NCLAT Upholds Insolvency Proceedings Against Majestic Hotels, Clarifies Scope of Section 10A Protection

New Delhi – The National Company Law Appellate Tribunal (NCLAT), in a significant ruling, has dismissed an appeal filed by the suspended director of Majestic Hotels Limited, upholding the initiation of insolvency proceedings against the company. The Tribunal, led by Member (Technical) Indevar Pandey, clarified that a default occurring before the COVID-19 moratorium period under Section 10A of the Insolvency and Bankruptcy Code (IBC) is actionable, even if a contractually agreed 'cure period' for that default extends into the protected period.

The judgment settles a critical question on the interplay between contractual terms and the statutory bar on insolvency petitions for defaults arising during the pandemic.

Background of the Dispute

The case revolves around Majestic Hotels Limited, which had availed multiple loans over decades for its hotel project in Ludhiana. After the original lenders classified the accounts as Non-Performing Assets (NPAs), U.V. Asset Reconstruction Company Ltd. (UVARC) acquired the debt in 2017.

Following the acquisition, Majestic Hotels and UVARC entered into a settlement-cum-restructuring plan in December 2017, which included a repayment schedule set to begin in January 2019. A key term of this agreement was a 45-day "cure period," allowing the hotel to rectify any payment delays before an "event of default" could be declared.

UVARC filed for insolvency against Majestic Hotels in March 2022, citing a default on the installment due for January 2020. The National Company Law Tribunal (NCLT), Chandigarh Bench, admitted the petition in July 2024, triggering the present appeal.

Core Arguments: A Clash Over "Default" and "Cure Period"

Appellant's Position: Default Shielded by Section 10A

Mr. Kewal Krishan Sharma, the suspended director, argued that the insolvency petition was barred by Section 10A of the IBC, which prohibits filing for defaults occurring on or after March 25, 2020. His key contentions were: - No Pre-Moratorium Default: While the January 2020 installment was due on January 31, 2020, the 45-day cure period meant an "event of default" could only occur after March 16, 2020. - Subsequent Payments Cured the Delay: Payments made between January and March 20, 2020, cleared the January dues, negating any default. - Lender's Conduct Implied Waiver: UVARC disbursed a fresh loan tranche of ₹70 lakhs on March 19, 2020, an act inconsistent with the existence of a default, thus implying a waiver. - Balance Sheet Misinterpreted: The NCLT wrongly interpreted an entry in the company's balance sheet as an admission of default for January 2020, when it referred to dues for the entire quarter.

Respondent's Counter: Default Was Complete and Continuing

UVARC, the financial creditor, countered that the default was clear, subsisting, and occurred well before the Section 10A moratorium began. Their arguments included: - Default Occurred on Due Date: A "default" under the IBC occurs when a payment is not made on its due date (i.e., January 31, 2020). The cure period only postponed the consequences (like loan recall) but did not shift the date of the default itself. - Settlement Automatically Lapsed: The failure to clear the January installment by March 16, 2020, caused the settlement agreement to automatically terminate as per its own terms, reviving the entire original debt of over ₹565 crores. - Unambiguous Admission: Majestic Hotels' own audited balance sheets for three consecutive years admitted that loan repayment was "pending since January 2020." - Disbursement Was Discretionary: The subsequent loan disbursement on March 19 was a discretionary act of commercial goodwill and did not waive the pre-existing default under the main settlement agreement.

NCLAT's Analysis and Key Findings

The Appellate Tribunal meticulously analyzed the contractual clauses and legal precedents to arrive at its decision. It found that the default had occurred before the Section 10A protection period kicked in.

The Tribunal made several key observations:

> "The contractual grace period did not postpone the 'occurrence' of default, it merely gave the debtor additional time to rectify it before triggering the contractual consequences."

On the automatic termination of the settlement, the NCLAT noted that the language of the MoU was unambiguous:

> "Clause 6 of the MoU clearly stipulates that in case the borrower fails to pay... and such failure continues for more than 45 days, the event of default shall occur automatically... A contract that has automatically lapsed, cannot be revived except by fresh consent of parties."

The Tribunal also rejected the argument that the subsequent loan disbursement constituted a waiver, stating that the lender had discretion under the separate loan facility and that this act did not negate the default under the primary settlement MoU. Further, it found the repeated admissions in the debtor's balance sheets to be conclusive proof of a continuing default.

> "The Corporate Debtor’s audited balance sheets for three consecutive years... expressly state that 'repayment of loan to UVARCL is pending since January 2020.' This admission establishes that the default was continuous and never cured."

The Final Verdict

The NCLAT concluded that since the default occurred on March 16, 2020—prior to the commencement of the Section 10A period on March 25, 2020—the petition for insolvency was maintainable. Finding no infirmity in the NCLT's original order, the bench dismissed the appeal, allowing the Corporate Insolvency Resolution Process against Majestic Hotels Limited to proceed.