Samrat Restaurant vs Brewcrafts Micro Brewing Private ...

IN THE MATTER OF: Samrat Restaurant 10A, Raj Kutir 3rd Road, Khar (West) Mumbai - 400054 ...Appellant

Versus

Brewcrafts Microbrewing Private Limited First Brewhouse, The Corinthians Club Mohammadwadi Pune Maharashtra - 411060 suketu@brewcraftsindia.com ...Respondent

Present: For Appellant : Mr. Ramchandra Madan, Advocate

For Respondent : JUDGMENT

(Hybrid Mode)

[Per: Arun Baroka, Member (Technical)]

The Appellant, M/S Samrat Restaurant, a registered partnership firm,

through its Managing Partner, Mr Paramjit Singh Ghai, i.e. the Operational

Creditor, against the Impugned Order dated 22.05.2024 passed in Company

Petition bearing CP (IB)/483/MB/2023 by the Ld. National Company Law

Tribunal, Mumbai Bench, ("Adjudicating Authority") whereby the Ld.

Adjudicating Authority dismissed the Application filed by the Appellant, under Section 9 of the Code for initiation of the Corporate Insolvency

Resolution Process ("CIRP"), the Appellant herein is constrained to prefer the

present Appeal.

Brief facts:

2. The Respondent and the Appellant entered into a leave & license

agreement ("L&L agreement") dated 4th May 2017. The term of the L&L

agreement was from 15th June 2017 to 30th April 2022.

3. The Appellant issued a statutory demand notice under Section 8 of the

Insolvency and Bankruptcy Code, 2016 ("IBC"), and thereafter filed a Section

9 IBC Application for initiation of CIRP against the Respondent, claiming

alleged default of Rs 5,22,95,571/- (rupees five crores, twenty-two lakhs,

ninety-five thousand, five hundred and seventy-one only) for the unpaid

license fees under the L&L agreement, wrongfully raised reimbursements,

and interest on the unpaid license fees.

4. The Section 9 Petition filed by the Appellant was at the very outset

declared to be non-maintainable by the Hon'ble NCLT Mumbai, as the default

amount claimed by the Appellant was inflated by inclusion of defaulted

license fees amounts, interest, purported reimbursements and default

amounts which fell due and payable during the prohibited period under

Section 10A of IBC.

5. The Adjudicating Authority excluded a license fee of Rs 69,30,442/-

(rupees sixty-nine lakhs, thirty thousand, four hundred and forty-two only) Company Appeal (AT) (Insolvency) No. 1409 of 2024 2 of 32 finding that the same fell due and defaulted during the prohibited period, in

terms of Section 10A of the IBC. The Adjudicating Authority did not consider

the 'OTS' letter dated 31.03.2023 wherein it is claimed that the Corporate

Debtor had not only admitted that they were liable to pay a sum of Rs

1,06,00,000/- (rupees one crore and six lakhs only) along with interest at the

rate of 18% pa, but had also agreed to pay the sum by 31.03.2023.

Resultantly, it is claimed that the default occurred only on 31.03.2023 and

not during the period prohibited under Section 10A of the IBC. This exclusion

led to the debt falling below the Rs 1 crore threshold. However, established

law states that if a default is committed prior to the Section 10A period and

continues into the Section 10A period, the initiation of proceedings is not

barred.

Submissions of the Appellant:

6. The Corporate Debtor, Brewcrafts Microbrewing Pvt Ltd, is a registered

company under Companies Act, 1956, having its registered office at First

Brewhouse, The Corinthians Club, Mohammadwadi, Pune MH 411060 IN.

7. The Operational Creditor, M/S Samrat Restaurant, is a partnership

concern having its office at 10A, Raj Kutir, Plot E854, 3rd Road, Khar (West),

Mumbai-400054. That the Operational Creditor is the exclusive owner of the

building known as Hotel Samrat, 10A, Raj Kutir, 3rd Road, Khar (West),

Mumbai- 400054.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 3 of 32

8. The Corporate Debtor approached the Operational Creditor for carrying

on the business of Restaurant for making and selling beverages and eatables

and merchandise from the property of the Operational Creditor under the

name and style 'doolally'.

9. The Corporate Debtor and the Operational Creditor agreed to enter into

a L&L agreement dated 04.05.2017 (hereinafter 'the Agreement'), for a period

of 58.5 months commencing from 15.06.2017 30.04.2022, whereby the

Operational Creditor would give the Corporate Debtor leave and license to

carry on its business activities, more specifically defined in the Agreement,

from '218 sq meters area on ground floor and 115 sq meters area on 1st floor

known as Harmony and Symphony Hall, terrace area of 126 sq meters,

common guest toilets of ladies and gents of 30 sq mts and common lobby area

on 1st floor of approx 10 sq meters' (hereinafter 'the premises').

10. The Corporate Debtor agreed to pay the Operational Creditor monthly

payments in the form of license fee along with GST on or before the 7th day of

the month. The license fee payable was agreed to be the following for the

respective years:

Year Escalation License Fees per Month

15.06.2017 - 30.04.2018 NA Rs 11,33,000 01.05.2018 - 30.04.2019 7% Rs 12,12,310 01.05.2019 - 30.04.2020 7% Rs 12,97,172 01.05.2020 - 30.04.2021 5% Rs 13,62,030 01.05.2021 - 30.04.2022 5% Rs 14,30,131

Company Appeal (AT) (Insolvency) No. 1409 of 2024 4 of 32

11. In addition to the above the Corporate Debtor was also liable to pay

utility dues on time for the duration of their possession of the premises. As

part of the responsibilities in the aforesaid Agreement, the Operational

Creditor was required to provide the aforesaid premises along with floorings,

fittings and fixtures including the air conditioners installed. The Operational

Creditor duly complied with all its obligations under the Agreement and

peacefully handed over the possession of the premises to the Corporate

Debtor. That despite the property being utilised by the Corporate Debtor

towards running of its business without let or hinderance from the

Operational Creditor, the Corporate Debtor started defaulting on making

timely payments towards the license fee as determined under the Agreement.

