The Supreme Court elucidated that once the National Company Law Tribunal was satisfied with the occurrence of a default, it was devoid of any discretion to refuse admission of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 hereinafter referred to as “IBC”).
The Apex Court noted that even the non-payment of a fraction of the debt that had matured and necessitated settlement would unequivocally amount to default on the part of the corporate debtor.
Brief Facts:
The Respondent No.1 , Canara Bank, which took over the operations of Syndicate Bank, applied to the NCLT under Section 7 of the IBC. This application was made after the merger of Syndicate Bank into Canara Bank.
Before the merger, Syndicate Bank had granted credit facilities to the Corporate Debtor through a letter of sanction. These facilities were valid for one year and included a Secured Overdraft Facility amounting to Rs. 12 crores and a Bank Guarantee limit of Rs. 110 crores. The credit facilities provided by Syndicate Bank to the Corporate Debtor encompassed both fund-based Overdraft Facilities and non-fund-based Bank Guarantees arrangements.
The Syndicate Bank applied Section 7 of the IBC, revealing that the Corporate Debtor’s liability under the Secured Overdraft Facility. The NCLT did not admit the application under Section 7 and hence, the present appeal.
Contentions of the Appellants:
It was asserted that even if the existence of financial debt and default on the part of the Corporate Debtor were established, the NCLT was not obligated to admit the application under Section 7 of the IBC and could have exercised its discretion to refuse admission.
It was asserted that the Bank’s failure to extend the Bank Guarantees should be held responsible for triggering the default. An interim order issued by a Single Judge of the Telangana High Court, was referred to, which restrained the Respondent No. 1 from taking coercive measures, including handing over Demand Drafts to the State Government. In light of this order, it was argued that the NCLT should not have admitted the application under Section 7.
Contentions of the Respondents:
It was contended that once the NCLT is satisfied that there is a financial debt and a default has occurred, it is obligated to admit the application under Section 7 of the IBC.
Observations of the Court:
The Top Court outlined that once the NCLT was satisfied that a default has occurred, it had no discretion to refuse admission of the application under Section 7 of the IBC. It was further observed that even the non-payment of a part of the debt that has become due and payable will amount to default on the part of the corporate debtor. If the NCLT finds that there was a debt but it had not become due and payable. Then, the application under Section 7 could be rejected.
The Court noted that the amount payable by the corporate debtor also included the amount repayable under the fund-based credit facility of secured overdrafts. The facility granted to the corporate debtor was not confined to Bank guarantees. It was held that a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was issued by the Respondent No.1, and as the corporate debtor did not honour the notice, the original application for recovery has been filed by the Respondent No.1 before the Debt Recovery Tribunal at Hyderabad. Additionally, the corporate debtor acknowledged the debt on 5th May 2019, to the extent of Rs. 63 crores. The Balance Sheet of the corporate debtor as of 31st March 2019 also reflects the said liability of the corporate debtor.
The decision of the Court:
The Supreme Court dismissed the Civil Appeal. The Bench further highlighted that when the NCLT had established that a default had occurred. NCLT was required to accept the application under Section 7 of the IBC without discretion.
Case Title: M. Suresh Kumar Reddy v Canara Bank & Ors
Case No.: Civil Appeal No. 7121 of 2022
Citation: 2023 Latest Caselaw 468 SC
Coram: Hon’ble Mr. Justice Abhay S. Oka and Hon’ble Mr. Justice Rajesh Bindal
Advocates for Petitioner: Advs. Mr. Krishnan Venugopal, Mr. R. Anand Padmanabhan, and Mr. Shashi Bhushan Kumar
Advocates for Respondent: Advs. Mr. Rajesh Kumar Gautam, Mr. Anant Gautam, Mr. Kartik Jindal, Mr. Sumit Sharma, Ms. Anani Achumi, Ms. Madhumita Bagchi, Mr. Dinesh Sharma, Ms. Shivani Sagar, Mr. Kiran Kumar Patra, and Mr. Chandrasekhar Padhi
Read Judgement @LatestLaws.com
Picture Source :
