Debtors Not Exempt From Insolvency For Defaults Occurring Before Covid-19 Suspension Period: NCLAT New Delhi

A bench comprising Justice Ashok Bhushan and Mr. Indevar Pandey (Technical Member) dismissed an appeal filed by the suspended directors of the corporate debtor and affirmed an order passed by the National Company Law Tribunal (NCLT) under section 7 of the IBC admitting the petition filed by U.V. Asset Reconstruction Company Ltd. (UVARCL).

“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,” the Bench held.

Background:

Majestic Hotels Limited had availed several term loans from Tourism Finance Corporation of India (TFCI) and Industrial Finance Corporation of India (IFCI) to finance construction and expansion. The accounts were classified as Non Performing Assets (NPA) in 2012. In 2017, U.V. Asset Reconstruction Company Ltd. (UVARCL) acquired the loans from TFCI and IFCI through assignment deeds. Subsequently, a settlement-cum-restructuring plan was executed through a Memorandum of Understanding (MoU) under which the Majestic Hotels undertook to repay Rs. 16.25 crore in 45 installments with a 45 day cure period for each installment.

Upon default in paying the installment due in 2020, a recall notice was issued. The company petition was later filed under section 7 of the IBC which was admitted by the NCLT. Aggrieved, the suspended director of the Majestic Hotels had filed an appeal before the NCLAT.

Majestic submitted that no default existed, even if a delay had occurred, it fell within the COVID suspension period. It was further submitted that a default in 2020 installment could be cured within 45 days which was slated to be expired on March 2020 and the recall notice issued fell within the suspension period.

Per contra, the Financial Creditor submitted that the default clearly occurred before the suspension period and the debtor's plea of cure period was misconceived. It was further submitted that the January 2020 installment was not paid till 31 January 2020 and the grace period expired without complete repayment thereby triggering default under clause 6 of the MoU. It was further submitted that a disbursal of Rs. 70 lakh was made under a separate working capital and did not condone the default. It was further submitted that as per section 60 of the Indian Contract Act, the creditor was entitled to appropriate such disbursement towards other dues.

Findings:

The Tribunal noted that clause 6 of the MoU provided that if the payment was not made within the 45 day cure period, the event shall be considered as an event of default and the settlement shall come to end. It observed that “the language of Clause 6 is unambiguous. It makes the occurrence of default automatic and self-executing upon non-payment within 45 days.”

The Tribunal further observed that once the MoU lapsed, it could not be revived except by fresh consent. It further held that payments made after the date could not retroactively cure the default. It held that “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 further observed that the disbursement of Rs. 70 lakh did not negate the default. It held that “the release of a pre-sanctioned tranche cannot be interpreted as waiver of contractual rights, particularly when the MoU itself provides that upon default, all concessions lapse automatically.”

It further noted that entries in the balance sheet clearly acknowledged the debt to be repaid. Such admission establishes that the default was continuous and never cured. Interpreting Ramesh Kymal, the Tribunal held that section 10A of the IBC protects defaults arising on after March 25 2020, not the default occurred before the suspension period.

Accordingly, the Tribunal dismissed the appeal holding that the event of default was established which occurred before the COVID-19 suspension period and continued. Therefore, the petition under section 7 of the IBC was not barred by section 10A of the IBC, the Bench concluded.

Case Title: Kewal Krishan Sharma v. Navneet Gupta & U.V. Asset Reconstruction Company Ltd.

Case Number: Company Appeal (AT) (Insolvency) No. 1302 of 2024

Judgment Date: 06/11/2025

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.

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