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

Case Background

The case involves an appeal by M. Suresh Kumar Reddy, a suspended director of M/s Kranthi Edifice Pvt. Ltd. (the Corporate Debtor), against the admission of an insolvency application filed by Canara Bank. Canara Bank, the successor of Syndicate Bank, had provided credit facilities to the Corporate Debtor, including a secured overdraft facility and bank guarantees. The Corporate Debtor defaulted on its repayment obligations, leading to the bank initiating insolvency proceedings.

Syndicate Bank had sanctioned credit facilities to the Corporate Debtor on April 2, 2016, which included a Secured Overdraft Facility of Rs. 12 crores and a Bank Guarantee limit of Rs. 110 crores, valid until February 28, 2017. As of November 30, 2019, the Corporate Debtor’s liability under the Secured Overdraft Facility was Rs. 74,52,87,564.93, and the liability towards outstanding Bank Guarantees was Rs. 19,16,20,100. The appellant, M. Suresh Kumar Reddy, claimed that the bank should have extended the bank guarantees, and its failure to do so led to the default.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT), Hyderabad, admitted the application filed by Canara Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016, on June 27, 2022, and declared a moratorium. The appellant, claiming to be an aggrieved person, appealed against this order before the National Company Law Appellate Tribunal (NCLAT). However, the NCLAT dismissed the appeal on August 5, 2022, upholding the NCLT’s decision. This led to the present appeal before the Supreme Court.

Legal Framework

The primary legal provision at the heart of this case is Section 7 of the Insolvency and Bankruptcy Code, 2016. This section deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor. According to the Supreme Court, once the Adjudicating Authority (NCLT) is satisfied that a default has occurred, it is obligated to admit the application unless it is incomplete.

Section 3(12) of the Insolvency and Bankruptcy Code, 2016 defines “default” as:

“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 even the non-payment of a part of the debt when it becomes due and payable constitutes a default, triggering the CIRP.

Arguments

Appellant’s Submissions:

• The appellant argued that repeated efforts were made to settle the dues with the bank, but the bank did not agree.
• Relying on the decision in Vidarbha Industries Power Limited v. Axis Bank Limited, the appellant submitted that the NCLT is not obligated to admit an application under Section 7 even if a financial debt and default are established.
• The appellant contended that the Syndicate Bank’s failure to extend the bank guarantees, despite requests from the Telangana Government, forced the Corporate Debtor to default.
• The appellant highlighted an interim order by the Telangana High Court restraining the bank from taking coercive steps, arguing that the NCLT should not have admitted the application in light of this order.

Respondent’s Submissions:

• The respondent argued that the decision in Vidarbha Industries was specific to the facts of that case and that the principle laid down in E.S. Krishnamurthy and others v. Bharath Hi-Tecch Builders Private Limited still holds the field.
• The respondent submitted that once the NCLT is satisfied that there is a financial debt and a default has occurred, it is bound to admit an application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
• The respondent pointed out that the Corporate Debtor’s request for an extension of the Bank Guarantees was specifically rejected, and this was communicated to the Corporate Debtor.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the NCLT was justified in admitting the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, given the appellant’s arguments that the bank should have extended the bank guarantees and that there was an interim order by the Telangana High Court.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court dismissed the appeal, upholding the decisions of the NCLT and NCLAT. The Court reiterated that once the NCLT is satisfied that a default has occurred, it is obligated to admit the application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Court clarified that the decision in Vidarbha Industries was specific to the facts of that case and should not be interpreted as a general principle that contradicts the views taken in Innoventive Industries and E.S. Krishnamurthy.