12. As a result of the default committed by the Corporate Debtor, the

Operational Creditor was constrained to issue notice dated 16.11.2018 for

non-payment of license fees and dues to the Corporate Debtor, whereby the

Operational Creditor called upon the Corporate Debtor to make payment of

the outstanding amount of Rs 99,85,540/- (rupees ninety-nine lakhs, eighty-

five thousand, five hundred and forty only).

13. Despite repeated acknowledgements, the Corporate Debtor failed to

clear the outstanding dues of the Operational Creditor. Resultantly, the

Operational Debtor was again constrained to issue notice dated 06.02.2019,

whereby the Operational Creditor called upon the Corporate Debtor to clear

Company Appeal (AT) (Insolvency) No. 1409 of 2024 5 of 32 the outstanding debt amounting to Rs 1,04,06,031/- (rupees one crore, four

lakhs, six thousand and thirty-one only).

14. Despite repeated assurances over WhatsApp, that the Corporate Debtor

would clear all dues and make timely payments in the future, the complete

outstanding dues of the Operational Creditor were never cleared. The

Corporate Debtor, made repeated requests for extension of time and would,

from time to time, make part payments of the outstanding debt, thereby

acknowledging the same. Pertinently, at no point in time did the Corporate

Debtor ever dispute the notices sent by the Operational Creditor or claim that

it was not liable to make the aforesaid payments.

15. On March 2020, a sum of Rs 52,50,000/- (rupees fifty-two lakhs and

fifty thousand only) remained outstanding and payable to the Operational

Creditor by the Corporate Debtor.

16. In March 2020, on account of COVID-19, and the resulting lockdowns,

the Corporate Debtor made representations to the Operational Creditor that

its business was badly affected and requested the Operational Creditor to

reduce the license fees. The Corporate Debtor further made representations

that if the license fee was reduced, they would not only clear past dues but

also make sure all future payments are made on time.

17. On the aforesaid clear understanding, the Operational Creditor

modified the license fee from time to time. It was further understood that in

Company Appeal (AT) (Insolvency) No. 1409 of 2024 6 of 32 case the Corporate Debtor defaulted on making payments, the Operational

Creditor would be entitled to claim the entire amount of the license fee in

terms of the Agreement.

18. Resultantly on the aforementioned understanding, the Operational

Creditor agreed to reduce the license fee to 50% from April 2020 to January

2021; and Rs 8 lakhs per month from February 2021 to March 2021; Rs 4

lakhs per month for April 2021 to May 2021; Rs 6 lakhs per month from June

2021 to 15.08.2021; Rs 8 lakhs from 15.08.2021 to March 2022; Rs 9 lakhs

from March 2022 till 30.11.2022 and Rs 13 lakhs for December 2022.

19. It is pertinent to point out that the Corporate Debtor again

acknowledged its dues by way of undertaking dated 29.08.2021, whereby the

Corporate Debtor agreed to clear its outstanding dues of Rs 1,18,82,400/-

(rupees one crore, eighteen lakhs, eighty-two thousand and four hundred

only) along with GST to the Operational Creditor on or before 31.03.2023 in

equal monthly instalments.

20. Again, despite giving an undertaking to clear all past dues, the

Corporate Debtor failed to clear its dues. Resultantly, the Operational

Creditor was again constrained to issue a notice dated 10.03.2023 whereby

the Corporate Debtor was put to notice and called upon to pay Rs 1.06 crores

along with 18% interest that continued to be outstanding. Most crucially, the

contents of this notice were duly acknowledged and admitted by the

Corporate Debtor.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 7 of 32

21. Despite the fact that the Corporate Debtor agreed to clear all dues of

the Operational Creditor on 10.03.2023, shockingly, in a surreptitious

manner the Corporate Debtor, through about 25 people illegally entered the

premises in the middle of the night on 27.03.2023 and removed all furniture

and fittings committing theft and causing damage to the premises amounting

to Rs 25 lakhs. The Operational Creditor has filed a complaint against the

Corporate Debtor and its directors vide Complaint dated 27.03.2023, and

reserves the right to pursue criminal remedy against the Corporate Debtor

and its directors.

22. Shockingly on 27.03.2023, at around 1:27 PM, the Corporate Debtor

sent an email to the Operational Creditor stating that the Corporate Debtor

had vacated the premises and 'removed loose furniture and other items that

belong to us.' The Corporate Debtor also stated that they had handed over the

keys to the reception staff of the Operational Creditors Hotel and would be

meeting with the Operational Creditor to 'close other formalities.' It is

pertinent to point out that the Corporate Debtor has till date not reached out

to the Operational Creditor, nor cleared the dues.

23. Since the Corporate Debtor failed to make the payment of outstanding

amounts on 31.03.2023 in terms of its undertakings dated 10.03.2023 and

29.08.2021, the Operational Creditor was constrained to send a notice under

Section 8 of the IBC. However, the Corporate Debtor did not respond to the

said notice. Since the Corporate Debtor failed to reply to the demand notice

Company Appeal (AT) (Insolvency) No. 1409 of 2024 8 of 32 sent in terms of Section 8 of the IBC, the Appellant was constrained to file CP

(IB)/483/MB/2023, an Application under Section 9 of the IBC to initiate CIRP

against the Corporate Debtor.

