Supreme Court Upholds Admission of Insolvency Application: M. Suresh Kumar Reddy vs. Canara Bank (2023)

Date of the Judgment: May 11, 2023

Citation: Civil Appeal No. 7121 of 2022

Judges: Abhay S. Oka, J., Rajesh Bindal, J.

Can the National Company Law Tribunal (NCLT) refuse to admit an application for the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IB Code) if a financial debt and default are established? The Supreme Court addressed this question in a recent case, clarifying the extent of NCLT’s discretionary powers. The Court held that once a financial debt and default are established, the NCLT has limited discretion to reject an application under Section 7 of the IB Code. The judgment was delivered by a two-judge bench comprising Justice Abhay S. Oka and Justice Rajesh Bindal.

Case Background

The case involves an appeal against the decision of the National Company Law Appellate Tribunal (NCLAT), which upheld the admission of an application under Section 7 of the IB Code by the National Company Law Tribunal (NCLT), Hyderabad. The application was filed by Canara Bank (the first respondent), the successor of Syndicate Bank, against M/s Kranthi Edifice Pvt. Ltd., a Corporate Debtor. The appellant, M. Suresh Kumar Reddy, claimed to be a suspended director of the Corporate Debtor.

Syndicate Bank had sanctioned credit facilities to the Corporate Debtor on April 2, 2016, including a Secured Overdraft Facility of Rs. 12 crores and a Bank Guarantee limit of Rs. 110 crores. As of November 30, 2019, the Corporate Debtor’s liability under the Secured Overdraft Facility was Rs. 74,52,87,564.93, and its liability towards outstanding Bank Guarantees was Rs. 19,16,20,100.

The appellant argued that the Corporate Debtor had made efforts for a one-time settlement, and the default was triggered by the Bank’s failure to extend the Bank Guarantees despite requests from the Telangana Government. However, the bank rejected the settlement proposal.

Timeline

Course of Proceedings

The respondent-Bank filed an application under Section 7 of the IB Code before the NCLT, Hyderabad. The NCLT admitted the application on June 27, 2022, and declared a moratorium. The appellant, claiming to be an aggrieved person, appealed this order before the NCLAT, which dismissed the appeal on August 5, 2022. The appellant then approached the Supreme Court.

Legal Framework

The Supreme Court referred to Section 7 of the Insolvency and Bankruptcy Code, 2016, which deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor. The Court also referred to Section 3(12) of the IB Code, which defines “default” as the non-payment of debt when it has become due and payable. The court quoted the following from Section 3(12) of the IB Code:

“3. Definitions: – In this Code, unless the context otherwise requires,–
(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor, as the case may be;”

The Court emphasized that under Section 7 of the IB Code, the NCLT is primarily required to ascertain whether a default has occurred. If a default is established, the NCLT is generally obligated to admit the application unless it is incomplete.

Arguments

Appellant’s Submissions:

• The appellant argued that repeated efforts were made for a one-time settlement of the dues, but the bank did not agree.
• Relying on the decision in Vidarbha Industries Power Limited v. Axis Bank Limited, the appellant submitted that even if a financial debt and default were established, the NCLT was not obligated to admit the application under Section 7 of the IB Code. The NCLT could have refused to admit the application for good reasons.
• The appellant highlighted correspondence between the Government of Telangana and the Syndicate Bank, where the government requested extensions of Bank Guarantees. The appellant contended that the Bank’s failure to extend the Bank Guarantees forced the Corporate Debtor to commit default, essentially making the Bank responsible for triggering the default.
• The appellant referred to an interim order by the Telangana High Court restraining the Bank from taking coercive steps pursuant to the invocation of Bank Guarantees and argued that the NCLT should not have admitted the application under Section 7 in light of this order.

