Date of the Judgment: September 08, 2020
Citation: 2020 INSC 647
Judges: R.F. Nariman, J., Navin Sinha, J., Indira Banerjee, J.

Can an admission made by a corporate debtor in a previous, withdrawn proceeding be used as evidence in a subsequent insolvency application? The Supreme Court of India addressed this question in a recent case involving SREI Equipment Finance Limited and Rajeev Anand & Ors. The court overturned the National Company Law Appellate Tribunal (NCLAT) order, reinstating the National Company Law Tribunal’s (NCLT) decision to admit an insolvency application based on a prior admission of debt by the corporate debtor. This judgment clarifies the evidentiary value of admissions made in withdrawn proceedings under the Insolvency and Bankruptcy Code, 2016.

Case Background

SREI Equipment Finance Limited (the appellant) had provided loans to the corporate debtor, which were restructured in 2016. The initial loan was restructured into two loans: one of Rs. 18.86 crores on April 1, 2016, and another of Rs. 16.80 crores on June 24, 2016, with an interest of Rs. 2.72 crores.

The appellant initially filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) on March 16, 2017, before the NCLT. The corporate debtor countered, stating that the application was premature as the agreed installment payments had not yet matured. Consequently, the appellant withdrew this application on May 30, 2017, with the liberty to file a fresh one.

A fresh application was filed on August 4, 2017, claiming an outstanding amount of Rs. 21.41 crores related to the April 1, 2016 loan. The corporate debtor then claimed to have repaid Rs. 65.60 crores since 2008. The appellant filed a supplementary affidavit on August 3, 2018, clarifying that the corporate debtor had paid Rs. 18,86,00,000 on April 13 and 16, 2016, and Rs. 16,80,62,000 between July 5 and 19, 2016. These payments were for a previous outstanding amount of Rs. 35,66,61,986 as of March 31, 2016, which was admitted by the corporate debtor in its counter-affidavit in the prior proceeding. The appellant argued that the Rs. 18,86,00,000 disbursed on April 1, 2016, remained outstanding.

Timeline

Date Event
2008 Initial loan provided by SREI Equipment Finance Limited to the corporate debtor.
April 1, 2016 Loan of Rs. 18.86 crores restructured.
June 24, 2016 Loan of Rs. 16.80 crores restructured.
March 16, 2017 First Section 7 application filed by the appellant before NCLT.
May 15, 2017 Corporate debtor files counter-affidavit stating the application was premature.
May 30, 2017 First application withdrawn by the appellant with liberty to file a fresh one.
August 4, 2017 Fresh Section 7 application filed by the appellant.
August 3, 2018 Appellant files supplementary affidavit explaining the payment of Rs. 35,66,62,000 by the corporate debtor.
N/A NCLT admits the application and appoints a Resolution Professional.
N/A NCLAT sets aside the NCLT order.
September 08, 2020 Supreme Court sets aside the NCLAT order and restores the NCLT order.
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Course of Proceedings

The NCLT admitted the insolvency application, noting that the corporate debtor had admitted to the restructuring of the loan amount in the previous proceedings. The NCLT also found that the disbursement of Rs. 18,86,00,000 on April 13, 2016, was an independent transaction and the principles of estoppel would apply, preventing the corporate debtor from taking a contrary stand.

The NCLAT, however, reversed the NCLT’s order. The NCLAT held that the NCLT had relied on documents that were rejected and that there was no evidence that the amount was still outstanding. The NCLAT also stated that documents filed in the earlier withdrawn petition could not be relied upon.

Legal Framework

This case primarily concerns Section 7 of the Insolvency and Bankruptcy Code, 2016. Section 7 of the IBC deals with the initiation of the corporate insolvency resolution process by a financial creditor. According to Section 7 of the Insolvency and Bankruptcy Code, 2016, a financial creditor can initiate the corporate insolvency resolution process against a corporate debtor when a default has occurred.

The relevant part of Section 7 of the Insolvency and Bankruptcy Code, 2016 states:
“7. Initiation of corporate insolvency resolution process by financial creditor.—(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.”

Arguments

The appellant argued that the corporate debtor had admitted to the outstanding debt in its counter-affidavit during the first round of litigation. The appellant contended that this admission should be considered as evidence of the debt, regardless of the withdrawal of the first application.

The corporate debtor argued that the documents from the previous withdrawn petition could not be relied upon by the NCLT. They contended that the amount of Rs. 18,86,00,000 was not an independent transaction but a part of the previous loan repayment.

The NCLAT supported the corporate debtor’s argument, stating that the NCLT had relied on rejected documents and that there was no evidence of any outstanding amount.

Main Submission Sub-Submissions
Appellant’s Arguments
  • The corporate debtor admitted to the debt in the previous counter-affidavit.
  • The admission is valid evidence despite the withdrawal of the first application.
  • The disbursement of Rs. 18,86,00,000 was an independent transaction.
Corporate Debtor’s Arguments
  • Documents from the withdrawn petition cannot be relied on.
  • The amount of Rs. 18,86,00,000 was not a new disbursement but a repayment of previous dues.
NCLAT’s Reasoning
  • The NCLT relied on rejected documents.
  • There was no evidence of any outstanding amount.
  • Documents from the withdrawn petition cannot be used.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in the judgment. However, the central issue was:

✓ Whether an admission made by a corporate debtor in a counter-affidavit in a previously withdrawn proceeding can be used as evidence in a subsequent insolvency application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

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The sub-issue was whether the NCLAT was correct in holding that the NCLT could not rely on documents from the previous withdrawn petition.