24. By way of Order dated 22.05.2024 the Adjudicating Authority

dismissed the Appellant's Application, despite recognising that the

Respondent defaulted for an amount of Rs 1,04,33,299/- (rupees one crore,

four lakhs, thirty-three thousand, two hundred and ninety-nine only). The

license fee of Rs 69,30,442/- (rupees sixty-nine lakhs, thirty thousand, four

hundred and forty-two only) was found to fall due and defaulted during the

prohibited period, in terms of Section 10A of the IBC finding that the same, it

was excluded. The Adjudicating Authority failed to consider that by way of

the 'OTS' letter dated 31.03.2023, the Corporate Debtor had not only admitted

that they were liable to pay a sum of Rs 1,06,00,000/- (rupees one crore and

six lakhs only) along with interest at the rate of 18% pa, but had also agreed

to pay the sum by 31.03.2023. Resultantly, the default occurred only on

31.03.2023 and not during the period prohibited under Section 10A of the

IBC. This exclusion led to the debt falling below the Rs 1 crore threshold.

However, established law states that if a default is committed prior to the

Section 10A period and continues into the Section 10A period, the initiation

of proceedings is not barred.

25. The Authority ought to have recognised that the 'one-time settlement'

(OTS) is a clear admission of debt by the Corporate Debtor and constitutes an

Company Appeal (AT) (Insolvency) No. 1409 of 2024 9 of 32 acknowledgment of debt as well as an understanding to pay the same at a

later date. The Authority should have noted that the Respondent

acknowledged the debt payable to the Appellant through letters/undertakings

dated 29.08.2021, 21.11.2022, and OTS dated 10.03.2023, including debt

incurred during the prohibition period, which is not barred by Section 10A.

In the light of the OTS dated 10.03.2023, the Respondent acknowledged the

outstanding debt, making the date of default 31.03.2023 and, thereby, no

part of the claim/debt is barred by Section 10A. The Adjudicating Authority

should have considered that it is well-established law that defaults during the

Section 10A period, continuing after it, make a CIRP Petition maintainable.

Continuous default means the debt does not fall under the 10A period. The

Authority erred by not appreciating that, in this case, the default is

continuous, occurring before, during, and after the prohibition period

imposed by Section 10A. Thus, the debt during this period is not barred by

Section 10A. The Authority erred in disallowing the interest on outstanding

license fees amounting to Rs 1,66,56,022/- (rupees one crore, sixty-six lakhs,

fifty-six thousand and twenty-two only) despite settled law that charging

interest is an actionable claim if properly agreed upon by the parties. Despite

noting that the license fee was reduced under an arrangement dated

10.03.2023, the Authority should have relied on this letter, recognising the

agreed upon 18% interest rate for delayed payments. The Authority erred in

noting that, in the event of a breach of settlement, the license fees would not

revert to those stipulated in the original L&L agreement dated 04.05.2017.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 10 of 32 The Authority should have applied the Doctrine of 'Accord and Satisfaction'

to the settlement dated 10.03.2023. The Authority failed to follow settled law

regarding the Doctrine of Accord and Satisfaction and erred in concluding

that the license fee reduction was not temporary, denying the Operational

Creditor's right to the entire license fee per the original agreement. The

Authority should have appreciated that, due to the failure to meet the accord's

conditions, the Appellant retained its rights under the original L&L

agreement.

Submissions of the Respondent:

26. The Respondent submits that the Impugned Order dated 22nd May

2024 is based on settled law, and the present Appeal preferred by the

Appellant needs to be outright rejected.

27. The Appellant's contention in the present Appeal that the letters/

correspondences dated 29th August 2021 and 10th March 2023 should be

considered as a one-time settlement and the default date for the purposes of

its Section 9 Application be considered as 31st March 2023 is baseless and

contrary to own pleaded case before the Hon'ble NCLT.

28. The letters dated 29th August 2021 and 10th March 2023 were issued

by the Appellant as reminders of allegedly unpaid license fees amounts. The

letters were never intended to be one-time settlement arrangement of any sort

whatsoever offered by the Appellant. None of the purported OTS letters

included any statement where the Appellant has provided any settlement

Company Appeal (AT) (Insolvency) No. 1409 of 2024 11 of 32 option to the Respondent, the letters simply were issued as reminders/follow

ups to the pending license fees amounts under the L&L agreement. The

Appellant had in fact submitted to the Hon'ble NCLT that its letter dated 10th

March 2023 was just a stopgap arrangement, thus, such stop-gap

arrangement cannot be considered to be an OTS of any sort whatsoever.

29. The Appellant in its Section 8 notice and in its Section 9 Application,

has made no reference to the amounts mentioned in purported OTS letters

and instead computed its default amount basis the terms of the L&L

agreement. Under the L&L agreement's clause VI (D), the license fees was to

be paid by the Respondent to the Appellant on a monthly basis. Thus, the

default date for the license fees was calculated on monthly basis by the

Appellant itself when it claimed the defaulted amount from the Respondent.

The Hon'ble NCLT in its Order has correctly relied on this factual position to

decide that a sum of Rs 69,30,442/- (rupees sixty-nine thousand, thirty

thousand, four hundred and forty-two only) became due only during the

prohibited period as the obligation to pay license fees arises every month

including during the prohibited period.

