Informal Restructuring No Bar To Insolvency If Debt & Default Proven: Supreme Court

New Delhi, Feb 25 (KNN) The Supreme Court on Tuesday observed that the existence of a debt restructuring arrangement does not prevent the initiation of a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

A Bench of Justices Sanjay Kumar and K Vinod Chandran set aside a ruling of the National Company Law Appellate Tribunal (NCLAT), which had rejected a Section 7 application on the ground that a restructuring arrangement was in place.

Debt and Default Key for Admission

The Court clarified that for admitting a Section 7 application, the adjudicating authority only needs to determine whether a financial debt exists and whether there has been a default. 

Internal communications regarding restructuring, it said, are not sufficient to resist insolvency proceedings once ‘debt and default’ are established.

The dispute arose fr0m a Rs 600 crore debenture-backed financing arrangement for a residential-cum-retail project in Mumbai. 

The corporate debtor had issued non-convertible debentures in March 2018 under a Debenture Trust Deed, with Catalyst Trusteeship Ltd. acting as trustee. The agreement required prior written consent of the trustee and approval of debenture holders through a special resolution for any restructuring.

After defaults occurred, the corporate debtor claimed that email exchanges with ECL Finance Ltd., a debenture holder fr0m the Edelweiss group, amounted to a restructuring agreement and argued that no default subsisted. 

The plea was accepted by the NCLT and NCLAT, prompting an appeal before the apex court.

Informal Talks Not Binding

Allowing the appeal, the Court held that informal negotiations or non-binding communications cannot override contractual or statutory requirements. It observed that discussions with one debenture holder could not bind others without explicit authorisation.

The Court noted that correspondence fr0m ECL Finance Ltd. only indicated that the proposal would be considered as per due process and did not amount to a confirmed restructuring. Accordingly, the Court directed that the CIRP application be admitted.

Implications for MSMEs

The ruling clarifies that lenders may initiate CIRP under Section 7 if debt and default are established, even when restructuring talks are ongoing, unless a formal and legally valid restructuring agreement is in place.

While micro, small, and medium enterprises (MSMEs) continue to enjoy specific safeguards under Section 240A of the IBC, the judgment underscores that MSME status does not shield a defaulting company fr0m insolvency. The decision reinforces the IBC’s ‘debt and default’ test and strengthens financial discipline and credit culture.

(KNN Bureau)