National Company Law Appellate Tribunal Upholds Insolvency Proceedings Against Majestic Hotels Limited

Tribunal Rules Section 10A Moratorium Inapplicable for Defaults Occurring Before March 25, 2020

In a recent decision, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, upheld the initiation of Corporate Insolvency Resolution Process (CIRP) against Majestic Hotels Limited. The appeal was filed by Kewal Krishan Sharma, the suspended director of the company, challenging the National Company Law Tribunal's (NCLT) order admitting the insolvency petition filed by U.V. Asset Reconstruction Company Limited (UVARC). The NCLAT's decision reaffirmed that the statutory protection under Section 10A of the Insolvency and Bankruptcy Code, 2016, which provides a moratorium for defaults occurring on or after March 25, 2020, does not extend to defaults that occurred prior to this date.

The case centered around the default by Majestic Hotels Limited on a financial debt that originated from a settlement agreement dated December 29, 2017, with UVARC, following the assignment of loans from IFCI and TFCI. Despite a cure period provision in the Memorandum of Understanding (MoU), the hotel company failed to meet its repayment obligations by March 16, 2020, thereby triggering an automatic event of default. UVARC subsequently filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, which was admitted by the NCLT, Chandigarh.

The appellant, Kewal Krishan Sharma, contended that the default fell within the Section 10A moratorium period, and that continuous payments and restructuring efforts were overlooked by the NCLT. However, the NCLAT, comprising Justice Ashok Bhushan and Mr. Indevar Pandey, found that the default was complete before the moratorium date of March 25, 2020. The Tribunal emphasized that the automatic termination of the MoU upon failure to pay within the cure period meant that the Section 10A protection was inapplicable.

The NCLAT also dismissed the appellant's argument regarding the disbursement of a working capital term loan tranche as evidence of waiver or condonation of the default. The Tribunal noted that such disbursements were discretionary and did not negate the occurrence of default under the MoU. Furthermore, the Tribunal highlighted that the audited financial statements of Majestic Hotels consistently acknowledged the pending loan repayment since January 2020, reinforcing the existence of a continuing default.

The decision upholds the NCLT's order for the initiation of insolvency proceedings, underscoring the statutory framework of the Insolvency and Bankruptcy Code, which mandates the admission of petitions upon the establishment of default. The NCLAT's ruling clarifies the applicability of Section 10A, reaffirming its intent to shield only those defaults arising due to the COVID-19 pandemic disruptions post-March 2020.

Bottom Line:

Insolvency and Bankruptcy Code, 2016 - Section 7 petition not barred under Section 10A where default occurred prior to the statutory moratorium period commencing from 25.03.2020.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Sections 7, 10A, Indian Contract Act, 1872 - Sections 60, 63

Kewal Krishan Sharma v. Navneet Gupta, (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2805144