Upholding CIRP against two hotel companies, the Supreme Court has held that admission under Section 7 IBC requires a summary finding of debt and default above the statutory threshold, and not an exact reconciliation or forensic reconciliation of accounts, and that positive Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) does not answer a failure to service debt.
The Court clarified that under Section 7 IBC, default is established through a summary, prima facie assessment on a preponderance of probabilities. The NCLT need not determine the outstanding liability down to the last rupee, and quantification disputes cannot arrest admission where the Section 4 threshold is satisfied. The Court also said that Record of Default issued by an Information Utility is independently sufficient to prima facie establish default. Although not irrebuttable, its presumption can be displaced only by clear, cogent, credible and compelling material, not bare denials or bookkeeping disagreements.
The Apex Court went on to observe that financial contracts, account statements, acknowledgements and other documentary material form an alternative evidentiary tier. They must collectively demonstrate that a financial debt became due and remained unpaid, and they do not individually enjoy the same evidentiary footing as an IU Record of Default. Further, positive EBITDA does not establish the capacity to meet debt-servicing obligations. The Code adopts default under Section 3(12), rather than commercial or balance-sheet insolvency, as the trigger for timely intervention.
Briefly, Piramal extended loan facilities to GSTAAD Hotels Pvt Ltd. and Neo Capricorn Plaza Pvt Ltd., which operated hotels in Bengaluru and Pune. The financing arrangements included a Cash Management Agreement (CMA), under which part of the hotel revenues was earmarked for debt servicing, and a Debt Service Reserve Account (DSRA). The companies also obtained separate Emergency Credit Line Guarantee Scheme (ECLGS) facilities.
The lenders subsequently assigned the facilities to Omkara Asset Reconstruction Pvt Ltd., which recorded defaults with NeSL, recalled the outstanding amounts and filed applications under Section 7 of the Insolvency and Bankruptcy Code, 2016. The NCLT initially admitted the applications, but the NCLAT remanded the matters for fresh consideration of the CMA, DSRA and other relevant material. After reconsideration, the NCLT again admitted both applications, and the NCLAT upheld those orders.
Before the Supreme Court, the appellants argued that proper adjustment of the CMA and DSRA amounts would eliminate the alleged default, that earlier remand observations had attained finality, and that profitable, operating hotels should not be pushed into insolvency. They also relied on the companies’ positive EBITDA to oppose admission into CIRP.
A Two-Judge Bench comprising Justice Augustine George Masih and Justice Dipankar Datta explained that an appeal under Section 62 is confined to questions of law, not a fresh examination of accounts or evidence. Concurrent factual findings of the NCLT and NCLAT can be disturbed only where they are perverse, unsupported by evidence, reached by ignoring material evidence, or based on an incorrect legal standard. It also held that Omkara’s status as a financial creditor under Section 5(7) stood established, as the assignment’s validity had already been conclusively decided between the parties, and reopening it was barred by issue estoppel.
On the accounting objections, the Court found no legal error in the tribunals’ approach. The NeSL records established that default had been registered and had gone unchallenged, while the account statements, review reports, recall notice and the companies’ own correspondence collectively supported a default exceeding the statutory threshold. The CMA and DSRA arguments had been examined by both tribunals, and further precision in the outstanding amount belonged to the claims-verification process during CIRP, rather than being a precondition to admission.
The Court rejected positive EBITDA as an answer to default. A profitable company may still lack sufficient cash to meet its repayment obligations, and EBITDA does not establish its ability to service debt. The Code is intended to intervene when default occurs, rather than wait until the company reaches irreversible financial collapse. The jurisdictional trigger is therefore ‘default’ under Section 3(12), not commercial or balance-sheet insolvency.
