhav v. Bank of Baroda, the bench observed that once an account is classified as NPA, the creditor is entitled to initiate insolvency proceedings, and the debtor cannot seek shelter under external circumstances such as the pandemic. “Once the Corporate Debtor defaulted and the loan accounts were classified as NPAs, pursuing resolution under the Code was a legitimate course of action. The Code is concerned with the fact of default — not the reason behind it,” the bench emphasized.
Holding that both debt and default stood conclusively established, the Tribunal admitted the petition filed by Prudent ARC Ltd. under Section 7 of the IBC. The order reinforces the settled legal position that commercial insolvency under IBC is determined by the fact of default, not by subjective explanations like financial hardship or COVID-related disruption.
Appearance
Financial Creditor: Adv. Mily Ghosal a/w. Adv. Sophia Hussain & Adv. Shweta Thanekar
Corporate Debtor: Adv. Rohan Agarwal a/w. Adv. Haaris Koradia & Adv. Akshata Shah i/b. Sujit Lahoti & Associates.
Cause Title: Prudent Arc Limited Vs. RBEP Entertainment Private Limited
Case No: CP (IB) No.235/MB/2023
Coram: Judicial Member Shri Ashish Kalia, Technical Member Shri Sanjiv Dutt
