S.7 IBC | Corporate Debtor's Ability To Pay Debt Not To Be Considered Before Admitting Insolvency Petition : Supreme Court

The Supreme Court on Wednesday (February 18) reaffirmed that the remedy under Section 7 of the Insolvency & Bankruptcy Code (IBC) to initiate the Corporate Insolvency Resolution Process (CIRP) is not discretionary but mandatory, leaving the adjudicating authority with no option but to admit the application once the existence of a debt and a default is established."The Adjudicating Authority is not required to go into the inability of a corporate debtor to pay its debt. This is a clear departure from the scheme of winding up envisaged under Section 433(e) of the erstwhile Companies Act, 1956 which required the Adjudicating Authority to come to a finding with regard to the inability of the company to pay the debt and thereby arrive at a requisite satisfaction whether it is just and equitable to wind up the company. The Code restricts the scope of enquiry for admission of an insolvency process by a financial creditor merely to the existence of default of a debt due and payable and nothing more," the Court observed.The Court reiterated that "when the financial creditor initiates the insolvency process for the purposes of admission, the Adjudicating Authority is only to ascertain the existence of a default from the records of the information utility or the evidence furnished by the financial creditor within fourteen days from the receipt of such application."At this stage, neither is a corporate debtor entitled nor is the Adjudicating Authority required to examine any dispute regarding the existence of such debt. This significantly reduces the scope of enquiry at the stage of a time-bound admission of an insolvency process by a financial creditor.Affirming the NCLAT's ruling, a bench comprising Chief Justice Surya Kant and Justices Joymalya Bagchi and Vipul M. Pancholi dismissed the Appellant-Corporate debtor's promoter's plea against the admission of the Section 7 IBC application against the Corporate Debtor. The dispute arose from a common loan agreement dated June 19, 2013, under which Financial Creditor-REC Ltd., a public sector financial institution, extended a loan of ₹1,859 crore to Corporate Debtor-Hiranmaye Energy Ltd. for setting up a thermal power plant at Haldia, West Bengal. A further term loan of ₹446.97 crore was sanctioned in October 2015 owing to cost overruns. The account was classified as a non-performing asset (NPA) on June 30, 2018, with the date of default recorded as March 31, 2018. Although two restructuring proposals were approved in principle in February and September 2020, both were subject to stringent pre-implementation conditions, including securing a favourable tariff order, creation of a Debt Service Reserve Account, continuous plant operation, and infusion of priority debt and working capital. None of these conditions were fulfilled within the stipulated timelines. Even the tariff order from the West Bengal Electricity Regulatory Commission was issued only on May 31, 2021, well beyond the agreed deadline. REC thereafter filed a Section 7 application before the National Company Law Tribunal (NCLT), Kolkata, which admitted the plea on January 2, 2024. The decision was upheld by the National Company Law Appellate Tribunal (NCLAT) on January 25, 2024, prompting the Corporate Debtor's promoter to appeal to the Supreme Court. Before the Supreme Court, the Appellant challenged the admission of the Section 7 application by contending that the power to initiate the Corporate Insolvency Resolution Process (CIRP) is discretionary rather than automatic, even where the existence of a financial debt and default is established. Relying on Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352, the Appellant argued that the Adjudicating Authority failed to properly apply its mind to relevant considerations, including whether initiation of insolvency proceedings was warranted in the facts of the case, despite the admitted default on a debt due and payable by the Corporate Debtor. Rejecting the Appellant's contention, the judgment authored by Justice Bagchi distinguished Vidarbha's case from the facts of the present case, noting that in Vidarbha, the award passed in favour of the Corporate Debtor was higher than the claim of the Financial Creditor, rendering the initiation of the CIRP unwarranted. However, in the present case, the Court noted that the Corporate Debtor had not paid off his liability, and there existed multiple liabilities in crores, justifying the REC's initiation of CIRP. “In Vidarbha (supra), this Court had taken note of an award passed by APTEL in favour of the corporate debtor which far exceeded the claim of the financial creditor, and held in the setting of such facts, initiation of CIRP was unwarranted. In the present case, Appellant's contention regarding Corporate Debtor's viability is highly dubious. Though the Corporate Debtor strenuously demonstrates its commercial viability, the NCLAT has noted that the extent of outstanding liability as on 02.01.2024 ...

S.7 IBC | Corporate Debtor's Ability To Pay Debt Not To Be Considered Before Admitting Insolvency Petition : Supreme Court

Yash Mittal

If debt and default are established, then Section 7 application must be admitted.

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