Supreme Court says that the National Company Law Tribunal has to admit petition under section 7 if the debt is due. The view taken in the case of Innoventive Industries still holds good.”

IN THE SUPREME COURT OF INDIA 

CIVIL APPELLATE JURISDICTION 

M. Suresh Kumar Reddy                                                                                                                                                                                                                  …Appellant 

versus 

Canara Bank & Ors.                                                                                                                                                                                                                     ...Respondents 

J  U  D  G  M  E  N  T 

ABHAY S. OKA, J. FACTUAL ASPECTS 

1. The   respondent­Bank   filed   an   application   under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short,   ‘the   IB   Code’)   before   the   National   Company   Law Tribunal, Hyderabad, Telangana.  The said application was filed against a Corporate Debtor M/s Kranthi Edifice Pvt. Ltd.   The   present   appellant   claims   to   be   a   suspended Director of the Corporate Debtor.   National Company Law  Tribunal (for short, ‘NCLT’), by an Order dated 27th  June 2022,   admitted   the   application   filed   by   the   respondentBank and declared a moratorium for the purposes referred in Section 14 of the IB Code.  The appellant claiming to be an aggrieved person preferred an appeal against the said Order before the National Company Law Appellate Tribunal (for short, ‘NCLAT’).  By the impugned judgment dated 5th August 2022, NCLAT has dismissed the appeal. 

 2. The first respondent, Canara Bank is the successor of Syndicate Bank, which made application under Section 7 of the IB Code to NCLT.  Syndicate Bank was merged into the first respondent­Canara Bank.   A letter of sanction dated 2 nd  April 2016 was issued by Syndicate Bank by which credit facilities were sanctioned to the Corporate Debtor for one­year   valid   up   to   28th  February   2017.   A   Secured Overdraft   Facility   of   Rs.   12   crores   was   granted   by   the Syndicate   Bank,   apart   from   sanctioning   the   Bank Guarantee   limit   of   Rs.   110   crores.   Thus,   the   facilities granted by the Syndicate Bank to the Corporate Debtor were   fund­based   (Overdraft   Facility)   and   non­fund­based (Bank Guarantees).  

3. In the application under Section 7 of the IB Code, the Syndicate Bank stated that as on 30th November 2019, the liability of the corporate debtor under the Secured Overdraft Facility   was   Rs.74,52,87,564.93.     The   liability   of   the Corporate   Debtor   towards   outstanding   Bank   Guarantees was Rs.19,16,20,100. 

4. On 21st October 2022, this Court while issuing notice, recorded   a   statement   of   the   learned   senior   counsel appearing for the appellant that a proposal for settlement under a One­Time Settlement Scheme has been submitted to the first respondent­Bank and a sum of Rs.6 crores has been deposited with the first respondent­Bank.  Eventually, the said proposal was turned down by the first respondentBank.     Therefore,   the   present   appeal   was   taken   up   for hearing.  

SUBMISSIONS 

5. The   learned   Senior   Counsel   appearing   for   the appellant submitted that repeated efforts were made to have one­time   settlement   of   the   dues   payable   to   the   first respondent.  But the said request was not acceded to.  He    relied upon a decision of this Court in the case of Vidarbha Industries   Power   Limited   v.   Axis   Bank   Limited1 .   He submitted   that   even   assuming   that   the   existence   of financial   debt  and   default   on   the  part   of   the  Corporate Debtor   was   established,   the   NCLT   was   not   under   an obligation to admit the application under Section 7.   For good   reasons,   NCLT   could   have   refused   to   admit   the application under Section 7 of the IB Code.  He also fairly pointed out the Order dated 22nd September 2022 passed by this   Court  in   a   Review  Petition   seeking  a   review  of   the decision in the case of Vidarbha Industries1 . 

