Pre-March 2020 Defaults Not Covered By Section 10A Of IBC: NCLAT Delhi

The National Company Law Appellate Tribunal (NCLAT), Delhi, on 24 February, held that Section 10A of the IBC cannot bar Corporate Insolvency Resolution Process (CIRP) initiation where the debt had fallen due prior to 25 March 2020, clarifying that dishonour of cheques during the COVID-19 suspension period does not alter the original default date.

The Principal Bench, comprising Judicial Member Justice Mohammad Faiz Alam Khan and Technical Member Naresh Salecha, dismissed an appeal filed by Irfan Khan, suspended director of Western Energetics Pvt. Ltd., challenging the Jaipur Bench of the NCLT's initiation of CIRP under Section 9 of the Code.

The Bench observed:

“We observe that Section 10A of the Code is not applicable in the present appeal as Section 10A is not applicable to the defaults which have been committed prior to 25.03.2020. The debt in respect of which the present appeal is for period from 20.04.2019 to 19.09.2019. We also note that the amount was to be paid within a period of30 days from the date of receipt of the invoice, thus the debt fell due 30 days after the date of the invoice and therefore, the date of default is 19.10.2019, which can be considered the date of default. Hence, Section 10A has no applicability, in the present case and the Corporate Debtor clearly committed default prior to the Sector 10A period of the Code.”

Khan had contended that the alleged default fell within the Section 10A suspension period (25 March 2020 to 24 March 2021). He argued that the default should be dated 29 January 2021, when cheques towards outstanding dues were dishonoured. He further submitted that the parties maintained a running account, with lump-sum payments made even during the pandemic, suggesting that the default arose only upon cheque dishonour.

Rejecting these submissions, the Tribunal noted that the relevant invoices were issued between April and September 2019, each specifying payment within 30 days. Accordingly, the dues became payable on or before 19 October 2019, i.e., well before the Section 10A cut-off date of 25 March 2020.

The Tribunal observed that Section 3(12) of the IBC defines “default” as non-payment of a debt when it becomes due and payable. Issuing cheques for pre-existing liabilities, which are later dishonoured, does not change the original default date. The cheques in question were intended to discharge liabilities arising prior to the Section 10A period, and their dishonour did not create a fresh default under the Code.

The NCLAT clarified that Section 10A bars CIRP initiation only for defaults arising on or after 25 March 2020, and not for earlier defaults that remained unpaid during the pandemic.

Accordingly, the NCLAT upheld the Section 9 application and dismissed Irfan Khan's appeal as the insolvency application was based on 2019 invoice defaults, and not on the subsequent cheque dishonour in 2021.