NCLAT Holds Discretion Under Section 7 Not Permissible Once Debt and Default Are Established; Sets Aside Rejection Based on Misapplication of Vidarbha

The NCLAT held that discretion under Section 7 of the IBC is not permissible once debt and default are established, and accordingly set aside the rejection of the CIRP application based on the Adjudicating Authority’s misapplication of the Vidarbha judgment.

On 1 July 2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Arun Baroka (Technical Member), while adjudicating a company appeal, held that once the existence of financial debt and default is established under Section 7 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority has no discretion to reject the application on equitable considerations or stakeholder-impact grounds. The NCLAT clarified that the Vidarbha Industries ruling was confined to its specific facts and does not override binding precedents that mandate admission of CIRP upon satisfaction of debt and default.

In the present case, the appellant acting as trustee of EARC Trust SC 444, filed an appeal challenging the NCLT Ahmedabad Bench’s order dated 06.11.2024, which dismissed its Section 7 application seeking initiation of CIRP against Takshashila Heights Pvt. Ltd. The application had been filed due to defaults in repayment of two term loans amounting to ₹70 crores originally sanctioned by ECL Finance Ltd. in 2018 and assigned to the appellant in 2022. Despite the appellant offering restructuring relief in 2023, the Corporate Debtor defaulted again, prompting revocation of the arrangement and initiation of proceedings under both SARFAESI and the IBC.

The Adjudicating Authority dismissed the Section 7 petition on the ground that the proceedings appeared to be recovery-oriented rather than resolution-driven, relying on the Supreme Court's ruling in Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 to justify the exercise of discretion in rejecting the application despite the admitted existence of debt and default. The NCLT also expressed concerns that admitting the Corporate Debtor—a real estate company with an ongoing project—into insolvency would adversely affect stakeholders, particularly homebuyers.

The appellant argued that the Adjudicating Authority had misapplied Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529, ignoring binding precedents including Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, Swiss Ribbons Private Limited and Another v. Union of India and Others, REEDLAW 2019 SC 01504, and M. Suresh Kumar Reddy v. Canara Bank and Others (2), REEDLAW 2023 SC 05587, which held that the satisfaction of debt and default leaves no room for discretion in rejecting a Section 7 petition. It further contended that the Corporate Debtor had acknowledged the debt and default, and that the restructuring had clearly failed. The invocation of parallel remedies under SARFAESI and DRT, it was submitted, did not preclude the initiation of CIRP, as there existed no legal bar under the IBC against doing so.

The Corporate Debtor, in opposition, highlighted its ongoing real estate project "Takshashila Elegna" in Ahmedabad, involving 279 units, out of which 186 were already sold. It claimed that delays due to regulatory hurdles and the COVID-19 pandemic had caused project setbacks and cash flow issues. While acknowledging the debt and partial default, the Corporate Debtor argued that the appellant's failure to issue provisional NOCs had blocked its ability to monetise collateral assets, further worsening repayment capacity. It also accused the appellant of forum shopping and of pursuing insolvency as a coercive recovery tactic.

The Appellate Tribunal found that the Adjudicating Authority erred in applying Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529, which was rendered in the specific facts of that case and could not override the general principle under Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 and E.S. Krishnamurthy and Others v. Bharath Hi Tech Builders Private Limited, REEDLAW 2021 SC 12544 that once debt and default are established, admission under Section 7 is mandatory. It held that the Corporate Debtor’s admitted defaults, failed restructuring, and continuing liabilities made a clear case for admission of CIRP. Allegations of mala fide intent and forum shopping by the appellant were rejected for lack of evidence.

The Tribunal also dismissed the Intervention Application filed by The Elegna Co-op. Housing and Commercial Society Ltd., noting that the intervenor had no locus under the IBC and was neither a financial nor an operational creditor. It reaffirmed that third-party concerns cannot override the statutory framework under which CIRP is to be admitted upon satisfaction of the prescribed conditions. The Tribunal concluded that the NCLT’s order suffered from legal infirmity and directed admission of CIRP against the Corporate Debtor within 30 days.

Mr. Abhijeet Sinha, Sr. Advocate with Mr. Aditya Vashishth and Mr. Anmol Bansal, Advocates, represented the Appellant.

Mr. Saurabh Kalia and Mr. Avik Sarkar, Mr. Arjun Sheth and Mr. Rajiv Chawla, Advocates, appeared for the Intervenor.

---

To access the full content related to this article, including the complete judgment text, detailed legal analysis, ratio decidendi, headnotes, cited case laws, and updates on relevant statutes and notifications, we invite you to subscribe to our premium service.

Click "Subscribe" to unlock these exclusive legal resources.

If you are already a subscriber, please explore these resources by clicking the following citation/link.

REEDLAW 2025 NCLAT Del 07502