6. He   invited   our   attention   to   the   correspondence between the Government of Telangana and the Syndicate Bank.   There   were   contracts   granted   by   the   Telangana Government   to   the   Corporate   Debtor.     He   invited   our attention to a letter dated 5th November 2018 addressed by the   Executive   Engineer   on   behalf   of   the   Government   of Telangana   requesting   the   Bank   to   extend   the   Bank Guarantees furnished by the said Bank on the request of the   Corporate   Debtor.     Similarly,   by   a   letter   dated   7th August 2019, the Government of Telangana requested the Syndicate Bank to extend 29 Bank Guarantees mentioned 1 2022 (8) SCC 352    in the said letter.  He pointed out that the Corporate Debtor addressed a letter to the Bank on 9th  January 2020 by which a request was made to extend the Bank Guarantees. He also invited the attention of the Court to a letter dated 8 th  January   2020   addressed   by   the   Government   of Telangana to the Bank requesting the Bank to extend the seven Bank Guarantees mentioned therein.  He submitted that   notwithstanding   the   requests   made   by   the   State Government,   Syndicate   Bank   did   not   extend   the   Bank Guarantees.   Thus, in a sense, the failure of the Bank to extend the Bank Guarantees forced the Corporate Debtor to commit default. He submitted that the Bank is responsible for triggering the default.  The learned counsel invited our attention to the interim order dated 24th April 2020 passed by the learned Single Judge of the Telangana High Court by which the first respondent­Bank was restrained from taking coercive  steps  pursuant  to  letters of  invocation  of Bank Guarantees including handing over of Demand Drafts to the State Government.  He urged that in the teeth of this order, NCLT ought not to have admitted the application under Section 7. 

7. Learned counsel appearing for the first respondentBank firstly pointed out that the decision in the case of   Vidarbha Industries1  is in peculiar facts of that case, as is explained by the same Bench while disposing of the Review Petition.  He submitted that the decision of this Court in the case of  E.S.  Krishnamurthy and others  v. Bharath  HiTecch Builders Private Limited2  still holds the field.  He, therefore, submitted that once NCLT is satisfied that there is a financial debt and a default has occurred, it is bound to admit an application under Section 7.  He submitted that the request made by the Corporate Debtor for extension of the   Bank   Guarantees   was   specifically   rejected   as communicated by the first respondent by a letter dated 18th January   2021   addressed   to   the   Corporate   Debtor.   He would, therefore, submit that there is no error committed by NCLT in admitting application under Section 7. 

OUR VIEW 

8. We   have   given   careful   consideration   to   the submissions.     This   Court   in   the   case   of  Innoventive Industries   Limited   v.   ICICI   Bank   and   Another3 has explained the scope of Section 7.  Paragraph nos.28 to 30 of the said decision read thus:­ 2 (2022) 3 SCC 161 3 (2018) 1 SCC 407   “28. When   it   comes   to   a   financial creditor triggering the process, Section 7   becomes   relevant.   Under   the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial   creditor   of   the corporate debtor — it need not be a debt   owed   to   the   applicant   financial creditor.   Under   Section   7(2),   an application is to be made under subsection (1) in such form and manner as is prescribed, which takes us to the Insolvency   and   Bankruptcy (Application to Adjudicating Authority) Rules,   2016.   Under   Rule   4,   the application   is   made   by   a   financial creditor   in   Form   1   accompanied   by documents   and   records   required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of   the   proposed   interim   resolution professional in Part III, particulars of the   financial   debt   in   Part   IV   and documents,   records   and   evidence   of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post   to   the   registered   office   of   the corporate   debtor.   The   speed,   within    which the adjudicating authority is to ascertain   the   existence   of   a   default from   the   records   of   the   information utility   or   on   the   basis   of   evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the   adjudicating   authority   is   to   be satisfied that a default has occurred, that the corporate debtor is entitled to point   out   that   a   default   has   not occurred in the sense that the “debt”, which   may   also   include   a   disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The   moment   the   adjudicating authority   is  satisfied  that  a  default has  occurred,   the   application  must be admitted unless it is incomplete, in which case it may give notice to the   applicant   to   rectify   the   defect within 7 days of receipt of a notice from   the   adjudicating   authority. Under sub­section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission   or   rejection   of   such application, as the case may be. 29. The scheme of Section 7 stands in contrast   with   the   scheme   under   Page 8 of 23 Section   8   where   an   operational creditor   is,   on   the   occurrence   of   a default, to first deliver a demand notice of the unpaid debt to the operational debtor   in   the   manner   provided   in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period   of   10   days   of   receipt   of   the demand notice or copy of the invoice mentioned in sub­section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre­existing—i.e. before   such   notice   or   invoice   was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code. 30. On   the   other   hand,   as   we   have seen,  in   the   case   of   a   corporate debtor  who   commits   a  default  of   a financial   debt,   the   adjudicating authority   has   merely   to   see   the records of the information utility or other   evidence   produced   by   the financial   creditor   to   satisfy   itself that a default has occurred. It is of no matter that the debt is disputed so   long   as   the   debt   is   “due”   i.e. payable  unless   interdicted  by   some law   or   has   not   yet   become   due   in    the sense that it is payable at some future  date.  It   is  only  when  this   is proved   to   the   satisfaction   of   the adjudicating   authority   that   the adjudicating authority may reject an application and not otherwise.” (emphasis added) 

