Suspension of Corporate Insolvency Resolution Process in light of Section 10A of IBC

Background

In this case, the complexity of the case arises from the interplay between the newly introduced Section 10A, the timing of the default, previous CIRP proceedings, and the interpretation of the law in light of the COVID-19 pandemic’s impact on business operations. 

Understanding Section 10A of IBC

Suspension of initiation of corporate insolvency resolution process. – Notwithstanding anything contained in sections 7, 9, and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Section 10A provided that no application for initiation of CIRP would be filed for any default arising on or after March 25, 2020, for a period of six months. This period could be extended further, but not exceeding one year from March 25, 2020.

Controversy in Question

The controversies revolve around the following key aspects: 

• Challenge to Admission of Section 7 Application – The main issue in this appeal was the admission of a Section 7 application by the Adjudicating Authority filed by M/s. Prudent ARC Ltd. The controversy centered on whether the date of default ie., 31.03.2020, was in direct contravention to Section 10A of the Insolvency and Bankruptcy Code, which prohibits an application from being filed in respect of any default within a period of one year, i.e., from 25.03.2020 to 24.03.2021.

• Previous CIRP Proceedings – There were earlier CIRP Proceedings initiated against the same Corporate Debtor, which were held to be barred by limitation and upheld by the Hon’ble Apex Court. One of the lenders, IFCI Limited, filed a petition under Section 7 of the Code, which was admitted and later set aside as the debt was time-barred.

• Settlement Agreement and Default Date – A Settlement Agreement was executed between the Corporate Debtor and EARC, with the Corporate Debtor undertaking to pay a specific amount in three tranches ending on 31.03.2020. The alleged default occurred on 31.03.2020, and the initiation of CIRP on this basis was challenged as being in direct contravention of Section 10A.

• Section 10A Interpretation – The object of the legislation was to suspend the operation of Sections 7, 9, and 10 in respect of defaults arising on or after March 25th, 2020, during the COVID-19 lockdown. The Tribunal’s view was that the ‘Explanation’ to Section 10A removed any doubt by clarifying that the provisions of the Section shall not apply in respect of any default committed prior to 25.03.2020.

• Suppression of Prior Proceedings – The appellant contended that the second respondent had suppressed prior CIRP proceedings against the Corporate Debtor based on the same loan documents, which were set aside by the National Company Law Appellate Tribunal and upheld by the Hon’ble Apex Court.

• Limitation Issues – Opposition argued that the present proceedings were barred by limitation as the default goes back to the final date of declaration of NPA i.e., 13.10.2013, and the three-year period had expired on 13.10.2016, whereas this petition was filed only in June 2021.

• Apex Court’s Interpretation – Hon’ble Apex Court concluded that the embargo in Section 10-A must receive a purposive construction, and the contention that Section 10-A would not be applicable was unsustainable.

Legal Issues Involved

The legal issues involved in this case are multifaceted and pertain to the Insolvency and Bankruptcy Code, 2016 (IBC). The key legal issues are as follows:

Section 10A Contravention

Whether the date of default, being 31.03.2020, is in direct contravention to Section 10A of the IBC, which prohibits an application from being filed in respect of any default within a period of one year, i.e., from 25.03.2020 to 24.03.2021.

Interpretation of Section 10A

The interpretation of Section 10A, which suspends the initiation of the corporate insolvency resolution process for defaults arising on or after 25th March 2020 for a specific period. The provision’s applicability to the case and its purposive construction were central to the legal debate.

Limitation Issues

Whether the present proceedings were barred by limitation, considering the date of default and the three-year period for initiating proceedings.

Suppression of Prior Proceedings

Whether the second respondent had suppressed prior Corporate Insolvency Resolution Process (CIRP) proceedings against the Corporate Debtor based on the same loan documents, which were set aside by the National Company Law Appellate Tribunal and upheld by the Hon’ble Apex Court.

Settlement Agreement and Default

The legal implications of the Settlement Agreement entered into between the Corporate Debtor and the Lenders, and the subsequent default on 31.03.2020. The interpretation of the agreement and its breach were significant legal issues.

Assignment of Rights and Section 7 Petition

The legal validity of the Assignment Agreement and the subsequent Section 7 Petition filed by Prudent ARC Ltd., invoking the rights under the Assignment Agreement and Loan Documents.

