Contributed by Hrishikesh Goswami and Mahim Raval

Introduction:

Section 7 of the IBC deals with the initiation of a Corporate Insolvency Resolution Process (“CIRP”) by Financial Creditors (“FCs”) against a Corporate Debtor (“CD”). However, the word ‘may’ used in Section 7(5) confers a discretionary power on the National Company Law Tribunal (“NCLT”) to admit an insolvency application filed by the FCs, subject to its satisfaction of the existence of a default. This usage, in contrast to the word “shall” used in Section 9, that allows for filing of an Insolvency Application by an Operational Creditor (“OC”), has been a subject of conundrum, and there are various contradictory precedents elucidating the same.

In M. Suresh Kumar Reddy v. Canara Bank, the Supreme Court (“Apex Court”) attempted to clarify this position by treating the Vidarbha Judgment as an exception and rewriting the whole jurisprudence around the admission of insolvency applications.

This blog attempts to analyse the verdict of Suresh Kumar, contextualise its findings with the established jurisprudence, in this regard before the Indian Courts, and discuss its implications for future disputes. Furthermore, we argue that the Suresh Kumar judgement represents an opportunity missed by the Apex Court to clarify a long-drawn confusion of law that would have significant legal and business implications.

Factual Background:

A loan had been sanctioned to M/S Kranthi Edifice Ltd. (hereinafter the ‘CD’) by Syndicate Bank, on which the CD subsequently defaulted. Following the merger of Syndicate Bank with Canara Bank, it became the FC in the instant case. Canara Bank, in its capacity as the FC, filed an application under Section 7 of the IBC before the NCLT, Hyderabad. The NCLT admitted the application upon being satisfied about the existence of a debt and the subsequent default by the CD. M. Suresh Kumar Reddy, a suspended director of the CD, aggrieved by the Order of Admission issued by the NCLT, appealed the same before the National Company Law Appellate Tribunal (“NCLAT”). In its order dated August 5, 2022, the NCLAT upheld the Order of Admission issued by the NCLT. Reddy approached the Apex Court  in an appeal against the NCLAT order, relying upon the finding of the Court in the Vidarbha judgement, arguing that the NCLT wasn’t under an obligation to admit the Section 7 application even if the existence of a debt and subsequent default was established.

Arguments:

The counsel appearing for M. Suresh Kumar Reddy argued before the Hon’ble Apex Court, relying upon the Vidarbha ratio, thatthe existence of a financial debt and subsequent default by the CD doesn’t obligate the NCLT to admit a Section 7 application. Countering this submission, the counsel for the FCs argued that Vidarbha Industries was a judgment that was premised on the peculiar facts of the case and wasn’t a uniform rule of law. It was also argued that the Supreme Court’s verdicts in Innoventive Industries & E.S. Krishnamurthy, which held that the NCLT, upon its satisfaction of the existence of ‘debt’ and ‘subsequent default’ shall admit an application under Section 7, are the settled position of law.

Findings of the Court:

The Apex Court was of the opinion that, if satisfied of the existence of a financial debt and a subsequent default on the same by the CD, the NCLT must admit the application. The only exception is when the application itself is incomplete, in which case the creditor will be instructed to rectify the insufficiency within 7 days. Further, the requisite condition to this effect is that the debt must be ‘due’, i.e. when a debt isn’t time barred or is not payable under provisions of law, irrespective of any dispute that might have arisen. Commenting on the position taken in Vidarbha Industries, the court held that the findings of the Supreme Court were to settle the peculiar facts of that case and could not be extended to the instant case, the facts of which were significantly different.

Missed Opportunity for the Supreme Court?

In relation to the ambiguity created after the Vidarbha judgment, the Ministry of Corporate Affairs (“MCA”), through a consultation paper dated 18th January, 2023, proposed an amendment to the current Section 7(5)(a) substituting the word ‘may’ with ‘shall’, making it mandatory rather than discretionary for NCLT. What is strange however, is that in the Suresh Kumar Reddy, the Supreme Court had the chance to explain the legal situation after Vidarbha and eliminate the necessity for such a legislative revision altogether. This however, was not the case.

To this end, the Suresh Kumar Reddy bench should have made it clear that the language of Section 7 of the IBC could be interpreted to mean that the NCLT has the authority to only accept or reject a financial creditor’s application on the grounds outlined in earlier Supreme Court decisions. The Supreme Court may have accomplished this by harmonizing the Vidarbha interpretation with earlier decisions.

Need for an amendment?

However, in our opinion, the proposal as put forward in the consultation paper will further create confusion, as various precedents like Vidarbha and others have a unique factual matrix requiring special consideration.

The Kolkata bench of the NCLT in Central Bank of India v. Simplex Infrastructures Ltd., although a debt and default was clearly established, rejected a Section 7 application when the corporate debtor proved that he had secured a few arbitral awards.

The Ahmedabad bench in HDFC Bank Ltd. v. John Energy Ltd., opined that since the debtor, John Energy Ltd., was one of the leading oil & gas suppliers having secured high-valued contracts with multiple clients, the initiation of CIRP will reduce the valuation of existing contracts of the CD, and a loan-restructuring by the HDFC bank will solve the issue.

Again In Kotak Mahindra Bank Ltd. v. Kunal Structure (India) (P) Ltd., the Ahmedabad Bench of the NCLT kept a section 7 application in abeyance for 6 months, relying on Vidarbha and on the justification that the debtor had obtained arbitral awards totalling Rs 41.23 crores that were in the process of being carried out as opposed to the established default of Rs 18.11 crores.

The Hyderabad Bench of the NCLT cited Vidarbha in SREI Equipment Finance Ltd. v. Madhucon Projects Ltd. and denied admission of an application under Section 7 of the Code on the grounds that there was a decree and an arbitral decision in the CD’s favour.

Given that corporate debtors continue to use the Vidarbha verdict as a sound precedent in their defence, it is probable that the Supreme Court’s strategy will not help tribunals resolve the current conundrum. Given the foregoing, it seems that these problems can only be solved by a legislative change that specifies the application of Section 7.

There is a lot of possibility for misunderstanding because the NCLT’s authority to accept or reject an application may vary on a case-by-case basis. Therefore, it is suggested that the legislature take a more objective approach to defining the type of unpaid debt, such as disputed/undisputed, existing or contingent, or temporary debt, so that the NCLT can refer to the same in order to decide whether to accept or reject a Section 7 application.

Looking Ahead:

It is obvious that there is a great deal of uncertainty when assessing the NCLT’s authority and jurisdiction to admit a claim under Section 7(5) of the IBC. As and when an appeal is brought before it, the Supreme Court of India has made an effort to clarify its stand on legislative intent. Although there already exist several precedents on this topic and the NCLT’s average processing time for applications has significantly risen, different problems still persist. With such unresolved or unclear questions, the primary goal of IBC, which is rapid resolution, is now in doubt. The authors are of the opinion that effective legislation, which makes the NCLT’s authority mandatory in nature, can alleviate the aforementioned issue by highlighting the exceptional circumstances in which the NCLT may exercise discretion.