COVID-Induced Financial Distress Or Inability To Pay Not Valid Defence Once Default Is Proved Under Section 7 IBC: NCLT Mumbai
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench-II, comprising Ashish Kalia (Judicial Member) and Sanjiv Dutt (Technical Member), has held that financial distress or inability to pay, including COVID-induced hardship, cannot be taken as a valid defence under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) once debt and default are proved. The Tribunal observed that the IBC represents a fundamental shift from the earlier “inability to pay” concept to a framework based on “determination of default.” Therefore, once default is established, the reasons for non-payment become irrelevant.
The decision came while admitting a Section 7 application filed by Prudent ARC Limited, assignee of Central Bank of India, against RBEP Entertainment Pvt. Ltd. (formerly known as Reliance Big Entertainment Pvt. Ltd.). The Tribunal found that both debt and default had been clearly established and rejected the corporate debtor’s plea that COVID-induced financial distress justified non-payment.
The case originated from a loan facility of ₹40 crore granted by the Central Bank of India to the corporate debtor for business expansion purposes. The loan account was classified as Non-Performing Asset (NPA), and a loan recall notice demanding ₹44.75 crore, inclusive of interest, was issued. The bank also initiated recovery proceedings before the Debt Recovery Tribunal (DRT) and, after assignment of debt, Prudent ARC filed the insolvency application under Section 7 of the IBC seeking initiation of Corporate Insolvency Resolution Process (CIRP).
The corporate debtor opposed the application on several grounds. It argued that the date of default mentioned in the petition was incorrect, claiming that the loan account had been regularised later. It also contended that the petition was unauthorised, as the bank’s Deputy Manager, who filed the case, lacked proper authorisation in the absence of a board resolution. Further, the debtor questioned the certification of bank statements, asserting they were not verified as per the Bankers’ Books Evidence Act, 1891. It also raised a technical objection that the loan documents were insufficiently stamped under the Maharashtra Stamp Act, 1958, and hence inadmissible. Finally, the corporate debtor pleaded that its business was severely impacted by the COVID-19 pandemic, resulting in an inability to make payments, and sought a three-year period to stabilise its financial operations.
On the other hand, the financial creditor submitted that the application was validly instituted and duly supported by authorisation. It argued that a Power of Attorney dated 9 January 2017 expressly empowered the bank’s Deputy General Manager to initiate and prosecute all legal proceedings. The creditor further submitted that the date of default was correctly recorded and substantiated by the CRILC report maintained by the Reserve Bank of India, which reflected the default as per official records. Regarding the issue of stamping, the creditor argued that the objection was purely technical and irrelevant to IBC proceedings, as the existence of debt and default was independently proved. It also pointed out that the corporate debtor had itself sought time for settlement and repayment, thereby acknowledging its liability.
After hearing both parties, the Tribunal examined each of the objections in detail. On the issue of authorisation, it held that the bank official was duly empowered under the Power of Attorney to initiate proceedings, observing that “the Power of Attorney grants sufficient authority to commence and prosecute any petition or legal proceeding; hence, the application was filed under valid authorisation.” On the question of certification of bank statements, the Bench noted that the statements were duly certified under the Bankers’ Books Evidence Act and therefore met all statutory requirements.
Rejecting the plea regarding insufficient stamping, the Tribunal relied on the Supreme Court’s judgment in Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, holding that the purpose of the Stamp Act is to protect government revenue and not to enable parties to obstruct proceedings through procedural technicalities. The Bench further cited the NCLAT’s ruling in Koncentric Investments Ltd. v. Standard Chartered Bank, affirming that insufficiency of stamp duty cannot invalidate an otherwise maintainable Section 7 application. It noted that “insufficient stamping is a technical deficiency which cannot be a ground to reject an application under Section 7 of the Code.”
The Tribunal accepted 29 November 2019 as the correct date of default, observing that the alleged regularisation of the loan account was merely an internal adjustment of unrealised interest entries rather than an actual payment. It relied on the NCLAT’s judgment in Milind Kashiram Jadhav v. State Bank of India, where it was held that once a borrower’s account has been classified as an NPA, the creditor’s initiation of insolvency proceedings under the IBC is fully justified as a legitimate statutory remedy.
Most significantly, the NCLT rejected the corporate debtor’s argument that the COVID-19 pandemic and the resulting financial distress justified its inability to repay. The Bench underscored that the Code operates on the principle of objective determination of default, not on the debtor’s reasons for non-payment. Citing the Supreme Court’s ruling in Swiss Ribbons Pvt. Ltd. v. Union of India (2019), it observed that “with the enactment of the Code, there is a shift from the concept of ‘inability to pay debts’ to ‘determination of default’. Once default is proved, the reason for non-payment — including financial distress or COVID-induced losses — is irrelevant.”
Finding that all conditions under Section 7(5)(a) of the IBC were satisfied, the Tribunal admitted the petition and initiated Corporate Insolvency Resolution Process (CIRP) against RBEP Entertainment Pvt. Ltd. It declared a moratorium under Section 14 of the Code and appointed NPV Insolvency Professionals Pvt. Ltd. as the Interim Resolution Professional (IRP) to take charge of the debtor’s affairs.
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In conclusion, the NCLT Mumbai reaffirmed that IBC proceedings are not concerned with the financial ability or economic hardships of the corporate debtor but solely with the existence of a debt and its default. Once default is established, excuses such as pandemic-induced losses or temporary liquidity crises cannot shield the debtor from insolvency proceedings. The ruling reinforces the principle that financial incapacity is not a defence to default under the IBC, marking a continued judicial emphasis on strict adherence to the Code’s object of time-bound resolution.
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: Ashish Kalia (Judicial Member), Sanjiv Dutt (Technical Member)