Time Barred Debt

The legal issue concerning the earlier CIRP Proceedings initiated against the same Corporate Debtor, which was held to be barred by limitation and upheld by the Hon’ble Apex Court (Page 6).

Admission of Financial Debt

The legal considerations related to the admission of financial debt, the execution of various agreements, and the declaration of the loan account as Non-Performing Asset (NPA) (Page 3).

Arguments made by Applicant

1. Interpretation of Section 10A: It was argued that the date of default, being 31.03.2020, was in direct contravention of Section 10A of the Insolvency and Bankruptcy Code, 2016, which prohibits an application from being filed in respect of any default within a period of one year, i.e., from 25.03.2020 to 24.03.2021.
2. Limitation Issues: Counsel submitted that the date of default, being the same as the date of declaration of the loan account of the Corporate Debtor as Non-Performing Asset (NPA), was 13.10.2013. Therefore, the alleged limitation to initiate any fresh proceeding had expired on 13.10.2016, making the present proceedings time-barred. 
3. Suppression of Prior Proceedings: It was contended that the second respondent had suppressed prior Corporate Insolvency Resolution Process (CIRP) proceedings against the Corporate Debtor based on the same loan documents. These were set aside by the National Company Law Appellate Tribunal and upheld by the Hon’ble Apex Court.
4. Settlement Agreement and Default: Reference was drawn to the Settlement Agreement executed between the Corporate Debtor and EARC, wherein the Corporate Debtor undertook to pay a specific amount in three tranches ending on 31.03.2020. The initiation of CIRP on the basis of the default occurring on 31.03.2020 was argued to be in direct contravention of Section 10A. 
5. Assignment of Rights and Section 7 Petition: The legal validity of the Assignment Agreement was highlighted and the subsequent Section 7 Petition filed by Prudent ARC Ltd., invoking the rights under the Assignment Agreement and Loan Documents.
6. Time Barred Debt: Emphasis was placed on the legal issue concerning the earlier CIRP Proceedings initiated against the same Corporate Debtor, which was held to be barred by limitation and upheld by the Hon’ble Apex Court.
7. Admission of Financial Debt: Attention was drawn to the facts related to the admission of financial debt, the execution of various agreements, and the declaration of the loan account as NPA. 

Arguments made by Opposition

1. Section 10A and Date of Default:  Respondent argued that the date of default, being 31.03.2020, was not in contravention of Section 10A of IBC. He contended that the embargo in Section 10A must receive a purposive construction, and the restriction does not prevent the initiation of CIRP against the Corporate Debtor if the default continues even after the period of one year from 25.03.2020
2. Limitation Issues: The Counsel submitted that the limitation issues raised by the Appellant were a non-starter. He pointed to a compromise memo entered into on 03.05.2020 and the Section 7 Application filed in June 2021, arguing that the Section 7 Petition was not barred by limitation.
3. Settlement Agreement and Default: The Counsel referred to a Settlement Agreement entered into between the Corporate Debtor and EARC, with the Corporate Debtor undertaking to pay specific amounts in three tranches ending on 31.03.2020. He emphasised that the default occurring on 31.03.2020 did not contravene Section 10A.
4. Assignment of Rights and Section 7 Petition: The Counsel highlighted the legal validity of the Assignment Agreement and the subsequent Section 7 Petition filed by Prudent ARC Ltd., invoking the rights under the Assignment Agreement and Loan Documents. He also referred to the Settlement Agreement and the obligations of the Corporate Debtor to pay the amounts in three tranches, with the third instalment due and payable on 31.03.2020. 
5. Debt Assignment and NPA Proceedings: The Respondent’s Counsel submitted that a Common Loan Agreement was entered into, and the debt was assigned by Edelweiss to Prudent ARC, who is deemed to be the lender. He further explained the initiation of proceedings before the Debts Recovery Tribunal, Hyderabad, and the subsequent Settlement Agreement, emphasising that the default occurring on or after 25.03.2020 did not prevent the initiation of CIRP against the Corporate Debtor.
6. Interpretation of Section 10A: The Counsel contended that adopting the construction suggested by the appellant would defeat the object and intent underlying the insertion of Section 10A. He referred to the Hon’ble Apex Court’s conclusion that the embargo in Section 10-A must receive a purposive construction, and the object of the legislation was to suspend the operation of Sections 7, 9, and 10 in respect of defaults arising on or after March 25th, 2020, during the disruption caused by the lockdown. 
7. Outcome of the Appeal: The Respondent’s arguments culminated in the allowance of the Appeal, with the Impugned Order dated 07.02.2022 being set aside, and the admission of the Section 7 Petition also being set aside. The Adjudicating Authority was directed to proceed in accordance with the law. 

