Ambit of Date of Default through the Lens of Judicial Pronouncements
Shr
2nd Year, B.Com L.LB (Hons.), The Institute of Law, Nirma University
Introduction
The Hon’ble Supreme Court, in M/S. Innoventive Industries Ltd. v. ICICI Bank & Anr. (2017) ibclaws.in 02 SC, has observed that the purpose of enacting the Insolvency and Bankruptcy Code, 2016 is to regulate insolvency and bankruptcy in India effectively, provide more rights to the creditors, foster credit availability, and improve recovery rates to support India’s entrepreneurial and economic growth. The report of the Bankruptcy Law Reforms Committee of November 2015 has observed the objectives of enacting the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) to achieve resolution in the minimum time possible, low loss of recovery, and higher levels of debt financing across a wide area of debt instruments. Further, the courts have highlighted that the Code is not a debt recovery legislation, but aims at rehabilitation and resolution of the corporate debtor.
The Code doesn’t explicitly define the term “Date of Default”. However, the term “Default” has been defined in the Code under Section 3(12) as the ‘non-payment’ of a debt (or installment of a debt) that has become due and payable. Date of Default is a dynamic concept under the Code, that is being shaped through judicial pronouncements. Thus, it can be implied that the Date of Default refers to that specific date on which such default has occurred.
Determination of Date of Default
Determination of the Date of Default is essential for initiating the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”). It establishes a reference or a point of action for the creditors and ensures that the application for initiating CIRP is made within the limitation period. Section 7 of the Code and Rule 6 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, make it mandatory for the Date of Default to be mentioned in the application and Form 3, to calculate the debt, including interest, and to determine the priority of the creditors. The Hon’ble National Company Law Appellant Tribunal (hereinafter referred to as “the Hon’ble NCLAT”), in Kodeboyina Srinivas Krishna v. PVM Innvensys Pvt. Ltd. & Anr. (2020) ibclaw.in 92 NCLAT, held that it is essential to explicitly specify the Date of Default in Form 3 so that the debt amount and Date of Default can be ascertained based on the documents. However, in many cases, such as M/S. Geocon Infra Private Limited v. M/S. Brij Gopal Construction Company Private Limited (2023) ibclaw.in 392 NCLT, the court has allowed and admitted the application without explicit mention of the Date of Default.
Another common criterion for determining the Date of Default is to ascertain the date on which the Corporate Debtor’s account had been classified as a Non-Performing Asset (hereinafter referred to as “NPA”). According to the Reserve Bank of India, NPA refers to a loan or advance that remains due and unpaid for over 90 days.
In the case of a Financial Creditor, when an account is declared as NPA, it is deemed as Default under the Code, making the NPA classification date as the Date of Default. The Hon’ble Supreme Court, in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. (2020) ibclaw.in 16 SC, observed that the date on which the loan account is classified as NPA should, ordinarily, be considered as the Date of Default for initiation of CIRP.
This has been followed in Milind Kashiram Jadhav v. State Bank of India & Ors. (2024) ibclaw.in 186 SC, the Hon’ble NCLAT observed that the Corporate Debtor’s account was classified as NPA on 27.09.2019 and a recall notice was sent on 11.08.2020, and held that irrespective of the partial payments made by the Corporate Debtor, his account remained classified as NPA, which depicts continuing default. Moreover, the classification of account as NPA overrides any further step, including the issuance of demand notice, and is regarded as the Date of Default.
In the case of Operational Creditors, generally, the due date mentioned in the invoice is considered as the Date of Default. If no due date is mentioned in the invoice, then it is the discretion of the court as to what date shall be considered as the Date of Default. In TLG India (P) Ltd. v. Puranik Builders Ltd., the Hon’ble Mumbai Bench held that if there is no due date mentioned in the invoice, then 30 days from the date on which the invoice was raised should be considered as the date of default.
The date of sending the demand notice is not considered as the Date of Default. A Demand Notice is defined in the Explanation to Section 8 of the Code as a notice sent by the Operational Creditor to demand payment of the operational debt against which default has occurred. In other words, a demand notice is the final opportunity given to the Corporate Debtor to make payment and avoid CIPR initiation against them. In Neeraj Jain, Director of Flipkart India Private Limited v. Cloudwalker Streaming Technologies Private Limited and Anr. (2020) ibclaw.in 221 NCLAT, the Hon’ble NCLAT held that sending the demand notice is merely a procedural step and doesn’t determine the Date of Default.
Section 10A
Section 10A of the Code was introduced through the Insolvency and Bankruptcy (Second Amendment) Code, 2020 to protect Corporate Debtors from unpaid debt due to the effects of the COVID-19 pandemic. It bars the initiation of CIRP under Section 7, Section 9, and Section 10 of the Code for defaults occurring between 25 March 2020 and 24 March 2021. In Ramesh Kymal v. M/S Siemens Gamesa Renewable Power Pvt. Ltd. (2021) ibclaw.in 08 SC, The Hon’ble Supreme Court upheld the decision of the Hon’ble NCLAT and reaffirmed the retrospective application of Section 10A. However, the court further highlighted, that such a bar doesn’t extinguish the liability of the Corporate Debtor or right of the creditor.
In Sandip Narendrakumar Patel (Promotor/Ex-Director) Yours Ethnic Foods Pvt. Ltd. v. Svakarma Finance Pvt. Ltd. & Anr. (2024) ibclaw.in 711 NCLAT, the Hon’ble NCLAT held that the Corporate Debtor cannot be allowed to benefit from Section 10A merely for the reason that the demand notice was sent during the prohibited period when the Date of Default is before the prohibited period.
In another judgment, in REC Limited v. Global Metal & Energy Private Limited (2024) ibclaw.in 913 NCLT, the Hon’ble Mumbai Bench, NCLT reaffirmed that the Date of Default remains within the prohibited period, irrespective of the fact that the demand notice was sent after the prohibited period.
Conclusion
The date of Default plays a crucial role in the insolvency proceedings and influences the limitation period, CIRP initiation, etc. Hon’ble courts and tribunals, through judicial pronouncements, have created a uniform and structured approach by clarifying various ambiguities in the determination of the Date of Default. However, uncertainties such as the explicit mentioning of the Date of Default is mandatory or mere directory persist that require judicial interpretation for consistent application in the insolvency proceedings. The Code is an evolving law, thus making future judgments critical in addressing such uncertainties and strengthening the insolvency framework in India.
