Section 7 IBC Admission Mandatory Once Debt & Default Are Established: Supreme Court

New Delhi, Feb 19 (KNN) The Supreme Court on Wednesday held that once a financial debt and default are established, admission of an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) is mandatory. 

The adjudicating authority is only required to ascertain the existence of default within 14 days based on records or evidence produced by the financial creditor and cannot examine the corporate debtor’s ability to repay or related disputes at this stage.

A Bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and Vipul M. Pancholi dismissed an appeal by the promoter of Hiranmaye Energy Ltd. challenging the initiation of Corporate Insolvency Resolution Process (CIRP) by REC Ltd.

Background

REC Ltd. had sanctioned Rs 1,859 crore in 2013 and an additional Rs 446.97 crore in 2015 to Hiranmaye Energy Ltd. for a thermal power project in Haldia, West Bengal. The account was declared an NPA on June 30, 2018, with default recorded as March 31, 2018. 

Two restructuring proposals approved in 2020 failed due to non-fulfilment of pre-conditions, including securing a tariff order and infusion of funds.

REC filed a Section 7 plea before the NCLT, Kolkata, which admitted it on January 2, 2024. The NCLAT upheld the order on January 25, 2024.

Court’s Findings

The appellant argued, citing Vidarbha Industries Power Ltd. v. Axis Bank Ltd., that admission under Section 7 is discretionary. The Court distinguished Vidarbha, noting that in that case an award in favour of the corporate debtor exceeded the creditor’s claim. 

In contrast, Hiranmaye Energy Ltd.’s outstanding dues as on January 2, 2024 were over Rs 3,100 crore, far exceeding its revenue and earnings.

Relying on Innoventive Industries Ltd. v. ICICI Bank and M. Suresh Kumar Reddy v. Canara Bank, the Court reiterated that once default is proven, the NCLT has limited discretion to refuse admission.

The Bench also rejected relief under Section 10A of the IBC, holding that since the first date of default preceded the COVID-19 exemption period (March 25, 2020 to March 24, 2021), no protection was available. It added that failed restructuring proposals cannot shift the date of default.

Holding the admission lawful, the Court dismissed the appeal.

(KNN Bureau)