Insolvency Plea Must Be Based On Fresh Default After Loan Account Regularisation: NCLT Mumbai

The Mumbai bench of the National Company Law Tribunal (NCLT) has held that a financial creditor cannot base an insolvency petition on a historical default that ceased to exist after the loan account was regularised, and must instead rely on a fresh default specifically pleaded in the application.

Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar observed:

“If the Corporate Debtor commits another default after the account has been regularised, a fresh Default occurs, and an application may lie basis such default, but such date of default has to be expressly pleaded by the applicant in the application. The Financial Creditor must file the Section 7 Petition using this new date of default, not the historical one. A Financial Creditor cannot base its Section 7 Petition on a historical Default date that no longer exists. Doing so makes the Petition technically flawed and subject to dismissal by this Adjudicating Authority.”

The ruling came while dismissing an insolvency plea filed by IIFL Home Finance Ltd against Bombay ISLE Developers Pvt. Ltd.

IIFL Home Finance stated that it had disbursed three loan facilities of about ₹1.03 crore, ₹5 crore and ₹5 crore in 2015, 2016 and 2017 respectively. According to the lender, the corporate debtor failed to repay the loan amounts and an amount of ₹15.94 crore remained outstanding.

The financial creditor claimed that the account was declared a non-performing asset (NPA) on February 3, 2018. It contended that the limitation period stood extended because the corporate debtor had acknowledged the debt through part-payments and pleaded that such payments had continued up to June 2022.

The corporate debtor opposed the plea and pointed to records which, according to it, showed that the account had subsequently been regularised. It also relied on material showing fresh loan disbursals after April 2018 and questioned the dates of default reflected in various records.

The Tribunal noted that the Debt Recovery Tribunal, in proceedings initiated under the SARFAESI Act, had already held that there was a default and that the date of NPA was February 3, 2018. The bench therefore found no substance in the contention that there was no default on that date.

However, the Tribunal also took note of a letter dated April 3, 2018 confirming that the account had become “standard and regularised”. The bench further noted that there had been fresh disbursals after that date.

Referring to the letter, the Tribunal observed,

“A Letter dt. 03.04.2018, confirming that the Account is standard and regularised, therefore, once the Account is regularised, the default committed on 3.2.2018 as claimed by way of amendment by the application does not survive.”

The Tribunal held that once the account was regularised, the default of February 3, 2018 ceased to survive. It observed that if the corporate debtor committed another default thereafter, a fresh default would arise and an insolvency application could be maintained on the basis of that default, provided the creditor expressly pleaded that date of default in its application.

The bench also referred to a National Company Law Appellate Tribunal ruling in Royal Construction v. Gannon Dunkerley & Company Ltd., which held that if the date of default requires modification, it is for the applicant to seek amendment and not for the adjudicating authority to alter the pleaded date on its own.

Holding that the petition continued to be founded on the earlier NPA date despite the subsequent regularisation of the account, the Tribunal held that the application was not maintainable as barred by limitation.

It accordingly dismissed the insolvency plea.