Creditors Cannot Bypass COVID-Era Insolvency Bar Through Arbitral Award Or Fresh Demand: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has recently held that creditors cannot circumvent the insolvency bar imposed during the COVID-19 period by relying on a subsequent arbitral award or a fresh demand arising from the same default.

The tribunal observed that accepting such an interpretation would defeat the purpose of the statutory protection.

A bench of Judicial Member K.R. Saji Kumar and Technical Member Anil Raj Chellan dismissed an insolvency petition filed by NKGSB Co-operative Bank against KSM Multitrade LLP seeking initiation of the corporate insolvency resolution process over an alleged default of Rs. 7.55 crore.

Explaining why the bar under Section 10A could not be overcome by a later arbitral award or demand, the tribunal observed,

“The expression “shall ever be filed” is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred during the specified period. The provision cannot be read to mean that the application can be filed concerning the same defaults after a fresh demand is made. If such an interpretation is accepted, the whole purpose and object shall be defeated. Thus, the embargo contained in Section 10A must be construed purposively to advance the object sought to be achieved by enacting the provision.”

The dispute arose from a cash credit facility of Rs. 4.50 crore sanctioned by the bank to KSM Multitrade LLP on September 1, 2018. The corporate debtor's loan account was classified as a non-performing asset (NPA) on October 31, 2020.

The bank subsequently initiated proceedings under the SARFAESI Act. It also commenced arbitration proceedings under the Multi-State Co-operative Societies Act, 2002.

The arbitration proceedings culminated in an award dated March 28, 2024 in favour of the bank. The bank later filed a petition under Section 7 of the Insolvency and Bankruptcy Code. It contended that fresh defaults had arisen upon the passing of the arbitral award and the corporate debtor's failure to comply with the requisitions contained in the award.

The corporate debtor opposed the petition. It contended that the application was barred because the admitted date of default fell within the period protected by Section 10A of the Insolvency and Bankruptcy Code.

It further argued that the arbitral award merely crystallised a debt that had already accrued and could not, by itself, create a fresh basis for commencing insolvency proceedings.

In response, the Tribunal noted that the bank had relied on several different dates to support its case. These included the expiry of the cash credit facility, the classification of the account as an NPA on October 31, 2020, the arbitral award passed on March 28, 2024, and the corporate debtor's subsequent failure to make payment despite a written demand.

A closer look at the loan documents led the Tribunal to reject the bank's contention that the first default occurred when the facility period ended on August 31, 2019. The Bench observed that the account continued to operate thereafter and was classified as an NPA only in October 2020. In those circumstances, it concluded that the facility must have been renewed.

The bench also examined the nature of the credit facility itself. Since the cash credit facility was repayable on demand, it held that there could be only one date of default in respect of the principal debt.

On that basis, it distinguished the National Company Law Appellate Tribunal's decision in Koncentric Investments Ltd. v. Standard Chartered Bank.

“The date of NPA classification was admittedly on 31.10.2020, which falls within the 10A period. As the Cash Credit Facility is payable on demand, it has only one default date for the principal amount. This is in contrast to the case of Koncentric Investments (supra), which pertains to a loan payable in installments. Consequently, the judgement in Koncentric Investments (supra) is not applicable to the facts of the present case,” the Tribunal held.

The bank also relied on the Supreme Court's decision in Kotak Mahindra Bank Limited v. Balakrishnan. It argued that a fresh cause of action arose upon the passing of the arbitral award.

The tribunal rejected the contention. It held that the Supreme Court's decision dealt with limitations and not with defaults that occurred during the period protected by Section 10A.

Referring to the Supreme Court's decision in Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt. Ltd., the tribunal reiterated that applications for initiation of insolvency proceedings cannot be maintained on the basis of defaults occurring during the protected period.

Holding that the present petition related to a default that occurred during the Section 10A period, the Tribunal rejected the insolvency application. It clarified that the rejection would be without prejudice to the bank's rights under any other law.