SC Clarifies: Once NCLT Is Satisfied of Default, Application under Section 7 of IBC Must Be Admitted

[SC] Once the NCLT is satisfied that there is a debt which is in default of payment, an application under section 7 of the IBC should be admitted.

The Hon’ble Supreme Court of India recently in the case of M. Suresh Kumar Reddy v. Canara Bank & Or’s., has held that, once the National Company Law Tribunal (‘NCLT’) is satisfied that there is a debt in respect of which default has occurred on the part of the Corporate Debtor, it is mandatory to consider the applications filed by financial creditors for initiation of the corporate insolvency resolution process (‘CIRP’) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

Brief Facts:

The application u/s 7 of the IBC was filed by the Canara Bank (Syndicate Bank merged into the Canara Bank) (‘Respondent’) against M/s. Kranti Edifice Pct. Ltd. (‘Corporate Debtor’) before the NCLT, Hyderabad, Telangana, for the defaults committed by the Corporate Debtor in repayment of the overdraft facility and bank guarantees. The NCLT vide an order dated 27.06.22 admitted the application filed by the Respondent. Aggrieved by the order of NCLT, M. Suresh Kumar Reddy (‘Appellant’) filed an appeal before the National Company Law Appellate Tribunal (‘NCLAT’), which was subsequently dismissed through the order dated 05.08.22.

1. The Appellant filed an appeal before the Hon’ble Supreme Court. In the appeal, the Appellant argued that despite making multiple attempts to reach a one-time settlement with the Respondent, the Respondent did not agree to such an arrangement. Additionally, the Appellant referred to the judgment in Vidarbha Industries Power Limited v. Axis Bank Limited, where the Hon’ble Supreme Court stated that the NCLT was not under an obligation to admit an application under Section 7 of the IBC merely based on the assumption of the existence of a financial debt or default by the Corporate Debtor. The Appellant contended that the NCLT had discretionary power, supported by valid reasons, to reject the application filed by the respondent under Section 7 of the IBC.

2. The appellant also submitted that they had requested the respondent to extend the bank guarantee, but the respondent did not accept. As a result, the Corporate Debtor was forced to default on its obligations.

3. In response, the respondent argued that the Supreme Court had clarified in the review order that the observations made in the Vidarbha Industries case regarding the discretionary power of the NCLT to admit an application under Section 7 of the IBC were specific to the facts of that particular case. The respondent emphasised that the application of such discretion depends on the unique circumstances and facts of each case and cannot be applied uniformly to all cases.

4. The respondent further referred to the Hon’ble Supreme Court decision in the case of E.S. Krishnamurthy and others v. Bharath Hi-Tech Builders Private Limited, wherein the Hon’ble Supreme Court observed that, once the NCLT is satisfied regarding the occurrence of financial debt and default, it becomes mandatory for the NCLT to admit an application under Section 7 of the IBC.

5. The respondent submitted that the request made by the Corporate Debtor for an extension of the bank guarantee was rejected by the respondent, and this rejection was communicated vide a letter dated 18.01.21.

Observations of the Hon’ble Supreme Court:

The Hon’ble Supreme Court dismissed the appeal filed by the Appellant and held as under:

1. The Hon’ble Supreme Court relying on its own decisions in the case of Innoventive Industries Limited vs ICICI Bank and E.S. Krishnamurthy supra held that once the NCLT is satisfied that default has taken place, there is hardly any discretion left on the NCLT to refuse admission of Section 7 application. Even non-payment of a part of the debt which is due and payable will amount to default on the part of the Corporate Debtor and even in such cases, the Section 7 petitions ought to be admitted.

2. The Hon’ble Supreme Court relied upon the review order passed in the case of Vidarbha Industries and held that the ratio of that decision does not lay down a general principle of law and the said decision was given on its own peculiar facts and circumstances.

Analysis and Conclusion:

The decision of the Hon’ble Supreme Court in this case reiterates the legal position that once the existence of debt stands established and there is a default, the petitions u/s 7 of the IBC ought to be admitted and there is hardly any discretion on the NCLT to reject such applications.

This judgment will pave the way for various Section 7 petitions which are currently pending before NCLT all over the country wherein the Corporate Debtors are staunchly resisting the admission of the petitions relying on the decision in the case of Vidarbha Industries. This will hopefully ensure that the CIRP process is expedited and the objects of IBC are achieved in a timely initiation of the CIRP and expeditious resolution of corporate debts in India.

Authored by Purvi Garg, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion