[Megha Maiti and Subhasmita Routray are legal counsels at Mercedes-Benz Financial Services India Private Limited]
Section 7(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) lays down the power of the National Company Law Tribunal (NCLT) to either accept or reject an insolvency application filed by a financial creditor. The issue of whether the said power is mandatory or discretionary in nature has witnessed many contradictory precedents, from the case of Innoventive Industries v. ICICI Bank to the case of Vidarbha Industries Power Ltd. v. Axis bank Ltd. The Supreme Court of India on 11 May 2023 has finally shed some clarity on the judicial interpretation of this section through its verdict in the case of M Suresh Kumar Reddy v. Canara Bank and explained its rationale behind the prior judgements passed.
This post attempts to analyse the observations made by the Supreme Court of India on various precedents while delivering their verdict in M Suresh Kumar Reddy. It proposes the need for a legislative amendment to achieve the objective of the IBC, i.e., to provide the resolution of insolvency disputes in a time-bound manner while maximizing the value of the assets of the corporate debtor.
Judicial Development of Powers of NCLT under Section 7 of the IBC
The role of the adjudicating authority under section 7(5) was dealt with in the cases of Innoventive Industries and ES Krishnamurthy v Bharath Hi Tech Builders Pvt. Ltd. whereby the Supreme Court of India specified the limits of jurisdiction of the NCLT in admitting an insolvency application under section 7(5). It was stated that if the financial creditor can prove that the corporate debtor has a “debt” and that they have “defaulted”, the NCLT shall admit the application filed by the creditor without entering into the merits of the case.
The intent of this provision was taken in a separate direction when the Supreme Court in Vidarbha Industries Power Ltd gave a new meaning and interpretation to the word “may”. This was indeed a major diversion from the settled law in the case of Innoventive Industries, which has been followed and cited throughout the years. The bench in this judgement gave discretionary power to the NCLT, which may admit or reject the application after considering the merits of the case. The rationale behind this was to ensure that temporarily insolvent companies can revive themselves to clear the default and are not put at an unfair disadvantage or penalised by the resolution process.
The discretion given to the NCLT by the literal interpretation of the clause was not in consonance with the intent of the act that then led to the Vidarbha Review case. The review petition highlighted the diversion from major landmark judgements like Innoventive Industries and E.S. Krishnamurthy, where it was held that NCLT’s powers are limited to ascertaining the existence of debt and the same being unpaid for admission of an application. However, the bench dismissed the review petition and upheld the original judgement by clarifying that the said stand was taken after taking into consideration the peculiar facts of the case. The bench also highlighted the judgement in E.S Krishnamurthy based on which the review petition was filed, and stated that the case nowhere dealt with the question of the NCLT’s power being discretionary or mandatory during admission of an application. Rather, it addressed the issue of whether the NCLT, while deciding whether to admit or reject an application, has the power to impose a settlement on the parties who are not ready to settle.
Ruling in the M. Suresh Kumar Reddy case
In the M Suresh Kumar Reddy, Syndicate Bank (the financial creditor) sanctioned a loan to Kranthi Edifice Pvt. Ltd. (the corporate debtor) in the form of a secured overdraft facility and bank guarantee in favour of the Telangana Government. Later, the corporate debtor requested an extension of the bank guarantee as the Telangana Government was likely to encash the guarantee. The bank rejected the request and asked the corporate debtor to repay the entire debt.
In December 2019, an application was filed before the NCLT under section 7 of the IBC by the financial creditor. During the pendency of the same, the High Court of Telangana in April 2022 passed an interim order restraining Syndicate Bank from taking any coercive steps. Meanwhile, the NCLT application was admitted by the bench in June 2022. An appeal to the National Company Law Appellate Tribunal (NCLAT) filed by the director of the corporate debtor was also dismissed by the bench. Hence, the current petition before the Supreme Court was filed, questioning the admissibility of the application by the NCLT Hyderabad Bench.
The Supreme Court observed that “once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7. ….. Thus, even the non-payment of a part of debt when it becomes due and payable will amount to default on the part of a Corporate Debtor. In such a case, an order of admission under Section 7 of the IB Code must follow. If the NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected. Otherwise, there is no ground available to reject the application.”
Thus, the Court upheld the view taken in the cases of Innoventive Industries and E.S Krishnamurthy and highlighted that if the debt of the corporate debtor is due and payable, then the NCLT shall accept the application of the financial creditor. Only in cases where the debt is not due and payable can the said application be rejected. The division bench of the Supreme Court categorically held that the Vidarbha review case has nowhere overruled the Innoventive Industries case and rather elucidated that the judgement was made in the context of the case at hand and should not be read as a proviso to the statute. Thus, the admission of an application by the NCLT if “debt” and “default” are proved is the general norm, and rejecting such an application can only be an exception to the same.
Need for Legislative Amendment
Section 7(5) of the IBC lays down two grounds under which the NCLT “may” accept a claim filed by financial creditors, provided that the application filed by the financial creditor is complete and there is no ongoing disciplinary proceeding against the proposed resolution professional.
- The corporate debtor is in debt.
- The corporate debtor has defaulted on the debt.
The Supreme Court, in several precedents, has established that the power of the NCLT is mandatory under section 7(5) of the IBC. The Ministry of Corporate Affairs, by way of a consultation paper dated January 18, 2023, has also proposed an amendment to section 7 of the IBC to amend the word “may” to “shall” in the provision, consequentially making it mandatory for the NCLT to admit an application where the occurrence of default is established. However, if the provision becomes mandatory, then how does one address exceptions that crop up in cases like Vidarbha Industries Power Ltd?
From a conjoint reading of the concerned provision and the multiple precedents in this context, it can be concluded that the power of the NCLT to admit or reject an application may vary on a case-by-case basis depending on the facts of the case, hence leaving a lot of room for confusion. Thus, it is proposed that the legislation should undertake a more objective approach in clarifying the kind of unpaid debt, like disputed/undisputed, existing/contingent or temporary debt, so that the same can be referred by the NCLT in order to adjudicate on the acceptance or rejection of a section 7 application. Hence, an amendment in this regard would not only lay out a proper framework for the NCLT to adjudicate on the admissibility of a claim filed by a financial creditor, but it would also bring in more uniformity and fairness in its adjudication.
It is clear that there is a lot of ambiguity in determining the jurisdiction and powers of the NCLT on whether to accept or reject a claim under section 7(5) of the IBC. The Supreme Court of India has tried to clarify its stance on legislative intent as and when an appeal is filed before it. The various challenges, though, still exist, as there are now multiple precedents on this issue and the average time for admission of an application by the NCLT has increased largely. The main objective of NCLT, which is quicker resolution, has now come into question with such unanswered or ambiguous answers in place. However, the said ambiguity can be resolved with strong legislation in place which, though makes the NCLT’s power mandatory in nature, also highlights the exceptional scenarios where the NCLT can have discretionary powers.
– Megha Maiti & Subhasmita Routray