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FLIPPING THE SCRIPT: CORPORATE INSOLVENCY ADMISSION BECOMES THE NORM

[Ayush Kumar is a student at Hidayatullah National Law University]



The Hon’ble Supreme Court ('SC') through its judgement in M Suresh Kumar Reddy vs. Canara Bank ('M Suresh Kumar Reddy Ruling') has tried to settle the dust pertaining to the admissibility of the application for Corporate Insolvency Resolution Process ('CIRP') under section 7(5) of the Insolvency and Bankruptcy Code ('IBC') 2016. Section 7(5) of IBC vests the power to admit or reject a CIRP application filed by a financial creditor with the NCLT. Interestingly, there have been diverse verdicts on the nature of power vested with the National Company Law Tribunal (‘NCLT’), ranging from Innoventive Industries vs ICICI Bank to Vidarbha Industries Power Limited vs Axis Bank Ltd (Vidarbha Judgement). In this blog, the author delves into the verdict of the SC in M Suresh Kumar Reddy Ruling and tries to establish a nexus with the past jurisprudence.


Nexus with the Past Jurisprudence


The question of the nature of power vested with the NCLT was first discussed extensively in the Innoventive Industries Case, in which the apex court held that the adjudicating authority must admit the application under section 7 of IBC if the corporate debtor is indebted and defaulted in payment. Again in E.S. Krishnamurthy and Others vs Bharat HiTech Builders Pvt. Ltd., the SC reiterated that the Adjudicating Authority (AA) only has the power to verify the occurrence of default. If there is a default and the requisites of Section 7(5) of IBC are met then it is obligatory for the AA to admit the petition. However, the apex court in Vidarbha Judgement held that the power conferred on NCLT by section 7(5) of IBC to admit the insolvency application is discretionary in nature. The usage of the word ‘may’ in section 7(5) of the IBC signified the discretionary power as against ‘shall’ in section 9(5) of the IBC for operational creditors which mandated the acceptance of application if the requirements were met. The court emphasized on literal interpretation of statutes, as held in Lalita Kumari v. Government of Uttar Pradesh. The Vidarbha judgement was premised on the reasoning that the entities facing temporary insolvency should not be subjected to unnecessary resolution processes and sufficient time should be given to resolve their defaults.


Factual Matrix


Canara Bank (‘Respondent’) is the successor of Syndicate Bank owing to a merger deal. A Secured Overdraft Facility of Rs. 12 crores were granted by the Syndicate Bank, apart from sanctioning the Bank Guarantee limit of Rs. 110 crores to M/S Krnathi Edifice Pvt. Ltd. (‘Petitioner’)The Respondent filed an application for insolvency against the petitioner under section 7 of IBC. In the insolvency application, the Respondent contended non-payment of dues. While the application was pending, the Telangana High Court by an interim order refrained the respondent from taking any coercive steps. The petitioner contended that a proposal of a one-time settlement was turned down by the respondent. The NCLT Hyderabad admitted the application and declared a moratorium under section 14 of the IBC. The appeal against the NCLT order was dismissed by NCLAT. Consequently, the petitioner resorted to an appeal in the apex court.

 

To Admit or Not to Admit: Analysis of the Judgement


The Appellant argued that numerous attempts to reach a one-time settlement with the respondents were of no avail. Reliance was placed on the Vidarbha Judgement to argue that the NCLT was empowered to reject the petition even when debt has become payable. The Respondent contended that the review petition filed before the apex court for the Vidarbha Judgement clarified that the observations were limited to the facts and circumstances of the case and the admission of application is only dependent upon the default of financial debt.

The Vidarbha Judgement came as a dismay for the financial creditors. There were a lot of irregularities in the judgement. The court did not only digress with the past jurisprudence by not following the Innoventive judgement but was also counterintuitive to the objectives of IBC. The Judgement highlighted that it is unnecessary to penalize the Corporate Debtor for temporary non-payment of dues. Although, this cannot be disputed the IBC is primarily enacted to expedite insolvency disputes in a transparent manner. The BLRC Report of 2015 also stated that the insolvency process should be initiated on the existence of default. This view was further advanced in the Swiss Ribbons Judgement which highlighted that "Legislative policy now is to move away from the concept of "inability to pay debts" to "determination of default". The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation."

The apex court in M Suresh Kumar Reddy Ruling has tried to settle the dust. The division bench of the apex court upheld the stance taken in the Innoventives Judgement and elucidated that if the CD had defaulted and the debt had become payable then the NCLT had to admit the application of a financial creditor. The court highlighted that only when the debt has not become payable the petition can be rejected by NCLT. Moreover, the court also pondered upon the fact that the current judgement has in no sense overruled the Vidarbha Judgement rather than only interpreted it. The Vidarbha Judgement has categorically stated that the decision in Vidarbha Judgement is limited to the facts of that case and is not to be read as a proviso to section 7.

 

Conclusion and Way forward


The IBC was enacted with the aim of resolving stressed assets and maximizing the value thereof. It is pertinent to note that if CD is provided with an option to enter their defence in the CIRP application filed by the financial creditor and discretion is given to the AA to admit the application, the debtors would use this as a tool to put an unprecedented delay to the proceedings. Section 7(5) of the IBC puts out two requisites after which the AA ‘may’ admit the application. Firstly, there should be an occurrence of debt and secondly, it should have become payable. Although the Courts/Tribunals, in many cases, have established that the power to admit is mandatory and not discretionary, there still exists a lot of ambiguity regarding the nature of the power conferred on NCLT primarily owing to the Vidarbha Judgement. The divided precedents have paved the way for lengthy litigation for admission of application.

The lack of clear legislative expression is the primary issue that needs to be resolved to settle the conundrum. A viable solution to this problem is an amendment to section 7(5) of the IBC. Amending the concerned section to make it mandatory for the AA to admit the application in case all the requisites are fulfilled would resolve the subsisting issue. In this regard, the Ministry of Corporate Affairs (MCA) put out a Consultation paper dated 18th January 2023 consisting of proposed changes, one of which was related to section 7 of the IBC. The MCA has proposed to make admission of application mandatory if there exists a default in the payment of debt. Moreover, the nature of unpaid debt also becomes pertinent in the admission of section 7 application. In the UK Insolvency laws, apart from other requisites, the unpaid debt should be undisputed for admission of Insolvency application. Therefore, taking a cue from this, an amendment could also be made in this regard to simplify the adjudication of the admissibility claim of financial creditors.


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