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's OTS Failure Cannot Create for CIRP, NCLAT Chennai Rules
The has delivered a significant ruling clarifying that a borrower’s failure to comply with the terms of a does not constitute a for the purpose of initiating the under the . In a judgment delivered on , a Bench comprising Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain dismissed an appeal filed by the suspended director of , upholding the admission of the company into CIRP by the .
The core legal principle established is that an OTS is a , not a rescheduling of the original debt. Therefore, when the OTS fails, the original debt position is revived, and the relevant date of default reverts to the date when the debt was first crystallised—in this case, the issuance of a in . This reasoning effectively precludes the argument that a missed OTS instalment gives rise to a new, independent default that could fall within the protective umbrella of the imposed during the COVID-19 pandemic.
Background of the Dispute
had availed credit facilities from and a consortium of lenders in 2013. Despite a restructuring in 2014, the account was classified as a on . initiated recovery proceedings under the in 2016 and eventually obtained a from the on .
In , the bank approved a for the outstanding dues. However, Sharon Solutions defaulted on the OTS instalments. Consequently, filed a petition under before the NCLT, Chennai, in , seeking initiation of CIRP. The NCLT admitted the petition on , prompting the suspended director, Uma Maheshwari, to appeal before the NCLAT.
The Appellant’s Arguments
The appellant raised several grounds against the NCLT’s order. First, she contended that the Section 7 application mentioned 1 November 2020 as the date of default, which fell squarely within the period (). She argued that the application was therefore barred by law. Second, she submitted that the NCLT had wrongly permitted to alter the default date to —the date of the DRC—thereby circumventing the prohibition. Third, she argued that the application was defective and should have been rejected rather than allowed to be cured. Finally, she emphasised that Sharon Solutions was a viable with potential investment, and that admitting it into CIRP was unjustified and contrary to the principles laid down by the in
The Respondents’ Stand
and the other respondents countered that the actual default occurred when the account was classified as an NPA in 2014, and that this default was crystallised through the DRC in 2018. They submitted that the reference to 1 November 2020 in the Section 7 application was a typographical error, which had been duly corrected. The respondents also pointed to earlier winding-up proceedings against the company and its failure to revive despite restructuring and the OTS. They argued that the company was not a in any meaningful sense and that the NCLT’s admission order was legally sound.
NCLAT’s Key Observations
The NCLAT Bench rejected the appellant’s arguments and upheld the NCLT’s decision. In a critical passage, the Tribunal held:
“Under an OTS, the principal loan does not remain alive. Therefore, missing the timeline for paying OTS amount which is a proceeding in consensus will not lead to a and upon its culmination, would merely result in restoration of the original position prior to OTS.”
This observation dismantles the notion that an OTS failure creates a new, independent cause of action for CIRP. Instead, the original debt—with its pre-existing default—is revived. The Bench treated , the date of the DRC, as the . It noted that the debt had been acknowledged on four separate occasions, placing the default well outside the period.
Regarding the appellant’s reliance on Vidarbha Industries , the Tribunal distinguished the case on facts. It observed that Sharon Solutions had not only failed to honour its OTS commitments but had also previously faced winding-up proceedings. The company’s claim of commercial viability did not displace the established default, which exceeded the statutory threshold for CIRP admission. The Bench further noted that despite the NCLT granting time, the company failed to bring in an investor or resolve the insolvency. It concluded that the NCLT’s order was reasoned and legally sustainable.
Legal Implications of the Ruling
This judgment carries significant implications for insolvency practitioners, banks, and corporate debtors. First, it clarifies the legal character of a One-Time Settlement under the IBC framework. An OTS is not a fresh loan or a rescheduling of debt; it is a conditional compromise. If the debtor defaults on the OTS, the creditor does not need to treat the missed instalment as a new default date. Instead, the original default date—often the date of NPA classification or the date of the DRC—revives. This prevents debtors from using OTS failures to manipulate the timeline and potentially escape CIRP by taking shelter under provisions like .
Second, the ruling reinforces the principle that was intended to protect debtors from CIRP initiated solely for defaults occurring during the pandemic period. It was not meant to shield debtors from pre-existing defaults that merely manifested again through an OTS failure. The NCLAT’s reasoning ensures that creditors cannot circumvent the by artificially creating a new default, nor can debtors exploit the by defaulting on an OTS entered into during the pandemic.
Third, the judgment underscores the importance of the Debt Recovery Certificate as a . By treating the DRC date as the operative default, the Tribunal provides a clear benchmark for financial creditors when filing Section 7 applications. This reduces ambiguity and streamlines the CIRP admission process.
Impact on Insolvency Practice
For legal professionals advising financial creditors, this judgment is a welcome clarification. It affirms that an OTS failure does not reset the or create a for IBC purposes. Creditors can safely rely on the original default date—provided it is properly documented—when filing Section 7 petitions, even if an OTS was subsequently entered into and defaulted upon. This simplifies the evidentiary burden and reduces the risk of applications being dismissed on technical grounds.
For corporate debtors and their advisors, the ruling serves as a caution. Entering into an OTS does not erase the history of default. If the debtor fails to comply with the OTS terms, the creditor can revive the original debt and proceed with CIRP based on the earlier default. Debtors cannot use the OTS as a strategic tool to delay or avoid insolvency proceedings.
The judgment also highlights the limited applicability of the Vidarbha Industries principle. While the in that case held that the adjudicating authority has discretion to reject a Section 7 application if the debtor is a , the NCLAT has now clarified that this discretion does not override the existence of an established default. Where the debtor has a track record of non-compliance—including failure under an OTS and previous winding-up proceedings—the mere claim of viability will not suffice to prevent CIRP.
Conclusion
The NCLAT Chennai’s decision in is a well-reasoned addition to the developing jurisprudence on the interplay between One-Time Settlements and the Corporate Insolvency Resolution Process. By holding that an OTS failure does not create a and that the original debt position revives, the Tribunal has provided much-needed clarity for both creditors and debtors. The judgment reinforces the integrity of the IBC timeline and ensures that provisions are not misused to shield pre-existing defaults. Legal practitioners and financial institutions will find this ruling a valuable reference in structuring recovery strategies and litigating Section 7 applications.