Respondent’s Submissions:

• The respondent argued that the decision in Vidarbha Industries Power Limited v. Axis Bank Limited was based on the peculiar facts of that case and that the decision in E.S. Krishnamurthy and others v. Bharath Hi-Tecch Builders Private Limited still holds the field.
• The respondent contended that once the NCLT is satisfied that a financial debt and default have occurred, it is bound to admit an application under Section 7 of the IB Code.
• The respondent submitted that the Corporate Debtor’s request for extension of Bank Guarantees was specifically rejected, as communicated by the Bank in a letter dated January 18, 2021.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the NCLT has discretion to reject an application under Section 7 of the IB Code once a financial debt and default are established.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed Innoventive Industries Limited v. ICICI Bank and Another [2018 1 SCC 407]* and reiterated that the NCLT is primarily required to ascertain whether a default has occurred. If a default is established, the NCLT is generally obligated to admit the application unless it is incomplete.
• The Court followed E.S. Krishnamurthy and others v. Bharath Hi-Tecch Builders Private Limited [2022 3 SCC 161]* and reiterated the principle that the NCLT’s role is to verify whether a default has occurred, and if so, the application must be admitted.
• The Court clarified that the decision in Vidarbha Industries Power Limited v. Axis Bank Limited [2022 (8) SCC 352]* was specific to its facts and not to be read as a contrary view to Innoventive Industries and E.S. Krishnamurthy.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the statutory framework of the IB Code and the precedents set by earlier judgments. The Court emphasized that the NCLT’s role under Section 7 is to ascertain the existence of a financial debt and default. Once these are established, the NCLT has limited discretion to reject the application. The Court clarified that the decision in Vidarbha Industries was specific to its facts and not to be interpreted as a general rule allowing the NCLT to reject applications even when a default is established.

The Court also highlighted that the Corporate Debtor’s liability was not solely based on Bank Guarantees but also included a Secured Overdraft Facility. Additionally, the Corporate Debtor had acknowledged the debt and its liability was reflected in its balance sheet. The Court found that the interim order of the Telangana High Court did not negate the existence of the debt or the default.

Logical Reasoning:

The Court’s reasoning was based on a strict interpretation of the IB Code and the established legal precedents. The Court rejected the appellant’s arguments that the NCLT should have considered the circumstances leading to the default, emphasizing that the NCLT’s primary role is to determine whether a default has occurred.

The Court did not consider any alternative interpretations that would have allowed the NCLT to reject the application despite the existence of a debt and default. The Court’s decision was unanimous.

The court quoted the following from the judgment:

“Thus, once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7.”

“Default is defined under sub-section 12 of Section 3 of the IB Code which reads thus: ‘3. Definitions: – In this Code, unless the context otherwise requires,– .. .. .. .. .. .. .. .. (12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor, as the case may be;’”

“In such a case, an order of admission under Section 7 of the IB Code must follow. If the NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected. Otherwise, there is no ground available to reject the application.”

Key Takeaways

• The NCLT has limited discretion to reject an application under Section 7 of the IB Code once a financial debt and default are established.
• The primary role of the NCLT is to ascertain whether a default has occurred, and if so, the application must be admitted.
• The decision in Vidarbha Industries is specific to its facts and should not be interpreted as a general rule allowing the NCLT to reject applications despite the existence of a debt and default.
• The existence of a debt and default are the key factors for the admission of an application under Section 7.

Directions

The Supreme Court dismissed the appeal and did not provide any specific directions.

Development of Law

The ratio decidendi of the case is that once a financial debt and default are established, the NCLT has limited discretion to reject an application under Section 7 of the IB Code. This judgment reinforces the settled position of law as established in Innoventive Industries and E.S. Krishnamurthy and clarifies the scope of the decision in Vidarbha Industries. There is no change in the previous position of law, but rather a reaffirmation and clarification.

Conclusion

The Supreme Court dismissed the appeal, affirming the NCLT’s decision to admit the application under Section 7 of the IB Code. The Court clarified that once a financial debt and default are established, the NCLT has limited discretion to reject such an application. This judgment reinforces the established legal position and ensures that the insolvency process is initiated in a timely manner when a default is established.