In the blog post titled ‘Vidarbha Aftermath’, the decision of the Supreme Court of India (“Supreme Court”) in Vidarbha Industries Power Limited v. Axis Bank Limited[1] (“Vidarbha”) was discussed and analysed. Based on the Vidarbha judgment, the National Company Law Appellate Tribunal (“NCLAT”) and various National Company Law Tribunals (“NCLT/Adjudicating Authority”) had taken divergent views and interpretations on the power of the Adjudicating Authority to reject an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”).
However, the Supreme Court on May 11, 2023, in M. Suresh Kumar Reddy v. Canara Bank[2] (“Suresh Kumar”), issued a few clarifications that made it clear that the pre-Vidarbha period principles continue to apply even today.
Brief facts in the Suresh Kumar judgment:
The Respondent – Canara Bank had extended a secured overdraft facility and several bank guarantees to Kranthi Edifice Private Limited (“Corporate Debtor”). The Corporate Debtor sought for extension of the bank guarantees which was rejected by the Respondent Bank. Thereafter, the Respondent Bank called upon the Corporate Debtor to pay the entire outstanding amount that was due. Upon the failure of the Corporate Debtor to make payment, the Respondent Bank initiated corporate insolvency resolution process (“CIRP”) under Section 7 of the Code against the Corporate Debtor before the NCLT, Hyderabad (“Application”).
The NCLT, Hyderabad admitted the Application on June 27, 2022. Aggrieved by the order of the NCLT, Hyderabad, the Appellant – a suspended director of the Corporate Debtor, filed an appeal before the NCLAT, Chennai, which was rejected on September 5, 2022. Thereafter, the Appellant filed a civil appeal before the Supreme Court under Section 62 of the Code.
Contentions taken:
The Appellant mainly contended that repeated efforts were made to enter into a one-time settlement by the Corporate Debtor, which were not acceded to by the Respondent Bank. The default occurred due to the Respondent Bank refusing to extend the bank guarantees, therefore, the Respondent Bank is responsible for triggering the default. Further, considering the Vidarbha judgment, even if debt[3] and default[4] were established, the Adjudicating Authority can refuse to admit the Application.
The Respondent Bank relied on the order in the review petition filed against the Vidarbha judgment[5] (“Review Petition”), which clarified that the Vidarbha judgment was based on peculiar facts. Moreover, it was submitted that the judgment of the Supreme Court in E.S. Krishnamurthy v. Bharath HiTecch Builders Private Limited[6] (“E.S Krishnamurthy”)is to be followed, which holds that once the Adjudicating Authority is satisfied that there is a financial debt[7] and default has occurred, it is bound to admit an application under Section 7 of the Code.
The Finding:
While dismissing the appeal, the Supreme Court referred to the judgments passed in Innoventive Industries Limited v. ICICI Bank[8] (“Innoventive Industries”) and E.S. Krishnamurthy[9] (which has followed the principles laid down in Innoventive Industries) and held that once the Adjudicating Authority is satisfied that the default has occurred, there is hardly any discretion left with it to refuse the admission of an application under Section 7 of the Code.
The Supreme Court analysed the definition of ‘default’ under Section 3(12) of the Code and held that even non-payment of a part of a debt, which is due and payable, would amount to a default on the part of the corporate debtor. The Supreme Court held that only if the Adjudicating Authority finds that there is a debt, but it has not become due and payable, the application under Section 7 of the Code can be rejected. Otherwise, there is no ground available to the Adjudicating Authority to reject an application filed under Section 7 of the Code.
More importantly, the Supreme Court held that “…the decision taken in the Vidarbha judgment cannot be read and understood as taking a view which is contrary to the view taken in Innoventive Industries and E.S Krishnamurthy. The view taken in the case of Innoventive Industries still holds good” (emphasis added).
Conclusion:
The Suresh Kumar judgment concludes the debate which arose due to the Vidarbha judgment on the discretion of the Adjudicating Authority to reject an application under Section 7 of the Code. The Vidarbha judgment provided an avenue to the corporate debtors to develop innovative arguments as a defence to the application filed under Section 7 of the Code. The Suresh Kumar judgment re-enforces the position that prevailed pre-Vidarbha where the principles laid down in Innoventive Industries and E.S. Krishnamurthy have been reiterated. Further, the action to now amend the Code insofar as to clarify this lacunae is effectively rendered moot considering the Suresh Kumar judgment.
For further information, please contact:
Sharan Kukreja, Partner, Cyril Amarchand Mangaldas
sharan.kukreja@cyrilshroff.com
[1] (2022) 8 SCC 352 (Supreme Court, decided on July 12, 2022).
[2] Civil Appeal No. 7121 of 2022 (Supreme Court, decided on May 11, 2023).
[3] Section 3(11), IBC.
[4] Section 3(12), IBC.
[5] Axis Bank Limited v. Vidarbha Industries Power Limited., 2022 SCC OnLine SC 1339 (Supreme Court, decided on September 9, 2022).
[6] (2022) 3 SCC 161 (Supreme Court, decided on December 14, 2021).
[7] Section 5(8), IBC.
[8] (2018) 1 SCC 407 (Supreme Court, decided on August 31, 2017).
[9] See supra note 5.