30. The Appellant's Section 9 Application was based on the L&L agreement,

and thus the same was correctly rejected by the Hon'ble NCLT, Mumbai, for

the same being based on an inflated default amount filed with the sole

malafide intent of meeting the threshold amount required to initiate

proceedings under the IBC against the Respondent.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 12 of 32

31. Furthermore, the law has already been settled by this Tribunal in SLB

Welfare Assn. vs PSA IMPEX (P) Ltd (2022 SCC OnLine NCLAT 1584), that

the date of default does not change basis an acknowledgement. The decision

of Rubra Buildwell Constructions Pvt Ltd vs PSA Impex (Company

Petition No. IB-11/ND/2022) relied upon by the Appellant in its Appeal has

been overruled by this Tribunal in SLB Welfare Assn. vs PSA IMPEX (P) Ltd.

32. As per the provisions of Section 10A of IBC, no Application for initiation

of Corporate Insolvency Resolution Process ("CIRP") under Sections 7, 9 or

10, can be filed for any debt arising during the period of 25th March 2020 to

25th March 2021. The Appellant has segregated the dues payable by the

Respondent on a yearly basis in his computation of the default amount for

the year 2020-2021. Therefore, the Appellant ought to have excluded the

amounts that fell due for the 'prohibited period' under Section 10A of IBC

from its Section 8 notice as well as from the Section 9 Application. The

Appellant, in its Section 8 notice and in its Section 9 Application, has

computed its default amount basis the terms of the L&L agreement. Under

the L&L agreement's clause VI (D), the license fees was to be paid by the

Respondent to the Appellant on monthly basis. Thus, the default date for the

license fees was calculated on monthly basis by the Appellant itself when it

claimed the defaulted amount from the Respondent. The Hon'ble NCLT in its

Order has already correctly distinguished the case of Narayan Mangal vs

Vatsalya Builders & Developers Pvt Ltd (CA AT Ins No. 294 of 2023),

which was relied upon by the Appellant by correctly applying the factual

Company Appeal (AT) (Insolvency) No. 1409 of 2024 13 of 32 position of the matter to decide that a sum of Rs 69,30,442/- (rupees sixty-

nine lakhs, thirty thousand, four hundred and forty-two only) became due

only during the prohibited period as the obligation to pay license fees arises

every month including during the prohibited period.

33. The Hon'ble NCLAT has also in the case of Bhavit Sheth vs Madan

Bajrang Lal Vaishnawa and Anr (CA AT Ins No 328 of 2024), wherein

license fees payment under a L&L agreement was in question clearly held that

since the claim of operation debt fell within 10A period no Application ever

could have been filed for the default of the lease rental during the 10A period.

34. The Appellant in its computation of default has arbitrarily charged

interest on the total defaulted amount at the rate of 18% pa, which in the

absence of any clause within the L&L agreement could not have been included

in the computation of default by the Appellant. It has been expressly

established in the case of Krishna Enterprises vs Gammon India Ltd (2018

SCC Online NCLAT 360) that 'claim' includes 'debt'. However, 'debt' cannot

be said to include 'interest' in all cases. It shall include interest only when the

same has been agreed by the parties, otherwise, only the principal amount

shall fall within the definition of 'claim' for the purpose of calculating default

amount under Section 4. Despite there being no provision for the Application

of interest in the L&L agreement, the Appellant in its Section 8 notice and

Section 9 Application has claimed interest in its computation on the license

fees as set out in the L&L agreement. The Appellant now, as an afterthought,

Company Appeal (AT) (Insolvency) No. 1409 of 2024 14 of 32 claims that the interest will be applicable on the amount as agreed in the

letters which it claims to be purported OTS. Without prejudice to the

contentions above, even if the purported OTS letters are taken into

consideration to calculate interest over the so-called defaulted amount, the

letter fails to set out to the manner in which the interest was agreed to be

calculated, and/or agreed default date for the calculation of interest. Thus, it

cannot be considered as an agreement between the parties for payment of

interest.

35. It is further submitted that the Appellant has failed to provide a proper

computation of interest considering purported OTS letters. The computation

of interest provided by the Appellant as part of Annexure D of its Section 9

Application was thus completely incorrect, and no proper and actual revised

computation of interest has been put forth by the Appellant.

36. Thus, the Hon'ble NCLT, after having duly considered the purported

OTS letters, has correctly excluded the wrongfully included interest amount

of Rs 1,66,56,022/- (rupees one crore, sixty-six lakhs, fifty-six thousand and

twenty-two only) from the default amount claimed by the Appellant.

37. The Hon'ble NCLT has correctly held that the Appellant had included

wrong license fees amount included by it in the Section 9 Petition and has

gone ahead and calculated the actual and correct license fees amount which

was also admitted by the Appellant during the course of the hearing. The

Hon'ble NCLT correctly reached the conclusion that the license fees claimed

Company Appeal (AT) (Insolvency) No. 1409 of 2024 15 of 32 by the Appellant were inflated as the defaulted unpaid license fees amount

which the Appellant could have claimed was Rs 1,04,33,299/- (rupees one

crore, four lakhs, thirty-three thousand, two hundred and ninety-nine only)

and not Rs 5,22,95,571/- (rupees five crores, twenty-two lakhs, ninety-five

thousand, five hundred and seventy-one only). The Hon'ble NCLT

incorporated a thorough analysis and computation table in its Order setting

out the correct computation of the maximum possible defaulted unpaid

license fee amount.

38. The Appellant in its computation of default before the Hon'ble NCLT

had included an arbitrary and unsubstantiated claim of 'other expenses

reimbursement receivable from Brewcrafts Microbrewing Pvt Ltd as on

31.03.2023', amounting to Rs 47,01,629/- (rupees forty-seven lakhs, one

thousand six hundred and twenty-nine only). The Hon'ble NCLT in its

Order has considered the veracity of such arbitrary reimbursement amounts

and considered them to be without any actual basis and, thus, under a

detailed analysis held that the Appellant had failed to establish its claim for

the reimbursement of expenses.

