Supreme Court: NCLT Cannot Refuse Admission of Application Under Section 7 of IBC in Case of Default, Clarifies Discretionary Powers
On May 11, 2023, Supreme Court of India, in a recent judgment, clarified the scope of Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) and the discretionary powers of the National Company Law Tribunal (NCLT) in admitting applications. The judgment was delivered by Justice Abhay S. Oka.
The case involved an application filed by Canara Bank under Section 7 of the IBC against M/s Kranthi Edifice Pvt. Ltd., a corporate debtor. The NCLT had admitted the application and declared a moratorium. The suspended director of the corporate debtor, M. Suresh Kumar Reddy, appealed against the NCLT’s decision before the National Company Law Appellate Tribunal (NCLAT), which dismissed the appeal. Aggrieved by the NCLAT’s decision, Reddy approached the Supreme Court.
The primary issue before the Supreme Court was whether NCLT had the discretion to refuse admission of an application under Section 7 of the IBC after establishing the existence of a default. The appellant argued that the NCLT could have refused to admit the application based on good reasons, as explained in the Vidarbha Industries Power Limited v. Axis Bank Limited case.
The Supreme Court, after considering the submissions, held that once the NCLT is satisfied that a default has occurred, it has limited discretion to refuse admission of the application under Section 7 of the IBC. The court emphasized that non-payment of a part or instalment of the debt when it becomes due and payable would constitute a default. It clarified that if a debt is due and payable, the NCLT must admit the application, unless there are grounds to reject it based on incomplete documentation or other specific reasons.
The court referred to the Vidarbha Industries case, which discussed the discretionary powers of the NCLT under Section 7(5)(a) of the IBC. It noted that the Vidarbha Industries case should not be read as taking a view contrary to the decisions in Innoventive Industries Limited v. ICICI Bank and Another and E.S. Krishnamurthy and others v. Bharath Hi-Tecch Builders Private Limited. The court held that the view taken in the Innoventive Industries case still holds good.
In the present case, the court found that there was no merit in the appellant’s appeal. It noted that the Corporate Debtor had committed a default, and the NCLT’s decision to admit the application was justified. The court also considered the demand notice issued under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the acknowledgments made by the Corporate Debtor. It concluded that the NCLT had not erred in admitting the application.
Based on its findings, the Supreme Court dismissed the appeal, stating that there were no grounds to interfere with the NCLT’s decision. The court ordered no costs in the matter.
Date of Judgment: May 11, 2023
Suresh Kumar Reddy vs Canara Bank & Ors.
