Section 7 IBC Admission Mandatory Upon Default – Corporate Debtor’s Viability Irrelevant | Supreme Court
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REEDLAW Legal News Network reports: In a significant reaffirmation of the settled law governing admission of insolvency petitions, the Supreme Court held that once the existence of a financial debt and occurrence of default are established under Section 7 of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority is mandatorily required to admit the application. The Court clarified that considerations relating to the Corporate Debtor’s commercial viability, repayment capacity, or pending settlement proposals are wholly extraneous at the admission stage and cannot be invoked to resist initiation of the corporate insolvency resolution process.
The Bench comprising Justice Surya Kant, Chief Justice of India, Justice Joymalya Bagchi and Justice Vipul M. Pancholi held that unimplemented restructuring proposals, subject to unfulfilled pre-implementation conditions, do not novate the original loan agreements nor alter the date of default so as to attract the statutory bar under Section 10A of the Code. It was reiterated that the jurisdiction of the Adjudicating Authority under Section 7 is limited to a summary determination of debt and default, without embarking upon any assessment of business feasibility or equitable considerations. The Court further clarified that the observations in Vidarbha Industries Power Limited were confined strictly to the peculiar facts of that case and do not dilute the mandatory admission principle laid down in Innoventive Industries Limited and reaffirmed in M. Suresh Kumar Reddy.
The Supreme Court examined the legality of admission of a corporate insolvency resolution process initiated under Section 7 of the Insolvency and Bankruptcy Code, 2016, where the promoter assailed the admission on the grounds of failed restructuring proposals, applicability of Section 10A, alleged novation of the original loan agreement, and the commercial viability of the corporate debtor. The financial creditor had classified the account as a non-performing asset on 31.03.2018, much prior to the COVID-19 period, and had initiated insolvency proceedings after restructuring proposals failed to satisfy pre-implementation conditions.
The Court noted that both restructuring proposals were expressly conditional and never fructified into binding agreements due to failure to fulfil essential pre-conditions such as tariff approval, creation of a debt service reserve account, maintenance of priority debt, and demonstration of operational performance. In the absence of fulfilment of these conditions, the plea of novation was rejected, and the original date of default remained unchanged. Consequently, the bar under Section 10A was held to be inapplicable in view of the Explanation thereto.
The Court reaffirmed the settled position that at the stage of admission under Section 7, the Adjudicating Authority is confined to examining the existence of a financial debt and occurrence of default, and has no jurisdiction to assess business viability, equities, or feasibility of repayment. The ratio in Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 was held to continue to govern the field, and observations in Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 were confined strictly to their peculiar facts, as clarified in M. Suresh Kumar Reddy v. Canara Bank and Others, REEDLAW 2023 SC 05532.
The Court further held that repeated settlement proposals made by the promoter, having been overwhelmingly rejected by the Committee of Creditors, could not interdict the insolvency process in the absence of compliance with Section 12A of the Code. Upholding the commercial wisdom of the Committee of Creditors and the approval of the resolution plan, the Supreme Court dismissed the appeal and vacated the interim stay on the CIRP.
Mr. Joy Saha, Sr. Advocate with Mr. Pranjit Bhattacharya, Ms. Salonee Shukla, Ms. Aashima Gautam, Mr. Sachin Jain, Advocates and Mr. Vaibhav Niti, AOR, represented the Appellant.
Mr. Tushar Mehta, Solicitor General, Mr. Anoop Rawat, Mr. Vaijayant Paliwal, Mr. Saurav Panda, Ms. Charu Bansal, Ms. Mohana Nijhawan and Ms. Snigdha Saraf, Advocates, Mr. S. S. Shroff, AOR, appeared for the Respondents.
Mr. Arvind Nayar, Sr. Advocate, Mr. Madhav Kanoria, Ms. Srideepa Bhattacharyya, Ms. Neha Shivhare, Mr. Aditya Tanay Pandey and Mr. Vikash Kumar Jha, Advocates, M/S. Cyril Amarchand Mangaldas, AOR, Mr. N. Venkataraman, A.S.G., Ms. Pooja Mahajan, Mr. Savar Mahajan, Ms. Urvashi Girdhar and Mr. Srivatsava Beerapali Reddy, Advocates, Mr. Avinash B. Amarnath, AOR, appeared for the Respondents.
Dr. Abhishek Manu Singhvi, Sr. Advocate, Ms. Mandakini Ghosh, AOR, Mr. Yash Johri, Mr. Shivansh Baghel and Mr. Sayandeep Chakraborty, Advocates, appeared for the Respondents.
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