Cure period in loan contract? It won't save you from CIRP.

When a Loan Went Bad: The NPA Date That Decided a CIRP

State Bank of India sanctioned a loan to Jabalpur MSW Pvt. Ltd. for a waste-to-energy plant. The company fell behind on loan repayments. SBI classified the account as a Non-Performing Asset on 27 September 2019. Then came the pandemic, and with it, Section 10A of the Insolvency and Bankruptcy Code — a moratorium that barred fresh insolvency petitions between March and December 2020. The company’s director, Milind Kashiram Jadhav, argued that the real default happened only after SBI issued a loan recall notice on 11 August 2020, which fell squarely within the Section 10A period. If he was right, the entire CIRP was illegal. If he was wrong, his company would be handed over to a resolution professional. The National Company Law Appellate Tribunal had to decide one thing: what counts as the date of default under the IBC?

The Loan That Turned Sour

Jabalpur MSW Pvt. Ltd. borrowed from SBI for a waste-to-energy project in Madhya Pradesh. The company made some payments, then stopped. By 27 September 2019, the account had been in default for 90 days. SBI classified it as an NPA.

That classification triggered a cascade of consequences. Under the RBI’s prudential norms, an NPA means the borrower has stopped generating income for the bank. But under the IBC, the NPA date carries a different kind of weight: it can be the starting gun for a corporate insolvency resolution process.

SBI didn’t immediately file a Section 7 application. Instead, it issued a loan recall notice on 11 August 2020, demanding full repayment within seven days. When the company didn’t pay, SBI filed its Section 7 petition on 30 March 2021, seeking to initiate CIRP against the corporate debtor. The application claimed a default, with the NPA date of 27 September 2019 as the date of default.

The Section 10A Trap

The company’s director, Milind Kashiram Jadhav, saw an opening. Section 10A of the IBC, inserted by the COVID-19 pandemic regulations, barred the initiation of CIRP for any default occurring on or after 25 March 2020 for six months (later extended to 24 December 2020). If the default had occurred on 18 August 2020 — the date the loan recall notice expired — the Section 7 application would be barred.

The argument was clever. The sanction letter contained a cure period clause. It said the borrower had 30 days to cure an event of default after receiving notice. The loan recall notice was issued on 11 August 2020. The 30-day cure period would have ended around 18 August 2020. That, the director argued, was the real date of default. And 18 August 2020 fell within the Section 10A moratorium.

The NCLT, New Delhi Bench-VI, didn’t buy it. On 14 September 2023, it admitted SBI’s Section 7 application, treating 27 September 2019 as the date of default. The director appealed to the NCLAT.

What the Appellate Tribunal Saw

Justice Arun Baroka, sitting as a single-member bench of the NCLAT, examined the record. The key question was simple: under Section 3(12) of the IBC, a “default” means non-payment of debt when the whole or any part of the instalment has become due and payable. When did the debt become due and payable?

The NCLAT looked at the loan agreement. The company had agreed to repay in instalments. When it missed those instalments for 90 consecutive days, the account became an NPA. That was 27 September 2019. The entire outstanding amount became due and payable on that date, the Tribunal held.

The director’s argument about the cure period in the sanction letter was rejected. The cure period, the NCLAT said, was a contractual remedy that existed before the IBC was enacted. It related to recovery mechanisms under the SARFAESI Act or DRT proceedings. It could not be imported into the IBC to redefine the date of default. The IBC has its own definition of default in Section 3(12), and that definition is triggered when the debt becomes due and is not paid — not when a contractual cure period expires.

The Partial Payment Problem

The director also argued that the company had made some payments after the NPA classification. These payments, he claimed, meant the account was no longer in default, and the NPA date should be disregarded.

The NCLAT rejected this too. The payments were partial. They did not regularise the account. The NPA status remained. A default that has occurred does not get erased by partial payments that do not bring the account back to a standard asset classification. The date of default remains the date on which the debt first became due and was not paid.

The Tribunal cited its own precedent in Jagdish Prasad Sarada v. Allahabad Bank and the Supreme Court’s judgment in Laxmi Pat Surana v. Union Bank of India to hold that the NPA date can ordinarily be reckoned as the date of default for a Section 7 application.

The Limitation Angle

There was also a limitation argument. The director contended that the Section 7 application was filed on 30 March 2021, more than three years after the default allegedly occurred. The NCLAT applied the Supreme Court’s ruling in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates, which held that Article 137 of the Limitation Act applies to Section 7 applications, and the right to sue accrues when default occurs.

But the NCLAT found that the NPA date of 27 September 2019 was within three years of the application filed on 30 March 2021. The limitation period had not expired. Moreover, the loan recall notice of 11 August 2020 and the partial payments made by the company constituted acknowledgments of liability under Section 18 of the Limitation Act, extending the limitation period.

The Doctrine That Mattered

The core principle from this judgment is straightforward: the date of NPA classification is the date of default under Section 3(12) of the IBC. Once an account is classified as an NPA, the entire outstanding debt becomes due and payable. Subsequent events — a loan recall notice, a cure period, partial payments that don’t regularise the account — do not shift that date.

This is not a new principle. The Supreme Court had already said as much in Laxmi Pat Surana and Dena Bank v. C. Shivakumar Reddy. But the NCLAT’s judgment in Milind Kashiram Jadhav applies it squarely to the Section 10A context, closing a potential loophole that corporate debtors might have exploited.

THE PLAY: If you are a financial creditor, file your Section 7 application within three years of the NPA date. Do not wait for a loan recall notice or cure period to expire — those are recovery remedies, not IBC triggers. The NPA date is your default date.

Why This Matters in Practice

For advocates advising financial creditors, this judgment provides clarity on two fronts. First, the NPA date is the safe harbour for limitation. Second, partial payments after NPA do not reset the default clock — they only extend limitation under Section 18.

For CFOs and founders of companies that have defaulted on loans, the message is equally clear: once your account is classified as an NPA, the IBC clock starts ticking. A loan recall notice or a cure period in your sanction letter will not save you from a Section 7 application. The only way to avoid CIRP is to regularise the account fully — partial payments won’t cut it.

The judgment also reinforces a practical point for resolution professionals: when verifying a Section 7 application, the NPA declaration from the bank is the primary document to check for the date of default. The loan agreement’s cure provisions are irrelevant for IBC purposes.

The Bottom Line

File your Section 7 application within three years of the NPA date. The cure period in your sanction letter is for recovery, not for IBC. Partial payments after NPA don’t change the default date — they only extend limitation. The NPA date is the date that matters.