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NCLAT reiterates that even partial non-payment constitutes a default and affirms that fresh defaults post-Section 10A period justify insolvency proceedings.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Yogesh Khanna (Judicial Member) and Arun Baroka (Technical Member) was hearing an appeal and ruled that even partial non-payment constitutes a default under Section 7 of the IBC, and fresh defaults occurring after the Section 10A suspension period justify the initiation of insolvency proceedings. The NCLAT Bench set aside the previous NCLT order and directed the commencement of CIRP against the Respondent.
In a recent NCLAT judgment, the Small Industries Development Bank of India (SIDBI) filed an appeal under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) against an order dated May 8, 2023, by the NCLT, Cuttack Bench. SIDBI, established in 1990 as a principal financial institution for the MSME sector, challenged the NCLT's dismissal of its application for initiating insolvency proceedings against the Respondent whose NBFC license had been cancelled by the RBI and was under an administrator's oversight.
SIDBI had sanctioned two term loans to Sambandh Finserve: Rs. 20 Crores on February 21, 2019, and Rs. 30 Crores on October 23, 2019. These loans were secured by the respondent's assets through loan agreements and hypothecation deeds. However, the Respondent defaulted on repayments after November 2020, leading to the account being classified as NPA on December 15, 2020, with an outstanding amount of Rs. 35,65,60,488 as of September 5, 2022. SIDBI's initial application under Section 7 of the IBC was dismissed on November 22, 2022, as the default date fell within the period covered by Section 10A of the IBC (March 25, 2020, to March 24, 2021).
Following this dismissal, SIDBI appealed to the NCLAT, which permitted the filing of a fresh application. Consequently, a new application was submitted with a default date of July 10, 2021, beyond the Section 10A period. Despite this, the NCLT dismissed the new application on May 8, 2023, citing inconsistencies in the default date and the same debt issue.
Upon review, the NCLAT noted that the previous dismissal should not impact the current petition, as SIDBI had been allowed to file a fresh application. The respondent admitted to defaulting on repayments, and the ongoing defaults justified initiating insolvency proceedings. The NCLAT considered SIDBI's argument that each missed instalment constitutes a fresh default, supported by the statement of accounts. It concluded that the fresh application was maintainable, thus justifying the initiation of the Corporate Insolvency Resolution Process (CIRP).
In conclusion, the NCLAT set aside the NCLT's order dated May 8, 2023, and directed the initiation of CIRP against the Respondent. This decision underscored the principle that the Adjudicating Authority under Section 7 is limited to determining the existence of debt and default. The NCLAT reiterated that even partial non-payment constitutes a default and affirmed that fresh defaults occurring after the Section 10A period justify insolvency proceedings. The appeal was allowed, and the matter was directed to be taken up for CIRP proceedings within ten days.
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