Treatment of the Issue by the Court

Issue Court’s Decision Reason
Whether an admission made in a previous withdrawn proceeding can be used as evidence? Yes The Court held that the admission in the counter-affidavit was not a ‘document’ from a previous petition, but rather a statement by the corporate debtor that could be relied upon.
Whether the NCLAT was correct in holding that the NCLT could not rely on documents from the previous withdrawn petition? No The Court held that the NCLAT was wrong in stating that documents which were already rejected by the adjudicating authority could not have been the basis of the order of admission.

Authorities

The Supreme Court did not cite any specific cases or books in this judgment. The primary focus was on the interpretation of the facts and the application of the Insolvency and Bankruptcy Code, 2016.

Authority How the Court Considered
Section 7 of the Insolvency and Bankruptcy Code, 2016 The court interpreted the provision to allow the initiation of corporate insolvency resolution process by a financial creditor when a default has occurred. The court used this provision to determine whether the NCLT was correct in admitting the application.

Judgment

Submission by Parties Court’s Treatment
Appellant’s Submission: The corporate debtor admitted to the outstanding debt in its counter-affidavit during the first round of litigation. Court’s Treatment: The Court agreed with this submission, stating that the admission was valid evidence.
Corporate Debtor’s Submission: Documents from the previous withdrawn petition could not be relied upon by the NCLT. Court’s Treatment: The Court rejected this submission, stating that the counter-affidavit was not a document from a previous petition but an admission by the corporate debtor.
NCLAT’s Reasoning: The NCLT had relied on rejected documents and that there was no evidence that the amount was still outstanding. Court’s Treatment: The Court disagreed with the NCLAT, stating that the NCLAT wrongly recorded that documents which were already rejected by the adjudicating authority could not have been the basis of the order of admission. The Court also held that the NCLAT was wrong in stating that there was no further evidence in support of the fact that any amount was outstanding.

The Supreme Court held that the NCLAT was incorrect in its assessment. The court emphasized that the NCLT had correctly considered the documents, pleadings, and the supplementary affidavit of 03.08.2018, including the counter-affidavit from the earlier Section 7 application. The court stated that the admission in the counter-affidavit was not a ‘document’ from an earlier petition but a clear admission of the debt being outstanding.

The Court stated:
“The ‘document’ was not a pleading by the appellant – it was a counter affidavit by the corporate debtor in which a clear admission of the debt being outstanding was made.”

The Supreme Court set aside the NCLAT order and restored the NCLT order, allowing the resolution proceedings to continue from the point where they were interrupted.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the corporate debtor had unequivocally admitted to the debt in a prior proceeding. The court emphasized the evidentiary value of this admission and found that the NCLAT had erred in disregarding it. The court’s reasoning focused on the factual accuracy of the NCLT’s order and the incorrect interpretation of the evidence by the NCLAT.

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Sentiment Percentage
Admission of Debt 40%
Factual Accuracy of NCLT Order 30%
Incorrect Interpretation by NCLAT 30%
Ratio Percentage
Fact 70%
Law 30%
Issue: Whether admission in withdrawn proceeding can be used as evidence?
↓
Corporate Debtor admitted debt in previous counter affidavit
↓
NCLT relied on this admission
↓
NCLAT rejected NCLT’s order saying admission can’t be used
↓
Supreme Court held NCLAT was wrong
↓
Admission can be used as evidence

Key Takeaways

  • ✓ Admissions made by a corporate debtor in a counter-affidavit, even in a withdrawn proceeding, can be used as evidence in subsequent insolvency applications.
  • ✓ The NCLT’s findings based on a thorough review of documents and pleadings are given weight.
  • ✓ The NCLAT should not disregard admissions made by parties in previous proceedings.
  • ✓ This case clarifies the evidentiary value of admissions in insolvency proceedings.

Directions

The Supreme Court directed that the resolution proceedings should continue from the stage at which they were interrupted.

Development of Law

This judgment reinforces the principle that admissions made by parties in legal proceedings, even if those proceedings are later withdrawn, can have significant evidentiary value in subsequent litigation. The ratio decidendi of the case is that an admission of debt in a counter-affidavit is valid evidence, regardless of the withdrawal of the proceeding in which it was made.

Conclusion

The Supreme Court’s decision in SREI Equipment Finance Limited vs. Rajeev Anand & Ors. clarifies that admissions made by a corporate debtor in a counter-affidavit, even if the proceeding is later withdrawn, can be used as evidence in subsequent insolvency applications. The court upheld the NCLT’s order and set aside the NCLAT’s decision, emphasizing the importance of considering all evidence, including admissions made in previous proceedings. This judgment provides clarity on the evidentiary value of such admissions in the context of insolvency law.

Source: SREI Equipment Finance Ltd. vs. Rajeev Anand & Ors.