1. Application under Section 7, Insolvency and Bankruptcy Code — Admission of corporate insolvency resolution process — Challenge against dismissal of appeal by appellate tribunal. (Para 1 , 2 , 3 , 4 )
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2023 Supreme(SC) 502
SUPREME COURT OF INDIA
ABHAY S. OKA, RAJESH BINDAL, JJ.
M. Suresh Kumar Reddy - Appellant
Versus
Canara Bank & Ors. - Respondents
Civil Appeal No. 7121 of 2022
Decided on : 11-05-2023
Important Points
The main legal point established in the judgment is that once NCLT is satisfied that a default has occurred, there is hardly any discretion left with NCLT to refuse admission of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
Subject
Insolvency and Bankruptcy - Admission of Application under Section 7
Act Referred
Headnote
IB Code - Insolvency and Bankruptcy - Section 7, Section 14 - [IB Code, Section 7, Section 14] - The court discussed the scope of Section 7 of the Insolvency and Bankruptcy Code, 2016 and the definition of default under subsection 12 of Section 3 of the IB Code. It emphasized that once the National Company Law Tribunal (NCLT) is satisfied that a default has occurred, there is hardly any discretion left with NCLT to refuse admission of the application under Section 7. The court also highlighted the importance of the Innoventive Industries case and clarified that the decision in the case of Vidarbha Industries cannot be understood as taking a view contrary to the view taken in the cases of Innoventive Industries and E.S. Krishnamurthy.
Fact of the Case:
The respondent-Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Hyderabad, Telangana, against a Corporate Debtor M/s Kranthi Edifice Pvt. Ltd. The NCLT admitted the application and declared a moratorium. The appellant, a suspended Director of the Corporate Debtor, appealed against the NCLT's order. The appellant claimed repeated efforts for a one-time settlement, which was turned down by the Bank. The appellant argued that the Bank's failure to extend Bank Guarantees forced the Corporate Debtor to default.
Finding of the Court:
The court found that once NCLT is satisfied that a default has occurred, there is hardly any discretion left with NCLT to refuse admission of the application under Section 7. The court emphasized the importance of the Innoventive Industries case and clarified that the decision in the case of Vidarbha Industries cannot be understood as taking a view contrary to the view taken in the cases of Innoventive Industries and E.S. Krishnamurthy. The court dismissed the appeal, finding no merit in it.
Issues: The issues revolved around the admission of the application under Section 7 of the IB Code, the discretion of NCLT in admitting the application, and the responsibility of the Bank in the Corporate Debtor's default.
Ratio Decidendi: The court emphasized that once NCLT is satisfied that a default has occurred, there is hardly any discretion left with NCLT to refuse admission of the application under Section 7. The court also clarified the importance of the Innoventive Industries case and the interpretation of the definition of default under subsection 12 of Section 3 of the IB Code.
Final Decision: The court dismissed the appeal, finding no merit in it, and there was no order as to costs.
Legal Category Hierarchy
Advocates appeared:
For the Appellant(s) : Mr. Krishnan Venugopal,Sr.Adv. Mr. R.Anand Padmanabhan,Adv. Mr. Shashi Bhushan Kumar, AOR
For the Respondent(s): Mr. Rajesh Kumar Gautam, AOR Mr. Anant Gautam, Adv. Mr. Kartik Jindal, Adv. Mr. Sumit Sharma, Adv. Ms. Anani Achumi, Adv. Ms. Madhumita Bagchi, Adv. Mr. Dinesh Sharma, Adv. Ms. Shivani Sagar, Adv. Mr. Kiran Kumar Patra, AOR Mr. Chandrasekhar Padhi, Adv.
For the Appellant(s) : Mr. Krishnan Venugopal,Sr.Adv. Mr. R.Anand Padmanabhan,Adv. Mr. Shashi Bhushan Kumar, AOR
For the Respondent(s): Mr. Rajesh Kumar Gautam, AOR Mr. Anant Gautam, Adv. Mr. Kartik Jindal, Adv. Mr. Sumit Sharma, Adv. Ms. Anani Achumi, Adv. Ms. Madhumita Bagchi, Adv. Mr. Dinesh Sharma, Adv. Ms. Shivani Sagar, Adv. Mr. Kiran Kumar Patra, AOR Mr. Chandrasekhar Padhi, Adv.
