AKP Law
The concept of the date of default occupies a central position in the insolvency framework under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”). It serves as the foundational trigger for the initiation of insolvency proceedings by a Financial Creditor under Section 7 or an Operational Creditor under Section 9 of the Code, while simultaneously marking the commencement of the limitation period for such proceedings.
Beyond its significance for limitation, the determination of the date of default assumes considerable importance in the application of other provisions of the Code, including the moratorium under Section 10A and various threshold issues concerning the maintainability of insolvency petitions. Given the far-reaching consequences that flow from the identification of this date, its interpretation warrants continual re-examination in light of evolving commercial realities.
This article seeks to explore the possibility of incorporating the concept of a “breaking point”, as articulated by the Hon’ble Supreme Court in Arif Azim Co. Ltd. v. Aptech Ltd., (2024) 5 SCC 313 within the IBC framework. The underlying rationale is that where parties have, in good faith, engaged in sustained negotiations or attempted an amicable resolution of their disputes, the period spent in such efforts ought not to operate to the detriment of either party for the purposes of limitation. Recognition of a “breaking point” would enable the exclusion of the period during which bona fide settlement discussions were underway and, consequently, permit a more nuanced determination of the date of default.
The authors are of the opinion that such a move is imperative as otherwise, taking a rigid interpretation of the date of default results in undue harm to the entities, specifically mid-size level enterprises and NBFCs, who frequently resort to out-of-court settlement of the default, which more often than not lasts for a considerable period of time and non-adjustment of the date of default may result in prejudicing the rights of the financial creditor who otherwise have a valid claim against the Corporate Debtor.
The difficulty becomes apparent in cases involving Non-Banking Financial Companies (NBFCs), where parties often engage in prolonged negotiations and settlement efforts after the occurrence of the default. For instance, upon the account of the Corporate Debtor being classified as a Non-Performing Asset (NPA), the Financial Creditor and the Corporate Debtor may enter into discussions for restructuring or settlement of the outstanding dues. During the course of such negotiations, the Corporate Debtor may repeatedly acknowledge its liability and make intermittent part-payments towards the outstanding debt over a substantial period of time. In many cases, the Financial Creditor may also extend a One-Time Settlement (OTS) proposal, which the Corporate Debtor initially accepts but subsequently fails to comply with.
Notwithstanding these subsequent events, insolvency adjudicatory forums have often continued to treat the date of NPA classification as the sole and determinative date of default for the purposes of a Section 7 application. Consequently, by the time settlement negotiations fail or the OTS arrangement collapses, the original NPA date may already have crossed the limitation period, thereby rendering the Financial Creditor's insolvency remedy vulnerable to challenge on grounds of limitation.
This concern was noticed in Milind Kashiram Jadhav v. State Bank of India and Anr., Company Appeal (AT) (Insolvency) No. 1589 of 2023, where the Hon'ble NCLAT held that the date of declaration of Corporate Debtor as NPA continued to constitute the relevant date of default despite subsequent part-payments and even a Loan Recall Notice in the year following the date of declaration of Debtor as NPA. A similar approach is also discernible from Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. and Anr., Civil Appeal No. 6347 of 2019, wherein the Hon'ble Supreme Court identified the NPA date as the date of default for the purposes of initiation of CIRP.
Such an approach may, in practice, discourage parties from pursuing genuine settlement efforts. A Financial Creditor who chooses to engage with the Corporate Debtor and explore the possibility of an amicable resolution, rather than immediately invoking the insolvency process, may ultimately find itself without a remedy under the Code once the negotiations fail. This is particularly problematic where the Corporate Debtor has, throughout the negotiation period, continued to acknowledge the debt and make part-payments. In effect, a creditor acting in good faith and attempting to resolve the dispute commercially may be placed in a worse position than one who rushes to initiate insolvency proceedings at the first instance. Moreover, such an interpretation leaves room for abuse, as a Corporate Debtor may deliberately prolong settlement discussions and repeatedly assure payment, only to later contend that the claim is barred by limitation with reference to the original date of default.
In Arif Azim Co. Ltd. v Aptech Ltd., (2024) 5 SCC 313, the Hon’ble Supreme court while adjudicating the limitation of a dispute under Section 11 of the Arbitration and Conciliation Act, 1996, rightly observed that the cause of action may not necessarily accrue on the first instance of default. The court further noted that there are multiple cases wherein the parties engage in mutual attempts at settlement of the disputes and the cause of action in such cases shall only crystallise after it becomes clear to the parties that further attempts at discussions are futile and that they have reached a ‘breaking point’ with respect to the settlement of the disputes.
The concept of ‘breaking point’, as recognised by the Supreme Court in Arif Azim. (supra), presents an interesting lens through which the determination of the date of default under the Insolvency and Bankruptcy Code may be reconsidered. The existing approach, which frequently pegs the date of default to the date of classification of the account as a Non-Performing Asset (NPA), often overlooks the commercial reality that parties may continue to engage in settlement negotiations, restructuring discussions, or one-time settlement arrangements long after the initial default. In such cases, the debt continues to be treated by both parties as a subsisting and recoverable obligation.
The difficulty with an unwavering focus on the NPA date is that it often fails to account for how commercial disputes actually unfold. Parties do not always rush to litigation or insolvency proceedings at the first sign of default. More often, they spend considerable time negotiating, restructuring obligations, exploring settlement proposals, and attempting to preserve their commercial relationship. Where such efforts continue for years, treating the original NPA date as the sole date of default may appear disconnected from the realities of the transaction. The concept of a “breaking point”, namely the point at which settlement efforts finally fail and the dispute truly crystallises, may therefore provide a more realistic basis for assessing when the creditor's right to invoke insolvency proceedings effectively arises.
The date of default is one of the most important aspects of an insolvency application and, therefore, its determination should reflect the realities of commercial dealings rather than be based solely on a technical benchmark. While the date of classification of an account as an NPA provides certainty, it does not always capture what actually happens between parties after a default. In many cases, creditors and debtors continue to negotiate, explore settlement options, and work towards resolving their differences for months or even years. If the law continues to look only at the NPA date, a creditor who genuinely attempts to settle the dispute may end up losing its right to initiate insolvency proceedings because of the time spent in those efforts.
The concept of a “breaking point”, recognised by the Supreme Court in Arif Azim, offers a more practical way of addressing this issue. It focuses on the stage where negotiations finally fail and it becomes clear that no settlement is possible. At the same time, this concept should be applied carefully and only where there is clear evidence of genuine settlement discussions, acknowledgements of debt, or part-payments by the debtor. Such an approach would encourage parties to attempt resolution outside the courtroom without fear of losing their legal remedies, while also preventing debtors from using prolonged negotiations as a tactic to defeat otherwise valid insolvency claims.