39. The Appellant had wrongfully inflated its claim by including so-called

other expenses/reimbursements, interest, wrongfully claimed license fees in

the total defaulted amount which was mutually revised (as admitted by the

Appellant), and license fees that fell due during the prohibited period of

Section 10A of IBC. By means of these intentional wrongful additions to the

Company Appeal (AT) (Insolvency) No. 1409 of 2024 16 of 32 default amount, the Appellant had attempted to meet the required threshold

for the maintainability of its Petition. The Appellant had indulged in

suppression of material facts and had included interest in order to bring

subject claim under the threshold of IBC, and to arm twist the Respondent to

pay the claim as made.

40. Under the thorough analysis of the submissions raised by both the

parties before the Hon'ble NCLT, the Tribunal rightly held that the sum of Rs

5,22,95,571/- (rupees five crores, twenty-two lakhs, ninety-five thousand,

five hundred and seventy-one only), as claimed by the Appellant to have

defaulted sum to be wrong and inflated, and thus correctly dismissed the

Section 9 Application.

41. The Tribunal had correctly relied on the revised actual agreed rental

amounts which was agreed between the parties for the period of Covid 19 -

which the Appellant in its computation of default in the Section 9 Application

had failed to take into account of which led to an outstanding license to be

Rs 1,04,33,299/- (rupees one crore, four lakhs, thirty-three thousand, two

hundred and ninety-nine only); the Tribunal further went on to correctly

exclude the amount of Rs 1,66,56,022/- (rupees one crore, sixty-six lakhs,

fifty-six thousand and twenty-two only) which was wrongly claimed by the

Appellant towards interest, the amount of Rs 47,01,629/- (rupees forty-seven

lakhs, one thousand, six hundred and twenty-nine only) towards arbitrary

and unsubstantiated reimbursements, and an amount of Rs 69,30,442/-

Company Appeal (AT) (Insolvency) No. 1409 of 2024 17 of 32 (rupees sixty-nine lakhs, thirty thousand, four hundred and forty-two only)

was excluded which fell due during the 'prohibited period' under Section 10A

of IBC. Consequentially, the total amount of default that the Appellant has

against the Respondent stands at Rs 35,02,857/- (rupees thirty-five lakhs,

two thousand, eight hundred and fifty-seven only), which is below the

threshold limit of INR 1 crore prescribed under Section 4 of IBC, making the

Section 9 Petition filed by the Appellant not maintainable.

42. It is submitted that considering the above submissions, no notice needs

to be issued for the instant Appeal and the same is fit to be rejected with

imposition of exemplary costs.

Analysis:

43. Heard the counsel of the Appellant and also perused all the records.

44. In nutshell, this Appeal arises from the Order of the National Company

Law Tribunal (NCLT), dated May 22, 2024, dismissing the Appellant's

Application under Section 9 of the Insolvency and Bankruptcy Code (IBC),

2016. The Appellant had sought to initiate the Corporate Insolvency

Resolution Process (CIRP) against the Respondent (Corporate Debtor). The

NCLT held that a portion of the debt claimed by the Appellant fell within the

period protected by Section 10A of the IBC and that the remaining debt did

not meet the mandatory threshold of Rs 1 crore for initiating CIRP. This

Appeal challenges the findings of the NCLT and seeks to admit the Corporate

Debtor into CIRP.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 18 of 32

45. The Appellant had entered into a L&L agreement with the Respondent

on May 4, 2017. Over time, the Respondent defaulted on its payment

obligations under this agreement, and the Appellant sent several notices

demanding payment of overdue amounts. On February 6, 2019, the Appellant

sent a demand notice for Rs 1.04 crores.

46. The Appellant filed an Application under Section 9 of the IBC, but the

NCLT rejected the Application, holding that part of the debt fell within the

Section 10A period, thus disqualifying the total debt from meeting the Rs 1

crore threshold.

47. The Appellant has raised several arguments challenging the NCLT's

decision:

a) The NCLT wrongly excluded part of the defaulted amount that was

covered by Section 10A, leading to the incorrect conclusion that the

total debt did not meet the Rs 1 crore threshold.

b) The parties had entered into agreements that extended the payment

obligations until after the Section 10A period. Therefore, the

subsequent default occurred outside the scope of Section 10A.

c) The legislative intent behind Section 10A was to provide temporary

relief, not to allow companies to avoid paying their debts indefinitely.

The Respondent's acknowledgment of the outstanding amount of Rs

1.06 crores as of March 10, 2023, confirms that the default was not

frozen under Section 10A.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 19 of 32

48. The Respondent has defended the NCLT's Order on the following

grounds:

a) The Appellant's claim was inflated, and the NCLT rightly

recalculated the actual unpaid amount, which fell below the Rs 1

crore threshold.

b) A significant portion of the default, amounting to Rs 69,30,442/-

(rupees sixty-nine lakhs, thirty thousand, four hundred and forty-

two only) occurred during the Section 10A period, which cannot be

included in the calculation of default for initiating CIRP.

c) The Appellant included interest at an inflated rate of 18% pa, despite

no agreement to this effect in the L&L agreement, further inflating

the claimed amount.

d) The OTS agreement did not alter the date of default, and the default

during the Section 10A period remained protected under law.