Table of Contents
2. Discretion of adjudicating authority to refuse admission despite default — Impact of failure to extend bank guarantees — Effect of interim stay on coercive actions. (Para 5 , 6 , 7 )
3. Analysis of debt acknowledgment — Distinction between fund-based and non-fund-based facilities — Effect of interim orders restraining coercive action on liability. (Para 8 , 11 , 12 , 14 , 15 , 16 , 17 , 18 )
4. Adjudicating authority must admit Section 7 application upon satisfaction of financial debt and default, unless the application is incomplete. (Para 9 , 10 , 13 )
5. Appeal dismissed. (Para 19 )
6. What is the role of the NCLT upon finding a default under Section 7 of the IB Code?
The NCLT must admit the application once it is satisfied that a default has occurred, unless the application is incomplete. It has little to no discretion to refuse admission if the debt is due and payable. (Para 8 , 9 , 10 )
7. Does the existence of a dispute or a request for settlement prevent the admission of a Section 7 application?
No. In the case of financial debt, the adjudicating authority only needs to verify if the debt is due and a default has occurred; whether the debt is disputed is irrelevant. (Para 8 , 9 )
8. How is default defined under the IB Code in the context of Section 7 applications?
Default is the non-payment of debt when the whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor. (Para 10 )
9. Does a court order restraining coercive action prevent the NCLT from admitting an insolvency application?
Not necessarily. An interim order preventing coercive action does not negate the liability of the corporate debtor to pay the dues or the occurrence of a default. (Para 17 )
JUDGMENT :
ABHAY S. OKA, J.
FACTUAL ASPECTS
1. The respondent-Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short, ‘the IB Code’) before the National Company Law Tribunal, Hyderabad, Telangana. The said application was filed against a Corporate Debtor M/s Kranthi Edifice Pvt. Ltd. The present appellant claims to be a suspended Director of the Corporate Debtor. National Company Law Tribunal (for short, ‘NCLT’), by an Order dated 27th June 2022, admitted the application filed by the respondent-Bank and declared a moratorium for the purposes referred in Section 14 of the IB Code. The appellant claiming to be an aggrieved person preferred an appeal against the said Order before the National Company Law Appellate Tribunal (for short, ‘NCLAT’). By the impugned judgment dated 5th August 2022, NCLAT has dismissed the appeal.
2. The first respondent, Canara Bank is the successor of Syndicate Bank, which made application under Section 7 of the IB Code to NCLT. Syndicate Bank was merged into the first respondent-Canara Bank. A letter of sanction dated 2nd April 2016 was issued by Syndicate Bank by which credit facilities were sanctioned to the Corporate Debtor for one-year valid up to 28th February 2017. A Secured Overdraft Facility of Rs. 12 crores was granted by the Syndicate Bank, apart from sanctioning the Bank Guarantee limit of Rs. 110 crores. Thus, the facilities granted by the Syndicate Bank to the Corporate Debtor were fund-based (Overdraft Facility) and non-fund-based (Bank Guarantees).
3. In the application under Section 7 of the IB Code, the Syndicate Bank stated that as on 30th November 2019, the liability of the corporate debtor under the Secured Overdraft Facility was Rs.74,52,87,564.93. The liability of the Corporate Debtor towards outstanding Bank Guarantees was Rs.19,16,20,100.
4. On 21st October 2022, this Court while issuing notice, recorded a statement of the learned senior counsel appearing for the appellant that a proposal for settlement under a One-Time Settlement Scheme has been submitted to the first respondent-Bank and a sum of Rs.6 crores has been deposited with the first respondent-Bank. Eventually, the said proposal was turned down by the first respondent-Bank. Therefore, the present appeal was taken up for hearing.
SUBMISSIONS
5. The learned Senior Counsel appearing for the appellant submitted that repeated efforts were made to have onetime settlement of the dues payable to the first respondent. But the said request was not acceded to. He relied upon a decision of this Court in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, 2022 (8) SCC 352. He submitted that even assuming that the existence of financial debt and default on the part of the Corporate Debtor was established, the NCLT was not under an obligation to admit the application under Section 7. For good reasons, NCLT could have refused to admit the application under Section 7 of the IB Code. He also fairly pointed out the Order dated 22nd September 2022 passed by this Court in a Review Petition seeking a review of the decision in the case of Vidarbha Industries.
6. He invited our attention to the correspondence between the Government of Telangana and the Syndicate Bank. There were contracts granted by the Telangana Government to the Corporate Debtor. He invited our attention to a letter dated 5th November 2018 addressed by the Executive Engineer on behalf of the Government of Telangana requesting the Bank to extend the Bank Guarantees furnished by the said Bank on the request of the Corporate Debtor. Similarly, by a letter dated 7th August 2019, the Government of Telangana requested the Syndicate Bank to extend 29 Bank Guarantees mentioned in the said letter. He pointed out that the Corporate Debtor addressed a letter to the Bank on 9th January 2020 by which a request was made to extend the Bank Guarantees. He also invited the attention of the Court to a letter dated 8th January 2020 addressed
