IBC | NCLT Has To Admit Sec 7 Petition If Debt Is Due; Decision In 'Vidarbha Industries' Based On Its Facts : Supreme Court

The Supreme Court has held that if the existence of a financial debt and its default on the part of Corporate Debtor has been proved, then the National Company Law Tribunal (“NCLT”) is left with no option apart from admitting the petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The only ground on which a petition under Section 7 of IBC can be rejected is when the debt in question has not become due and payable(M. Suresh Kumar Reddy v Canara Bank & Ors.).

The Bench comprising of Justice Abhay S. Oka and Justice Rajesh Bindal, while adjudicating an appeal filed in M. Suresh Kumar Reddy v Canara Bank & Ors., has held that the decision in Innoventive Industries Limited v. ICICI Bank and Another, (2018) 1 SCC 407, still holds good and the NCLT must admit a petition under Section 7 of IBC once existence of debt and default is established. Further, the decision in Vidarbha Industries Power Limited v. Axis Bank Limited, 2022 LiveLaw (SC) 587, was passed based on the facts of that particular case and it did not hold anything contrary to the Innoventive Industries judgment.

BACKGROUND FACTS

M/s Kranthi Edifice Pvt. Ltd. (“Corporate Debtor”) had availed credit facilities from Canara Bank (“Financial Creditor”) and had failed to repay the same. The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the National Company Law Tribunal (“NCLT”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

On 27.06.2022, the NCLT admitted the petition and initiated CIRP against the Corporate Debtor. M. Suresh Kumar Reddy (“Appellant/Suspended Director”) being a Suspended Director of the Corporate Debtor filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”), which was dismissed.

Thereafter, the Suspended Director preferred an appeal before the Supreme Court. It was contended on the strength of Vidarbha Industries Power Limited v. Axis Bank Limited, that the NCLT had the discretion to not to admit the petition under Section 7 of IBC even after the existence of debt and default had been proved.

SUPREME COURT VERDICT

In the matter of Innoventive Industries Limited v. ICICI Bank and Another, (2018) 1 SCC 407, the Supreme Court had held that NCLT must admit a petition under Section 7 of IBC, the moment it is satisfied that a default in payment of a financial debt has occurred. Thereafter, in the matter of E.S. Krishnamurthy and others v Bharath HiTecch Builders Pvt. Ltd., (2022) 3 SCC 161, the Supreme Court held that NCLT is only empowered to verify whether a default has occurred or not; if the default has occurred then the petition must be admitted under Section 7.

Subsequently, in Vidarbha Industries Power Limited v. Axis Bank Limited the Supreme Court held that the NCLT would have to exercise its discretion to admit a petition under Section 7 of IBC if existence of a financial debt and default on the part of the Corporate Debtor in its payment is proved, unless there are good reasons not to admit the petition.

Section 7 petition to be rejected only if the debt has not become due and payable, otherwise there is no ground available to reject the petition

While placing reliance on the Supreme Court judgments in Innoventive Industries Limited v. ICICI Bank and Another and E.S. Krishnamurthy and others v Bharath HiTecch Builders Pvt. Ltd., the Bench observed that once default has occurred, the NCLT is hardly left with any discretion to refuse admission of a petition under Section 7 of IBC. It has been held that the sole ground for rejection of Section 7 petition would be the debt not becoming due and payable. It has been held as under:

“Thus, even the non­payment of a part of debt when it becomes due and payable will amount to default on the part of a Corporate Debtoṛ. 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.”

The decision in Innoventive Industries Limited v. ICICI Bank and Another still holds good

The Bench opined that after the judgment in Vidarbha Industries Power Limited v Axis Bank Limited, a review petition was filed by the Axis Bank Limited. The Supreme Court vide an order dated 22.09.2022 had disposed of the review while holding as follows:

“The elucidation in paragraph 90 and other paragraphs were made in the context of the case at hand. It is well settled that judgments and observations in judgments are not to be read as provisions of statute. Judicial utterances and/or pronouncements are in the setting of the facts of a particular case.”

Based on the clarificatory order passed in the review petition, the Bench concluded that the decision of Vidarbha Industries was passed as per the facts of the case and cannot be considered to be contrary to the ratio of Innoventive Industries.

“Hence, the decision in the case of Vidarbha Industries cannot be read and understood as taking a view which is contrary to the view taken in the cases of Innoventive Industries and E.S. Krishnamurthy. The view taken in the case of Innoventive Industries still holds good.”

The appeal has been dismissed.

Case Title: M. Suresh Kumar Reddy v Canara Bank & Ors.

Citation : 2023 LiveLaw (SC) 428

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