49. With respect to the interest claimed by the Appellant, the matter has

been analysed by the Adjudicating Authority, and which is extracted as

follows:

"13. We now turn our attention to the matter of interest. The Operational Creditor asserts a claim of Rs 1,66,56,022/- against the Corporate Debtor, representing interest at a rate of 18% per annum on the outstanding license fees. Upon reviewing the registered Leave and License Agreement dated May 4th, 2017, submitted by the Operational Creditor, it is evident that no provision exists within the agreement for the imposition of interest on delayed payments. Furthermore, there is no other

Company Appeal (AT) (Insolvency) No. 1409 of 2024 20 of 32 agreement/understanding on record demonstrating mutual consent between the parties regarding the imposition of interest by the Corporate Debtor in the event of non-payment or delayed payment of license fees. The Hon'ble NCLAT had observed in Krishna Enterprises vs Gammon India Ltd (Citation: 2018 SCC Online NCLAT 360 at Para 4) as follows:

"4. It is submitted that the 'debt' includes the interest, but such submission cannot be accepted in deciding all claims. If in terms of any agreement, interest is payable to the Operational or Financial Creditor then debt will include interest, otherwise, the principal amount is to be treated as the debt which is the liability in respect of the claim which can be made from the Corporate Debtor."

Therefore, in the light of observations made by the Hon'ble NCLAT in the above-mentioned case and in the absence of any contractual agreement in the given case pertaining to interest on outstanding license fees, the sum of Rs 1,66,56,022/-, claimed as interest, cannot be considered a valid component of the claim."

(emphasis supplied)

50. Reliance is placed by the Respondent on Krishna Enterprises (supra)

in which it was held that 'debt' cannot be said to include 'interest' in all cases.

It shall include interest only when the same has been agreed by the parties,

otherwise, only the principal amount shall fall within the definition of 'claim'

for the purpose of calculating default amount. Despite there being no

provision for the Application of interest in the L&L agreement, the Appellant

in its Section 8 notice and Section 9 Application claimed interest in its

computation on the license fees as set out in the L&L agreement. We do not

find any infirmity with the above analysis of the Adjudicating Authority and

Company Appeal (AT) (Insolvency) No. 1409 of 2024 21 of 32 do not find merit in the claim of the Appellant for the interest of Rs

1,66,56,022 (rupees one crore, sixty-six lakhs, fifty-six thousand and twenty-

two only).

51. Now we move on to examine the applicability of Section 10A of IBC in

the facts of the instant case. Section 10A of the IBC, introduced to provide

relief to businesses affected by the COVID-19 pandemic, prohibits the

initiation of CIRP for defaults that occurred between March 25, 2020, and

March 25, 2021. Section 10A of the Code provides as follows:

"Section 10A: Suspension of initiation of corporate insolvency resolution process.

10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation. - For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020."

(emphasis supplied)

52. Applicability of the prohibited period of 10A has been clearly noted in

the findings by the Adjudicating Authority and is extracted as follows:

"14. Another contention raised by the Corporate Debtor is that the claim of the Operational Creditor includes the period prohibited under Section 10A of the Code and in any event, it is less than Rs1 crore, which is the minimum threshold for initiation of any action before this Tribunal. On the other hand, the Applicant submitted Company Appeal (AT) (Insolvency) No. 1409 of 2024 22 of 32 that section 10-A will not apply to the present case as the date of default stated in the application is 31st March 2023 which does not fall within the period covered u/s 10A of the Code. The Counsel further contends that Section 10A of the Code has no application when the default occurred before the period mentioned in Section 10A and the same is continued even after the Prohibited Period. To buttress the above argument, the Counsel for the Applicant has relied upon the judgment of Hon'ble NCLAT in Narayan Mangal vs Vatsalya Builders & Developers Pvt Ltd; Company Appeal (AT) (Ins.) No. 294 of 2023(supra) wherein it was held that if the default is committed prior to the Section 10A period and continues, there is no prohibition in initiating proceedings under Section 7. It is however noticed that in the aforesaid case, the default occurred prior to the Section 10A period and interest was only charged during the Prohibited Period, but in the present case, the obligation to pay the license fee arises every month including during the Prohibited Period.

Thus, the decision of Narayan Mangal (supra) is not applicable in the facts of the present case. The objective of Section 10A of the Code was to protect a corporate debtor from the filing of any insolvency application against it for any default committed during the period when Covid pandemic was prevailing and the records reveal that the business of the Corporate Debtor suffered due to Covid Pandemic and major defaults are relating to the license fee fallen due during the lockdown period. This fact was even acknowledged by the Applicant resulting in the reduction of license fees. Considering the above, the Corporate Debtor is entitled to seek exclusion of the license fee which fell due and defaulted by the Corporate Debtor during the Prohibited Period, for the purpose of this Petition. It is noticed that the license fee payable for the Prohibited Period was Rs 97,07,042/- and the Corporate Debtor paid an amount of Rs 27,76,600/- during the period. Thus, the defaulted amount during the Prohibited Period amounts to Rs 69,30,442/-."

(Emphasis supplied)

Company Appeal (AT) (Insolvency) No. 1409 of 2024 23 of 32

53. Reliance is also placed by the Respondent on this Tribunal's judgement

in the case of Bhavit Sheth (supra), wherein the license fees payment under

an L&L agreement was in question and it was held that since the claim of

operation debt fell within 10A period, no Application ever could have been

filed for the default of the lease rental during the 10A period.

54. The Adjudicating Authority in our view correctly interpreted that any

default falling within this period cannot form the basis for initiating CIRP. In

this case, a portion of the default claimed by the Appellant clearly falls within

the protected period under Section 10A. We find that the Corporate Debtor is

entitled to seek exclusion of the license fee of Rs 69,30,442/- (rupees sixty-

nine lakhs, thirty thousand, four hundred and forty-two only), which fell due

and defaulted by the Corporate Debtor during the prohibited period.

