NCLAT New Delhi: Defaults Before March 25, 2020 Not Protected By COVID-19 Suspension Under Section 10A Of IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that corporate debtors cannot claim the protection of Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC) for defaults that occurred before the commencement of the COVID-19 suspension period, even if payments were due during that period.
A Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Indevar Pandey (Technical Member) upheld the initiation of the Corporate Insolvency Resolution Process (CIRP) against Majestic Hotels Limited, and dismissed the appeal filed by its suspended director, Kewal Krishan Sharma, challenging the order of the National Company Law Tribunal (NCLT), Chandigarh Bench, which had admitted the petition under Section 7 of the IBC filed by U.V. Asset Reconstruction Company Ltd. (UVARCL).
Background
Majestic Hotels Limited, engaged in the hospitality business, had availed multiple term loans from Tourism Finance Corporation of India (TFCI) and Industrial Finance Corporation of India (IFCI) to finance the construction and expansion of its hotel “Majestic Park Plaza” at Ludhiana. The accounts were classified as Non-Performing Assets (NPAs) in 2012. In 2017, U.V. Asset Reconstruction Company Ltd. (UVARCL) acquired these loans through assignment deeds and entered into a settlement-cum-restructuring agreement with the corporate debtor. Under the Memorandum of Understanding (MoU) executed on 29.12.2017, Majestic Hotels agreed to repay Rs. 16.25 crore in 45 monthly installments with a 45-day “cure period” for each installment. The first installment was due in January 2020.
Upon failure to make timely payment, UVARCL issued a recall notice and subsequently filed a petition under Section 7 of the IBC, which the NCLT admitted on 03.07.2024. The suspended director filed an appeal before the NCLAT, contending that the default fell within the protection of Section 10A, introduced during the COVID-19 pandemic.
Appellant’s Submissions
The appellant argued that there was no default prior to the commencement of Section 10A, as the January 2020 installment was paid within the contractual 45-day grace period, which expired on 16.03.2020—before the lockdown and the coming into force of Section 10A on 25.03.2020. It was submitted that the Rs. 70 lakh disbursed by UVARCL on 19.03.2020 under a separate working capital facility indicated that the lender itself did not treat the delay as a default. The appellant contended that payments made till March 2020 had covered the January dues and that any subsequent delay fell within the COVID-19 suspension period, thus protected by Section 10A.
Further, it was argued that the NCLT failed to appreciate that no notice of default was issued and that the disbursement of additional funds negated any presumption of default. Reliance was placed on Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt. Ltd. (2021) 3 SCC 224 and Indiabulls Housing Finance Ltd. v. Revital Realty Pvt. Ltd. to argue that defaults during the 10A period could not trigger insolvency proceedings.
Respondent’s Submissions
The Financial Creditor, UVARCL, opposed the appeal, asserting that the default occurred on 31.01.2020, when the first installment under the MoU fell due and was not paid in full. Only a partial payment of Rs. 32.52 lakh was made, leaving an outstanding of Rs. 63.39 lakh, which remained unpaid even after the 45-day cure period ended on 16.03.2020. It was submitted that under Clause 6 of the MoU, non-payment within the cure period automatically triggered an “event of default” and caused the settlement to lapse. Consequently, the entire outstanding debt became payable as per the Debt Recovery Tribunal’s (DRT) consent decree dated 26.10.2018.
The respondent emphasized that Section 10A applies only to defaults arising on or after 25.03.2020, and not to pre-existing defaults. The corporate debtor’s audited balance sheets from FY 2019–20 to FY 2022–23 repeatedly acknowledged that repayment of the loan had been pending “since January 2020”, which amounted to an admission of continuous default. The lender’s decision to disburse Rs. 70 lakh on 19.03.2020, it was clarified, was under a separate Working Capital Term Loan (WCTL-III) and did not waive the existing default. Under Section 60 of the Indian Contract Act, the creditor had the discretion to appropriate payments as it deemed fit.
Tribunal’s Findings
After examining the contractual documents and payment records, the Appellate Tribunal held that the event of default occurred automatically on 16.03.2020 under Clause 6 of the MoU, when the corporate debtor failed to clear the January 2020 dues within the 45-day period. Quoting Clause 6, the Tribunal noted: “In case MHL fails to repay the amount within the cure period, then the same shall be considered as an event of default and the settlement shall come to an end, and all reliefs and concessions granted will automatically lapse.” The bench observed that the default was self-executing and did not require any separate notice from the creditor. Once the grace period expired, the MoU lapsed, and the entire settlement stood terminated. The Tribunal emphasized: “A contract that has automatically lapsed cannot be revived except by fresh consent of parties. Post-default payments do not erase the historical fact of default.”
The Tribunal also held that the Rs. 70 lakh disbursal on 19.03.2020 could not be treated as a waiver of default since it was made under a separate facility and at the lender’s discretion. It stated that the use of permissive terms like “may” in Clause 4.2 of the WCTL-III Agreement indicated that the lender had the option—not the obligation—to withhold disbursement in case of default.
The NCLAT further observed that the balance sheets of Majestic Hotels Limited contained unambiguous admissions that repayment to UVARCL had been pending since January 2020, confirming a continuing default. Relying on Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt. Ltd., the bench reiterated that Section 10A protects defaults that arose on or after 25.03.2020, and does not extend to defaults that occurred prior to that date. Hence, defaults of January and March 2020, being prior events, were actionable.
Holding that the default was complete and continuing before the Section 10A suspension period, the NCLAT ruled that the insolvency proceedings were validly initiated. It concluded: “The default of the Corporate Debtor occurred on 16.03.2020, which is prior to 25.03.2020, i.e., the date on which the operation of Section 10A came into effect. The petition under Section 7 is therefore not barred by Section 10A.” Accordingly, the appeal was dismissed, affirming the initiation of CIRP against Majestic Hotels Limited. No order as to costs was passed.
Appearance
For Appellant: Mr. Gaurav Mitra, Mr. Aalok Jagga, Mr. Nipun Gautam, APS Madaan, Mr. Sahil Lohan and Lavanya Pathak, Advocates.
For Respondents: Mr. Krishnendu Datta, Sr. Advocate with Mr. Dhruv Dewan, Ms. Sanjukta Roy and Ms. Alina Merin Mathew, Advocates for R-2.
Cause Title: Kewal Krishan Sharma v. Navneet Gupta & U.V. Asset Reconstruction Company Ltd.
Case No: Company Appeal (AT) (Insolvency) No. 1302 of 2024
Coram: Justice Ashok Bhushan, Mr. Indevar Pandey (Technical Member)