How each authority was viewed by the Court:

• Innoventive Industries Limited v. ICICI Bank and Another [CITATION]: The Court followed this case, reiterating that the adjudicating authority has to see the records to satisfy itself that a default has occurred.
• E.S. Krishnamurthy and others v. Bharath Hi-Tecch Builders Private Limited [CITATION]: The Court followed this case, reiterating that the adjudicating authority only has to determine whether a “default” has occurred.
• Vidarbha Industries Power Limited v. Axis Bank Limited [CITATION]: The Court clarified that this decision was specific to its facts and should not be read as a general principle contrary to the views in Innoventive Industries and E.S. Krishnamurthy.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the established legal position that once a default is proven, the NCLT is obligated to admit the insolvency application. The Court emphasized the importance of adhering to the statutory framework of the Insolvency and Bankruptcy Code, 2016. The Court also considered the fact that the Corporate Debtor acknowledged the debt and that the default was not solely due to the bank’s refusal to extend bank guarantees but also due to non-payment of the secured overdraft facility.

The Court’s reasoning was primarily based on the legal interpretation of Section 7 of the Insolvency and Bankruptcy Code, 2016, and the precedents set by previous Supreme Court judgments. While the factual context of the case was considered, the legal framework and the established legal principles were the dominant factors in the Court’s decision.

The Court’s reasoning was based on the following points:

• The Court emphasized that once a default is proven, the NCLT is obligated to admit the insolvency application.
• The Court clarified that the decision in Vidarbha Industries was specific to its facts and should not be interpreted as a general principle that contradicts the views taken in Innoventive Industries and E.S. Krishnamurthy.
• The Court noted that the Corporate Debtor’s request for an extension of the Bank Guarantees was specifically rejected by the bank.
• The Court also highlighted that the liability of the Corporate Debtor was not confined to Bank Guarantees, but also included the amount repayable under the fund-based credit facility of secured overdrafts.
• The Court stated that the interim order of the Telangana High Court did not absolve the Corporate Debtor of its liability.

The Court quoted from the judgment:

“Thus, even the non-payment of a part of debt when it becomes due and payable will amount to default on the part of a Corporate Debtor. In such a case, an order of admission under Section 7 of the IB Code must follow.”

“Default is defined under sub-section 12 of Section 3 of the IB Code which reads thus: ‘(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;’”

“Hence, we find that there is no merit in the appeal, and the same is, accordingly, dismissed.”

Key Takeaways

• The Supreme Court has reaffirmed that the NCLT is obligated to admit an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, if a financial debt and default are established.
• Corporate debtors cannot avoid insolvency proceedings by arguing that the creditor should have extended bank guarantees or other credit facilities.
• Interim orders from High Courts that prevent coercive action do not absolve a corporate debtor from its liability or prevent the initiation of insolvency proceedings.
• The decision clarifies that even non-payment of a part of the debt when it becomes due and payable constitutes a default.
• The judgment emphasizes the importance of adhering to the statutory framework of the Insolvency and Bankruptcy Code, 2016.

This judgment reinforces the strict timelines and processes of the Insolvency and Bankruptcy Code, 2016, ensuring that financial creditors can initiate CIRP when defaults occur. It also clarifies that NCLT’s discretion is limited in admitting applications under Section 7, and the focus should be on whether a debt and default exist.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that once the NCLT is satisfied that a default has occurred, it is obligated to admit the application under Section 7 of the Insolvency and Bankruptcy Code, 2016. This judgment clarifies that the NCLT’s discretion to reject such applications is limited. The court also clarified that the decision in Vidarbha Industries was specific to its facts and should not be interpreted as a general principle that contradicts the views taken in Innoventive Industries and E.S. Krishnamurthy, thus reaffirming the settled position of law.

Conclusion

In conclusion, the Supreme Court’s decision in M. Suresh Kumar Reddy vs. Canara Bank reinforces the mandatory nature of admitting insolvency applications under Section 7 of the Insolvency and Bankruptcy Code, 2016, when a financial debt and default are established. The Court clarified that the NCLT has limited discretion to reject such applications and that the focus should be on whether a debt and default exist. The judgment also clarifies that the decision in Vidarbha Industries was specific to its facts and should not be interpreted as a general principle that contradicts the views taken in Innoventive Industries and E.S. Krishnamurthy. This ruling provides clarity to financial creditors and corporate debtors alike, emphasizing the importance of adhering to the statutory framework of the Insolvency and Bankruptcy Code, 2016.