55. The Appellant also argues that the subsequent agreements, including

the OTS agreement, shifted the date of default to March 31, 2023. Thus, the

default falls outside the Section 10A period. The Appellant contends that the

letters/correspondence dated 29.08.2021 (@96-97 APB) and 10.03.2023

(@98-99 APB) be considered as a one-time settlement and due to this, the

default date for the purposes of Section 9 Application gets shifted to

31.03.2023. Per contra, the Respondent contends that these are just

reminders of unpaid licence fees amount and they were never intended to be

one-time settlement arrangements of any sort. It was just a stop gap

arrangement and cannot be considered as OTS.

Company Appeal (AT) (Insolvency) No. 1409 of 2024 24 of 32

56. We have gone through these letters from @ 96-99 APB and we do not

find them to be one-time settlement arrangements by any stretch of the

imagination. It has been held in SLB Welfare Assn. (supra) that the date of

default and acknowledgment are two different events. The date of default is

not dependent on the date of acknowledgement. The Appellant has relied

upon the purported OTS letters dated 29.08.2021 and 10.03.2023, which

attempt to change the date of default. In fact, the repayment is governed by

L&L agreement. OTS agreements and rent reductions due to Covid, only

reflect a temporary modification of payment terms, but they do not extinguish

the original default that occurred during the Section 10A period. The purpose

of Section 10A was to prevent companies from being pushed into insolvency

due to temporary financial distress caused by the COVID-19 pandemic. The

Appellant's interpretation that subsequent agreements should nullify the

protection offered by Section 10A would undermine the legislative intent and

open the door for Creditors to circumvent the protections offered by law. The

Tribunal cannot accept an interpretation that erodes the protection that

Section 10A was specifically designed to offer. The argument of the Appellant

that if a default is committed prior to the Section 10A period and continues

into the Section 10A period, the initiation of proceedings is not barred and is

applicable in the instant case. But the facts of the case as discussed in the

case speak otherwise. This is a gross misrepresentation of the facts.

57. It is argued by the Appellant that the default is continuous, occurring

before, during and after the prohibited period under Section 10A and

Company Appeal (AT) (Insolvency) No. 1409 of 2024 25 of 32 therefore, the CIRP petition is maintainable. Looking at the facts in the case,

we find that the date of default is proposed to be changed to 31.03.2023 as

per the purported settlement agreement vide letters dated 29.08.2021 and

10.03.2023 which shifts the date of default for the purposes of Section 9 to

31.03.2023. As has been noted by us in other parts of this judgment, the date

of default could not have been shifted and part default was occurring in the

Section 10A period and the total default amount which could have been

considered is less than the threshold amount. It noticed by us that

continuous default is being artificially created by inflating claims, omitting to

take into account the revised license fees during the COVID period, arbitrary

and unsubstantiated claim of 'other expenses reimbursement and incorrectly

claiming interest on default in payments. Therefore, the argument that it is a

continuous default cannot be accepted.

58. We further note that the Appellant, in its calculation of the default

amount forming part of its Petition, has omitted to take into account the

revised license fees amount agreed to by the parties after the onset of

lockdown caused by the COVID-19 pandemic. During the lockdown period,

the parties made mutual reductions and adjustments to the license fees

payable under the L&L agreement. This has been recorded in the Appellant's

letter dated 10th March 2023. However, the Appellant has failed to consider

those revised and reduced license fee amounts when computing its defaulted

sum in the Section 9 Petition. This has been duly noted by the Adjudicating

Company Appeal (AT) (Insolvency) No. 1409 of 2024 26 of 32 Authority in its findings while recalculating the amounts of licence fee payable

by the Respondent. We do not find any infirmity in these calculations.

59. We also note that the Appellant in its computation of default had

included an arbitrary and unsubstantiated claim of 'other expenses

reimbursement receivable from Brewcrafts Microbrewing Pvt Ltd as on

31.03.2023', amounting to Rs 47,01,629/- (rupees forty-seven lakhs, one

thousand six hundred and twenty-nine only). The Adjudicating Authority

has considered the veracity of such arbitrary reimbursement amounts and

found them to be without any actual basis and, thus, under a detailed

analysis held that the Appellant had failed to establish its claim for the

reimbursement of expenses. The relevant extract is as follows:

"In accordance with the recitals of the registered Leave and License Agreement executed between the involved parties on May 4th, 2017, the licensee (i.e. the Corporate Debtor) assumed the responsibility to cover and settle all charges related to electricity consumption, water, and other utilities within the licensed premises. This obligation is extended to promptly paying the bills submitted by the licensor on or before their due date or within three days of bill receipt, whichever occurred earlier. It is duly noted that the Applicant provided debit notes as evidence for reimbursement of certain charges, as outlined in the preceding table, through a rejoinder. However, there exists no record of electricity, water, or drainage bills, along with corresponding payment receipts, indicating that these bills were indeed settled by the Operational Creditor and subsequently claimed for reimbursement from the Corporate Debtor. The Corporate Debtor, in its reply affidavit, explicitly denied any outstanding bills of such nature having been paid by the Applicant.

Furthermore, it strains credulity to accept the contention that these bills remained unpaid since the financial year 2017-18 and that the Operational Creditor consistently assumed responsibility for their payment throughout the license period, seeking reimbursement

Company Appeal (AT) (Insolvency) No. 1409 of 2024 27 of 32 from the Corporate Debtor, despite the explicit terms of the Leave and license Agreement dictating the Corporate Debtor's obligation to cover such expenses. Additionally, there exists no evidence to demonstrate that the debit notes annexed to the Applicant's affidavit in- rejoinder were duly served upon the Corporate Debtor. In the present case, the Applicant has invoked debit notes to claim reimbursement for expenses, yet has failed to furnish substantiating evidence establishing that said expenses were indeed incurred by the Applicant. Consequently, based on the aforementioned reasons, we find that the claim for reimbursement of expenses as asserted by the Applicant/Operational Creditor has not been established/substantiated and thus, it cannot be considered for the purpose of determining the amount of outstanding operational debt in default by the Corporate Debtor for the purpose of computing the threshold limit."

