National Company Law Appellate Tribunal, New Delhi: In an appeal challenging the Adjudicating Authority’s order dismissing appellant’s insolvency petition under of the Insolvency and Bankruptcy Code, 2016 (IBC), a 3-member bench of Ashok Bhushan, J., Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka* (Technical Member), upheld that NCLT’s decision that the debt amount was insufficient to meet the threshold required for CIRP initiation due to the Section 10A protections and lack of valid interest claims.
Background
In the instant matter, the Samrat Restaurant (the appellant) and the Brewcrafts Microbrewing Private Limited (the respondent), entered into a Leave and Licence agreement (L&L agreement). The appellant in the case demanded Rs. 5,22,95,571/- as unpaid dues. The proceedings under Section 9 of the IBC were initiated by the appellant against the respondents. The Adjudicating Authority dismissed the petition under Section 9 IBC and held that a portion of the default occurred during the period protected by Section 10A of the IBC, and the remaining default amount did not meet the threshold of Rs 1 crore required to initiate CIRP. The exclusions as per Section 10-A of the IBC led to the debt being decreased to less than 1 crore.
Moot Point
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Whether the NCLT was correct in excluding the portion of the debt falling within the Section 10A period and reducing the overall debt below Rs 1 crore?
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Whether the appellant’s inclusion of interest in the claim was justified despite no contractual provision for it?
Appellant’s Contentions
The appellant contended that the corporate debtor in this case failed to honour the terms and conditions of the agreements and defaulted on paying the licence fees and other dues on time. On 16-11-2018 the Operational Creditor issued a notice to the respondent to pay the outstanding amount to the tune of Rs. 99,85,540 and on 06-02-2019 another notice of Rs 1,04,06,031 was given to the respondent. The Appellant contended that the notices were duly acknowledged by the respondent and part-payments were made from time to time and by March 2020 only Rs 52,50,000 remained unpaid. The licence fee was also revised and by way of an undertaking on 29.08.2021 the respondent agreed to clear their dues amounting to Rs 1,18,82,400. On 27.03.2023 the respondent in this case illegally removed the furniture from the premises and vacated the premises and refused to clear their dues. The Adjudicating authority as per the appellant failed to take into consideration the fact that the respondent in this case had agreed for a One Time Settlement on 31.03.2023 to pay their dues amounting to Rs 1,06,00,000 and thus the amount is not barred by Section 10A of the IBC. The Adjudicating authority failed to apply the Doctrine of ‘Accord and Satisfaction’ and denied the interest on the outstanding licence amount. The Appellant relied upon Rubra Buildwell Constructions (P) Ltd v. PSA Impex, (Company Petition No. IB-11/ND/2022), to further their contentions. The appellant argued that the rejection of the dues by stating it to be inflated and wrongful additions and consequently stating that the total debt does not cross the threshold of Rs 1 Crore.
Respondent’s Contentions
The Respondent rejected the appellant’s contentions and stated that the reminders of the payment were for the pending licence fee only and were not intended for the One Time Settlement. The respondent contended that the amount claimed by the appellant falls under the prohibited period as per Section 10-A of the IBC. The respondent relied upon SLB Welfare Assn. v. PSA IMPEX (P) Ltd., 2022 SCC OnLine NCLAT 1584, to further their contentions. It was argued that the appellant should have excluded the amount falling under Section 10-A of the IBC in the Section 8 Notice and the application under Section 9. The respondent stated that as per Krishna Enterprises v. Gammon India Ltd., 2018 SCC Online NCLAT 360, the ‘debt’ cannot be stated to include ‘interest’ in all the cases and thus the interest amount claimed by the Appellant was correctly excluded as the wrongful amount.
NCLAT’s Observations
The NCLAT observed that the adjudicating authority was correct in holding that a portion of default amount falls under the protected period of Section 10-A. The NCLAT upheld the Adjudicating Authority’s decision that the L&L agreement did not include a provision for interest, and therefore, the Rs 1.66 crore claimed as interest could not be considered as part of the operational debt.
The NCLAT stated that the amount claimed as One Time Settlement was only a stopgap payment. The NCLAT held that “the OTS agreement did not alter the date of default, and the default during the Section 10A period remained protected under law.” The appellant, as per the NCLAT, has artificially inflated the claims and amounts and thus the interest on the default payments cannot be accepted.
The NCLAT affirmed that Section 10A protected the respondent from insolvency proceedings for any default occurring during the COVID-19 lockdown period (March 25, 2020 – March 25, 2021). The NCLAT stated that the portion of the defaulted amount falling within this period (Rs 69.30 lakh) was rightly excluded by the Adjudicating Authority. The NCLAT stated that the Adjudicating Authority had correctly interpreted Section 10-A of the IBC and the total payable amount comes at Rs. 35,02,857 and the threshold amount of Rs 1 Crore is not crossed.
NCLAT’s Decision
The NCLAT held that —
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Section 10A of the IBC prohibits the initiation of CIRP for defaults that occurred during the COVID-19 pandemic period, and this protection cannot be bypassed by subsequent agreements.
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Interest on operational debts is only valid if explicitly agreed upon between the parties. Without a clear provision in the contract, interest claims cannot inflate the default amount.
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The mandatory threshold for initiating CIRP must be met without including any debt that is protected under Section 10A.
The NCLAT consequently dismissed the appeal with an observation that manipulating and inflating the figures was an abuse of the insolvency proceedings.
[Samrat Restaurant v. Brewcrafts Microbrewing (P) Ltd., 2024 SCC OnLine NCLAT 1148, order dated 25-09-2024]
*Judgment by Arun Baroka (Technical Member)
Advocates who appeared in this case:
Mr. Ramchandra Madan, Counsel for the Appellant
