Threshold Compliance under Section 7 Amid Section 10A Provisions: Narayan Mangal v. Vatsalya Builders

Introduction

The case of Narayan Mangal v. Vatsalya Builders & Developers Pvt. Ltd. adjudicated by the National Company Law Appellate Tribunal (NCLAT) on August 18, 2023, marks a significant development in the interpretation of the Insolvency and Bankruptcy Code, 2016 (IBC), specifically concerning the interplay between Section 7 and Section 10A. This appeal revolves around the rejection of a Section 7 application by the National Company Law Tribunal (NCLT), Mumbai Bench, and delves into the complexities introduced by the suspension provisions under Section 10A amidst the COVID-19 pandemic.

The appellant, Narayan Mangal, positioned as a financial creditor, sought initiation of corporate insolvency proceedings against the corporate debtor, Vatsalya Builders & Developers Pvt. Ltd., under Section 7 of the IBC. The core contention lies in whether the total debt claimed by the appellant meets the statutory threshold, especially considering the interest accrued during the period governed by Section 10A.

Summary of the Judgment

The NCLT Mumbai Bench initially dismissed the Section 7 application on the grounds that the claimed amount did not meet the threshold as per the Ministry of Corporate Affairs Notification dated March 24, 2020. The appellant challenged this rejection, asserting that the total claim of INR 1,00,59,922/- (comprising INR 65 lakhs in principal and INR 35,59,922/- in interest) indeed satisfied the requisite threshold. The respondent argued that a portion of the interest calculated fell within the Section 10A suspension period and should thereby be excluded from the threshold computation.

Upon appeal, NCLAT scrutinized the applicability of Section 10A, which suspends the initiation of insolvency proceedings for defaults arising after March 25, 2020, amidst the COVID-19 lockdown. Drawing parallels with prior judgments, particularly the Supreme Court's decision in Ramesh Kymal v. Siemens Gamesa Renewable Energy, the Tribunal affirmed that only defaults committed during the Section 10A period are barred from being grounds for insolvency proceedings. In this case, since the primary default occurred before the Section 10A timeline, the accrued interest during the suspension period did not negate the fulfillment of the threshold.

Consequently, the NCLAT set aside the NCLT's rejection of the Section 7 application, directing a fresh order to admit the application within 30 days, thereby allowing the parties a window to potentially settle the matter.

Analysis

Precedents Cited

The Judgment extensively referenced pivotal cases that have shaped the interpretation of Sections 7 and 10A.

Ramesh Kymal v. Siemens Gamesa Renewable Energy [Civil Appeal No. 4050 of 2020]: The Supreme Court elucidated that Section 10A bars insolvency applications for defaults arising during its period but does not affect defaults committed prior to its enactment.
Raghavendra Joshi Vs. Axis Bank Limited: This case reinforced that defaults predating the Section 10A period remain actionable under Section 7, and the benefits of Section 10A cannot be retroactively applied to negate such defaults.
Vishal Agarwal Vs. ICICI Prudential Real Estate AIR-I & Anr. [Company Appeal (AT) Ins. No. 1016 of 2022]: The Tribunal held that acknowledgments of default prior to Section 10A preclude the application of Section 10A benefits, emphasizing that only clear defaults during the suspension period are barred.

Legal Reasoning

The crux of the Tribunal's reasoning hinged on distinguishing between defaults occurring before and during the Section 10A period. Section 10A was introduced as a temporary measure to safeguard distressed corporates amidst the pandemic-induced lockdown, thereby halting the initiation of insolvency proceedings for defaults arising within this timeframe.

In this case, the primary default by Vatsalya Builders occurred on February 1, 2020, well before the Section 10A timeline commenced on March 25, 2020. The appellant's claim, inclusive of interest accrued before and during the Section 10A period, was scrutinized. The respondent's argument that part of the interest fell within the suspension period was countered by the Tribunal's interpretation that only the default's occurrence governs the applicability of Section 10A, not the period during which interest is calculated.

Consequently, since the initial default predated Section 10A, the entire claim, including interest accrued thereafter, was deemed valid for threshold computation under Section 7.

Impact

This Judgment reinforces the principle that Section 10A serves as a protective shield only for defaults initiated during its active period. Defaults occurring prior to its enactment retain their eligibility for insolvency proceedings under Sections 7, 9, and 10 of the IBC. Consequently, creditors cannot dilute their claims by segregating portions of their debt that accrue during the suspension phase.

Future Section 7 applications will likely reference this Judgment to argue for the inclusion of the entire debt claim in threshold calculations, provided the primary default is outside the Section 10A period. Additionally, this reinforces the importance for creditors to meticulously document the timeline and nature of defaults to fortify their insolvency claims.

Complex Concepts Simplified

Section 7 of the Insolvency and Bankruptcy Code, 2016

Section 7 pertains to the initiation of corporate insolvency resolutions by financial creditors. To invoke this process, a creditor must prove that a corporate debtor has defaulted on its obligations and that the claimed debt exceeds a prescribed threshold.

Section 10A of the Insolvency and Bankruptcy Code, 2016

Section 10A was introduced as a temporary measure to suspend the initiation of insolvency proceedings amid the COVID-19 pandemic. It prevents creditors from initiating insolvency actions for defaults occurring during the lockdown period specified in the section.

Threshold in Section 7 Applications

For a Section 7 application to be valid, the claimed debt must exceed a certain amount as notified by the Ministry of Corporate Affairs (MCA). If the total debt falls below this threshold, the application is deemed non-maintainable.

Conclusion

The NCLAT's decision in Narayan Mangal v. Vatsalya Builders & Developers Pvt. Ltd. serves as a clarifying beacon on the interplay between Section 7 and Section 10A of the IBC. By affirming that only defaults initiated during the Section 10A suspension period are barred from insolvency proceedings, the Tribunal underscores the sustained relevance of pre-Shutdown defaults in insolvency claims. This Judgment not only aids in delineating the boundaries of Section 10A's protective measures but also empowers creditors to pursue legitimate claims without undue hindrance, provided their defaults fall outside the suspension timeline. As the financial landscape continues to evolve post-pandemic, such interpretations will be pivotal in shaping the strategies of creditors and the resilience of corporate debtors alike.