NCLAT Bars Insolvency Action Against Zee Entertainment for DSRA Default Covered by IBC Section 10A

I. Introduction

In a pivotal judgment dated 07 April 2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, upheld the NCLT Mumbai’s rejection of a Section 7 application filed by IDBI Bank Ltd. against Zee Entertainment Enterprises Ltd., holding it to be barred under Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC). The case involved an alleged default in maintaining a Debt Service Reserve Account (DSRA) guaranteed by Zee in respect of facilities extended to Siti Networks Ltd..

This decision reinforces the protective intent of Section 10A, introduced as a pandemic-time relief to shield corporate debtors from insolvency for defaults committed during a specific moratorium period.

II. Factual Background

• IDBI Bank extended working capital and term loan facilities to Siti Networks Ltd., with Zee Entertainment executing a DSRA guarantee dated 03.08.2012.
  
• The borrower’s account was classified as NPA on 29.12.2019.
  
• A recall notice was issued to the borrower on 18.02.2021, followed by a demand notice to Zee on 05.03.2021, for ₹61.97 crore.
  
• The Section 7 IBC application was filed on 13.12.2023, alleging continuous default by Zee in replenishing the DSRA.
  

Zee moved an application under Section 10A, arguing that the invocation of guarantee and corresponding default occurred during the IBC moratorium period (25.03.2020–25.03.2021), thus barring initiation of CIRP.

III. Legal Issues for Consideration

1. Whether the invocation of DSRA guarantee by IDBI Bank on 05.03.2021 constitutes a default during the Section 10A moratorium period?
   
2. Whether Section 7 of the IBC can be invoked against a corporate guarantor based on such a default?
   
3. Whether continuous default post-10A permits a fresh cause of action?
   

IV. Submissions by the Parties

Appellant – IDBI Bank Ltd.

• Argued that the default in maintaining DSRA occurred as early as 30.09.2019, and thus precedes the 10A period.
  
• Submitted that non-replenishment continued even after the moratorium, implying a continuing default.
  
• Claimed that under Clause 25 of the guarantee, notice to the borrower was sufficient to bind the guarantor.
  

Respondent – Zee Entertainment Enterprises Ltd.

• Asserted that liability under a demand guarantee arises only upon invocation.
  
• As the first invocation of the guarantee was on 05.03.2021 (within 10A period), no actionable default existed before that date.
  
• Cited multiple clauses (Clauses 7, 9, 10, and 11) from the DSRA guarantee that required explicit invocation to trigger liability.
  
• Emphasized that no demand was made on Zee prior to 05.03.2021, and thus the default—if any—fell within the prohibited period.

V. Reasoning and Observations of the Tribunal

1. Nature of Guarantee and Requirement of Invocation
   NCLAT analyzed the guarantee agreement and concluded that Zee’s obligation was to replenish the DSRA upon specific demand from IDBI. Clauses 7 to 11 underscored the need for a formal invocation.
   • The Tribunal held that default under a guarantee accrues only upon valid invocation.
     
   • Mere existence of debt (i.e., borrower’s failure) does not constitute default under Section 3(12) of IBC without non-payment by the corporate debtor post-demand.
2. Section 10A Protection Applies
   IDBI’s own application acknowledged 05.03.2021 as the invocation date. This fell squarely within the 10A moratorium period (25.03.2020–25.03.2021).
   • Section 10A prohibits filing of Section 7 applications for defaults occurring during the moratorium.
     
   • The Tribunal cited its prior decisions (including Pooja Ramesh Singh v. SBI and Mudhit Madanlal Gupta v. Supreme Constructions) holding that guarantee-based defaults are pegged to date of invocation.
3. Clause 25 Does Not Override Specific Clauses
   Clause 25, which stated that notice to the borrower suffices as notice to guarantor, was held to be general in nature and cannot override explicit demand-based clauses. Interpretation must harmonize all clauses.
4. No Allegation of Post-10A Default in Application
   Though IDBI argued that Zee remained in default after 25.03.2021, its Section 7 application was solely based on the 05.03.2021 invocation. Hence, the application was barred.

VI. Decision

The NCLAT upheld the NCLT’s dismissal of the Section 7 application as barred under Section 10A of the IBC. However, it granted liberty to IDBI Bank to initiate fresh proceedings based on any default post-24.03.2021, if so advised.

“Default on the part of the guarantor can only arise when guarantee is invoked… Application under Section 7 was not based on any default subsequent to 10A period.”
– Para 34, Judgment

VII. Conclusion

This ruling emphasizes the jurisprudential distinction between existence of debt and actionable default under IBC. In cases involving on-demand guarantees, default for the purposes of Section 7 accrues only upon valid invocation. The Tribunal’s meticulous clause-wise interpretation reaffirms the need for contractual clarity and procedural precision in insolvency matters.

While the financial creditor may still pursue relief for post-10A defaults, this judgment is a stern reminder that mischaracterization of default timelines can derail recovery efforts under the Code.

FAQs:

1. What is Section 10A of the Insolvency and Bankruptcy Code, 2016?

Section 10A, introduced in 2020, provides temporary protection from insolvency proceedings for defaults committed during the COVID-19-related economic disruption. Specifically, it bars the filing of Section 7, 9, and 10 applications for any default occurring between 25 March 2020 and 25 March 2021.

2. Why was Zee Entertainment not held liable under its DSRA guarantee to IDBI Bank?

Zee’s liability as a corporate guarantor under the DSRA arose only upon valid invocation of the guarantee. Since the first demand notice was issued on 05.03.2021, the NCLAT held that default—if any—fell squarely within the 10A moratorium period, and hence no CIRP could be initiated based on that default.

3. Can a continuing default after 25 March 2021 create a fresh cause of action under IBC?

Yes, defaults occurring after 25.03.2021 are not protected by Section 10A. However, the Tribunal noted that IDBI’s Section 7 application was solely based on the 05.03.2021 invocation, and made no specific allegations of a fresh default post-10A. Therefore, no new cause of action was established in this case.

4. Does a guarantee automatically trigger liability when the borrower defaults?

No. In this case, the Tribunal clarified that under the terms of the DSRA guarantee, liability of the guarantor arises only upon invocation. Mere borrower default or NPA classification does not amount to actionable default by the guarantor under Section 3(12) of the IBC.

5. What did the Tribunal say about Clause 25 of the DSRA guarantee?

Clause 25, which stated that notice to the borrower shall be deemed notice to the guarantor, was held to be a general provision. It could not override the specific requirement for formal invocation under Clauses 7 to 11. The NCLAT emphasized harmonious construction of the guarantee terms.

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