Decision of the Court

The main issue in the appeal was whether the date of default, being 31.03.2020, was in direct contravention to Section 10A of the Insolvency and Bankruptcy Code, 2016, which prohibits an application from being filed in respect of any default within a period of one year, i.e., from 25.03.2020 to 24.03.2021. 

The court found that the initiation of CIRP on the basis of the default occurring on 31.03.2020 was in direct contravention of Section 10-A. The court referred to Section 10A of the Code, which suspends the initiation of corporate insolvency resolution process for any default arising on or after 25th March 2020 for a specified period. NCLAT concluded that the appeal was allowed, and the Impugned Order (dated 07.02.2022) was set aside. Consequently, the admission of the Section 7 Petition was also set aside. The ‘Adjudicating Authority’ was directed to proceed in accordance with the law. No order as to costs was made, and all connected pending Interlocutory Applications, if any, were ordered to stand ‘closed’. 

Important Observations of Court

Contravention of Section 10A

The court observed that the date of default, being 31.03.2020, was in direct contravention of Section 10A of the Insolvency and Bankruptcy Code, 2016. This section prohibits an application from being filed in respect of any default within a period of one year, i.e., from 25.03.2020 to 24.03.2021

Purposive Construction of Section 10A

NCLAT observed Hon’ble Apex Court’s judgement in Ramesh Kymal versus M/s. Siemens Gamesa Renewable Power Pvt. Ltd. and concluded that the embargo in Section 10A must receive a purposive construction. The contention that Section 10-A would not be applicable was found unsustainable. 

Object of Legislation

It was noted that the object of the legislation was to suspend the operation of Sections 7, 9, and 10 in respect of defaults arising on or after March 25th, 2020, during the disruption caused by the lockdown. The Tribunal expressed the view that the ‘Explanation’ removes any doubt by clarifying that the provisions of the Section shall not apply in respect of any default committed prior to 25.03.2020. 

Admission of Debt and Limitation

The court assessed the earlier CIRP Proceedings initiated against the same Corporate Debtor, which was held to be barred by limitation and upheld by the Hon’ble Apex Court. The court also examined the date of default and the contravention to Section 10A. 

Settlement Agreement and Default

Court looked into the Settlement Agreement entered into between the Corporate Debtor and EARC, and the subsequent Assignment Agreement and Section 7 Petition. The initiation of CIRP on the basis of the default occurring on 31.03.2020 was found to be in direct contravention of Section 10-A.

Adjudicating Authority’s Observations

The  Authority observed that the financial debt in this case stands admitted. It also noted that the debt was ‘due and payable’ in light of the Agreement, and the Assignee ‘Financial Creditor’ had moved the Debts Recovery Tribunal for recovery. 

Important Provisions of Law

Sr no.	Provision / Section of Law		What it stands for	Context in the case
1	Section 10A of the Insolvency and Bankruptcy Code, 2016		Suspension of initiation of corporate insolvency resolution process for any default arising on or after 25th March 2020 for a specified period.	The main issue in the appeal was the contravention of Section 10A due to the date of default being 31.03.2020. The court found that the initiation of CIRP on this basis was in direct contravention of Section 10-A.
2	Section 7 of the Insolvency and Bankruptcy Code, 2016		Initiation of corporate insolvency resolution process by a financial creditor.	The appeal challenged the admission of Section 7 application by the Adjudicating Authority filed by M/s. Prudent ARC Ltd. The court set aside the Impugned Order and the admission of the Section 7 Petition.

Conclusion

The primary objective of introducing Section 10A was to provide temporary relief to companies struggling due to the COVID-19 pandemic. The global crisis had a significant impact on businesses, and this provision was aimed at preventing the initiation of insolvency proceedings against companies for defaults occurring during this challenging period. 

This provision effectively suspended the application of Sections 7, 9, and 10 of the IBC for the specified duration, providing a temporary reprieve to businesses affected by the pandemic and the subsequent lockdown measures. It ensured that companies were not pushed into insolvency for defaults that occurred during this unprecedented global crisis.

 

Author: Parthvi Patel, United World School of Law