The Supreme Court has clarified that the scope of inquiry before the Adjudicating Authority under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) is limited to ascertaining the existence of a financial debt and a default in its payment. The Adjudicating Authority does not have the discretion to reject a Section 7 application on grounds of the corporate debtor’s financial health, viability as a going concern, or other equitable considerations, once the twin requirements of debt and default are established.
The Court said that the law laid down in the case of Innoventive Industries Ltd. v. ICICI Bank [(2018) 1 SCC 407] remains the settled position, and the observations in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [(2023) 7 SCC 321] were specific to its facts and do not create a general discretionary power to refuse admission.
Further, the Court held that a restructuring proposal that is subject to unfulfilled pre-implementation conditions does not novate the original loan agreement, and the date of default remains tied to the original agreement. The commercial wisdom of the Committee of Creditors in accepting or rejecting a resolution or settlement plan is paramount and non-justiciable.
A Larger Bench comprising the Chief Justice Surya Kant, Justice Joymalya Bagchi and Justice Vipul M. Pancholi found the plea of a bar under Section 10A of the IBC to be a ‘non-starter’. It found that the Financial Creditor’s Section 7 application specified the date of default as March 31, 2018, which is well before the Section 10A prohibited period. Thus, the Appellant’s argument that the restructuring proposals reset the default date was deemed ‘wholly misconceived’.
The Bench noted that even if the first restructuring plan was considered, it was subsumed by the second plan, under which the first instalment was due on March 31, 2021, a date falling outside the Section 10A window. More fundamentally, the Bench agreed with the NCLAT that the restructuring proposals never fructified into valid agreements because the pre-implementation conditions were not fulfilled by the Corporate Debtor. Therefore, the original date of default of March 31, 2018 remained operative, and the proceeding was not barred by Section 10A.
The Bench rejected the Appellant’s argument that the acceptance of part payments by the Financial Creditor amounted to a deemed approval of the restructuring proposals, leading to a novation of the original loan agreement. It observed that the Financial Creditor had consistently maintained that the proposals were contingent on unfulfilled pre-implementation conditions.
In such circumstances, the Bench pointed out that mere receipt of money did not constitute an acceptance of the restructuring proposals or novate the earlier loan agreement. Further, these part payments did not constitute full satisfaction of the existing debt so as to render the Section 7 application inadmissible.
The Bench went on to held that the Appellant’s reliance on the Corporate Debtor’s alleged viability and ability to repay debts was legally misplaced at the admission stage of a Section 7 application. It explained that the legislative intent of the IBC restricts the scope of enquiry for admission of an insolvency process by a financial creditor to the existence of a default of a debt that is due and payable.
Accordingly, the Bench concluded that the Adjudicating Authority i.e., the NCLT has ‘scarcely any discretion’ to refuse admission once a financial debt and default are proven and is not required to conduct a broad inquiry into business viability or other equitable considerations.
Briefly, a common loan agreement was executed between Hiranmaye Energy Ltd. (Corporate Debtor) and REC Ltd. (Financial Creditor) for a term loan of Rs. 1859 crore, with an additional term loan of Rs. 446.97 crore. Later, the Financial Creditor classified the Corporate Debtor’s accounts as non-performing assets (NPA) due to payment defaults. Subsequently, two loan restructuring proposals were formulated, and its implementation was contingent upon the fulfilment of several pre-implementation conditions by the Corporate Debtor, including obtaining a favourable tariff order, creating a Debt Service Revenue Account (DSRA), and demonstrating the power plant’s operational capacity, among others. However, the Corporate Debtor failed to meet these conditions within the stipulated deadlines.
Consequently, the Financial Creditor filed an application under Section 7 of the IBC before the NCLT, citing a default date of March 31, 2018 and an outstanding claim of Rs. 21,83,19,16,896. The NCLT admitted the application and initiated the Corporate Insolvency Resolution Process (CIRP). This decision was upheld by the NCLAT, leading to the appeal before the Supreme Court by Power Trust, a promoter of the Corporate Debtor. During the appeal, the Appellant (Power Trust) made five settlement proposals, all of which were rejected by the Committee of Creditors (CoC). Simultaneously, the CoC approved the resolution plan submitted by Damodar Valley Corporation (DVC) with a 99.92% voting share.
Case Relied On:
Innoventive Industries Ltd. v. ICICI Bank [(2018) 1 SCC 407]
Appearances:
Senior Advocate Joy Saha, AOR Vaibhav Niti, along with Advocates Pranjit Bhattacharya, Salonee Shukla, and Sachin Jain, for the Appellant
Senior Advocate Arvind Nayar and Sanjay Sen, AORs Cyril Amarchand Mangaldas, S.S. Shroff, Avinash B. Amarnath, and Mandakini Ghosh, along with Advocates Madhav Kanoria, Srideepa Bhattacharyya, Neha Shivhare, Aditya Tanay Pandey, Vikash Kumar Jha, Aakanksha Bhola, Sayandeep Chakraborty, and Shivansh Baghel, for the Respondent