(emphasis supplied)

Looking at the analysis by the Adjudicating Authority we don't find any

infirmity in this exclusion of the claim of other expenses.

60. For clarity, the above analyses are summarised as follows:

S. Description Amount in Rs. Explanation No. 1. PARTICULARS OF Rs 5,22,95,571/- Rs OPERATIONAL DEBT with date of 3,56,39,549/- As per Part IV of Form 5 default being 31st along with application by Operational March 2023 interest @ 18% Creditor to initiate Corporate p.a. as on Insolvency Resolution Process 19.04.2023 under chapter II of part II of the being Rs Code. (Under Rule 6 of the 1,66,56,022/- Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016)

2. Total license fees payable (after 7,96,79,522/- @ 66 APB reducing during Covid period as per mutual agreement)

3. Security (to be deducted) 39,65,000/-

4. Rent Paid by the CD 6,52,81,223/- (to be deducted)

Company Appeal (AT) (Insolvency) No. 1409 of 2024 28 of 32 5. Outstanding License fees [2-3- 1,04,33,299/- 4]

How was the Appellant's claims treated by the Adjudicating Authority?

6. Interest @ 18% 1,66,56,022/- No such prior agreement for interest @18% for delayed payments. Held to be wrongly claimed.

7. Other Expenses 47,01,629/- Arbitrary and unsubstantiated reimbursements and were rejected by the AA and we concur.

8. Amount payable under 10A 69,30,442/- Was excluded as period fell due during the "prohibited period" under Section 10A of IBC

9. Total license payable [5-8] 35,02,857 Less than threshold of Rs 1 crore.

61. Overall, we find that Adjudicating Authority has correctly excluded the

following amounts:

o Rs 1,66,56,022/- (rupees one crore, sixty-six lakhs, fifty-six thousand and twenty-two only), which was wrongly claimed by the Appellant towards interest,

o Rs 47,01,629/- (rupees forty-seven lakhs, one thousand, six hundred and twenty-nine only) towards arbitrary and unsubstantiated reimbursements,

Company Appeal (AT) (Insolvency) No. 1409 of 2024 29 of 32 o Rs 69,30,442/- (rupees sixty-nine lakhs, thirty thousand, four hundred and forty-two only) was excluded which fell due during the 'prohibited period' under Section 10A of IBC.

62. After examining the facts of the case, it is noted by the Adjudicating

Authority that the outstanding license fees should have been Rs

1,04,33,299/- (rupees one crore, four lakhs, thirty-three thousand, two

hundred and ninety-nine only), which gets further reduced by Rs 69,30,442/-

which fell due during the "prohibited period" under the Section 10A of IBC.

63. Consequentially, the total amount of outstanding default that the

Appellant has against the Respondent stands at Rs 35,02,857/- (rupees

thirty-five lakhs, two thousand, eight hundred and fifty-seven only), which is

below the threshold limit of Rs 1 crore prescribed under Section 4 of IBC,

making the Section 9 Petition filed by the Appellant not maintainable. The

IBC mandates that for a Corporate Debtor to be admitted into CIRP under

Section 9, the defaulted amount must meet the threshold of Rs 1 crore. In

recalculating the actual unpaid amount, excluding the portion protected

under Section 10A and the improperly calculated interest and

reimbursements, the NCLT correctly determined that the outstanding default

amounted to Rs 35,02,857/- (rupees thirty-five lakhs, two thousand, eight

hundred and fifty-seven only), far below the threshold requirement. This

finding is legally sound and consistent with established principles of

insolvency law.

64. In conclusion we find that:

Company Appeal (AT) (Insolvency) No. 1409 of 2024 30 of 32

a) A significant portion of the default, amounting to Rs 69,30,442/-

(rupees sixty-nine lakhs, thirty thousand, four hundred and forty-

two only) occurred during the Section 10A period, which cannot be

included in the calculation of default for initiating CIRP.

b) The Appellant included interest at an inflated rate of 18% pa, despite

no agreement to this effect in the L&L agreement, further inflating

the claimed amount.

c) The OTS agreement did not alter the date of default, and the default

during the Section 10A period remained protected under law.

d) The Appellant's claim was inflated, and the Adjudicating Authority

rightly recalculated the actual unpaid amount, which fell below the

Rs 1 crore threshold.

65. We find that the Appellant's inclusion of inflated interest rates,

unsubstantiated reimbursements, and amounts that fall under the Section

10A period demonstrates a deliberate attempt to manipulate the figures to

meet the threshold for initiating CIRP. This constitutes an abuse of the

insolvency process, and the Adjudicating Authority was right in dismissing

the Section 9 Petition.

Conclusion

66. For the above-noted reasons, this Tribunal finds that the Adjudicating

Authority correctly interpreted and applied Section 10A of the IBC and rightly

Company Appeal (AT) (Insolvency) No. 1409 of 2024 31 of 32 concluded that the outstanding default did not meet the Rs 1 crore threshold.

We, therefore, find the Appeal to be devoid of merit and deserves to be

dismissed.

Order

67. The Appeal is hereby dismissed. All related IAs pending, if any, are

closed. No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Arun Baroka] Member (Technical) New Delhi.

September 25, 2024.

pawan

Company Appeal (AT) (Insolvency) No. 1409 of 2024 32 of 32