Mere Account Irregularity During S.10A Period Is Not 'Default'; Date of NPA Is Key: NCLT Mumbai - 2025-07-11

Laws, Courts & Judgments.

NCLT Admits Canara Bank’s Insolvency Plea Against Elegant Forge for ₹81 Crore Default, Clarifies Scope of Section 10A

Mumbai, July 11, 2025 – The National Company Law Tribunal (NCLT), Mumbai Bench, has admitted Canara Bank's petition to initiate the Corporate Insolvency Resolution Process (CIRP) against M/s Elegant Forge & Equipment Private Limited over a default amounting to ₹81.60 crores.

The bench, comprising Sh. Sushil Mahadeorao Kochey (Judicial Member) and Sh. Charanjeet Singh Gulati (Technical Member) , delivered a crucial ruling that distinguishes between mere "account irregularity" and a "default" under the Insolvency and Bankruptcy Code (IBC), particularly in the context of the bar imposed by Section 10A for the COVID-19 period.

Case Background

Canara Bank, the lead financial creditor in a consortium, filed a petition under Section 7 of the IBC on December 17, 2024. The bank stated that Elegant Forge had defaulted on payments related to term loans and working capital facilities sanctioned starting in 2018 for setting up a green-field forging plant. The bank cited the date of default as July 31, 2021, and the date of Non-Performing Asset (NPA) classification as November 30, 2021.

Arguments from Both Sides

Elegant Forge's Defence:

The corporate debtor, Elegant Forge, vehemently opposed the petition on several grounds: -

Maintainability under Section 10A: Their primary argument was that the petition was barred by Section 10A of the IBC. They contended that the bank's own SARFAESI notice indicated the account became "irregular" on March 20, 2021, which falls within the statutory suspension period (March 25, 2020, to March 24, 2021). They accused the bank of manipulating the default date to circumvent the bar. -

Procedural Flaws: The company challenged the petition on technical grounds, citing the lack of a proper board resolution authorizing the bank's representative, absence of detailed debt computation, and non-compliance with the Bankers' Books Evidence Act. -

Pending Counter-Claim: They highlighted a pending counter-claim of ₹403.43 crores against the bank in the Debt Recovery Tribunal (DRT) for alleged damages and breach of contract, arguing that no "debt was due."

Canara Bank's Position:

The bank's counsel, Adv. Mily Ghoshal, argued that: - A financial debt existed, supported by sanction letters, a deed of guarantee, and detailed statements of account. - The default occurred outside the Section 10A period, as the account was officially declared an NPA on November 30, 2021. - All procedural requirements under the IBC were met.

Tribunal's Analysis and Key Findings

The NCLT systematically addressed and dismissed each of the corporate debtor's objections.

On the Section 10A Challenge:

This was the central issue of the case. The tribunal made a critical distinction, stating:

"...it is pertinent to note that mere irregularity in account operations does not constitute 'default' as contemplated under Section 3(12) of the Code."

Relying on Supreme Court precedents, including Laxmi Pat Surana vs. Union of India , the bench clarified that while the NPA date is a key indicator, the "default" is the non-payment of debt when it becomes due and payable. The tribunal observed:

"In view of the classification of the account as NPA on 30.11.2021, the date of default, as determined in accordance with the RBI guidelines, would relate back to 30.08.2021, which marks the point when the payment obligations first remained unpaid and thereafter remained overdue for a continuous period of 90 days. This date falls well beyond the period prescribed under Section 10A of the Code."

The tribunal also noted from NESL records that while an overdue amount existed in May 2020, it was subsequently regularized and brought to zero by July 2020, demonstrating that the earlier irregularity was cured and did not constitute a continuing default from the Section 10A period.

On Procedural and Other Objections:

• The bench found that the bank had submitted sufficient documentation, including an Authority Letter for its representative, computation of debt, a certificate under the Bankers’ Books Evidence Act, and an NESL report, thereby satisfying procedural norms.
• It affirmed the established legal principle that the existence of a counter-claim in a different forum like the DRT does not bar the admission of a Section 7 petition if the financial creditor proves the existence of debt and default under the IBC.

Final Order and Implications

Finding that all conditions for initiating CIRP were met—existence of a financial debt, a default exceeding the threshold, and the application being within the limitation period—the NCLT admitted the petition.

The tribunal's order initiates CIRP against M/s Elegant Forge & Equipment Private Limited, declares a moratorium under Section 14 of the IBC, and appoints Mr. Dinesh Kumar Aggarwal as the Interim Resolution Professional (IRP). This judgment reinforces the NCLT's strict interpretation of "default" under the IBC and clarifies that temporary financial stress during the COVID-19 period, which does not crystallize into a 90-day overdue default outside the suspension window, will not provide indefinite immunity under Section 10A.