9. The view taken in the case of Innoventive Industries3 has   been   followed   by   this   Court   in   the   case   of  E.S. Krishnamurthy and others2 .   Paragraph nos.32 to 34 of the said decision read thus:  32.In Innoventive   industries [Innoventive   Industries Ltd. v. ICICI Bank,   (2018)   1   SCC   407, paras 28 and 30 : (2018) 1 SCC (Civ) 356], a two­Judge Bench of this Court has explained the ambit of Section 7 IBC,   and  held   that   the   adjudicating authority   only   has   to   determine whether a “default” has occurred i.e. whether  the   “debt”   (which  may   still be   disputed)   was   due   and   remained unpaid. If the adjudicating authority is of the opinion that a “default” has occurred,   it   has   to   admit   the application   unless   it   is   incomplete. Speaking through Rohinton F. Nariman,    J., the Court has observed: (SCC pp. 438­39, paras 28 & 30) “28. When it comes to a financial creditor   triggering   the   process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt   owed   to   [Ed. :   The   word between   two   asterisks   has   been emphasised in original.] any [Ed. : The   word   between   two   asterisks has been emphasised in original.] financial creditor of the corporate debtor  —  it  need not  be  a  debt owed   to   the   applicant   financial creditor.   Under   Section   7(2),   an application is  to  be  made under sub­section (1) in such form and manner   as   is   prescribed,   which takes   us   to   the   Insolvency   and Bankruptcy   (Application   to Adjudicating   Authority)   Rules, 2016.   Under   Rule   4,   the application is made by a financial creditor   in   Form 1   accompanied by   documents   and   records required   therein.   Form 1   is   a detailed   form   in   5   parts,   which requires   particulars   of   the applicant in Part I, particulars of the   corporate   debtor   in   Part   II,    particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part   IV   and   documents,   records and evidence of default in Part V. Under Rule 4(3), the applicant is to   dispatch   a   copy   of   the application   filed   with   the adjudicating   authority   by registered   post   or   speed   post   to the   registered   office   of   the corporate   debtor.   The   speed, within   which   the   adjudicating authority   is   to   ascertain   the existence   of   a   default   from   the records of the information utility or   on   the   basis   of   evidence furnished by the financial creditor, is   important.   This   it   must   do within 14 days of the receipt of the application. It   is   at   the   stage   of Section   7(5),   where   the adjudicating   authority   is   to   be satisfied   that   a   default   has occurred, that the corporate debtor is   entitled   to   point   out   that   a default   has   not   occurred   in   the sense that the “debt”, which may also   include   a   disputed   claim,   is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority    is   satisfied   that   a   default   has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant   to   rectify   the   defect within 7 days of receipt of a notice from   the   adjudicating   authority. Under   sub­section   (7),   the adjudicating  authority  shall  then communicate the order passed to the   financial   creditor   and corporate debtor within 7 days of admission   or   rejection   of   such application, as the case may be. *           *          * 30. On   the   other   hand,   as   we have   seen, in   the   case   of   a corporate   debtor   who   commits a   default   of   a   financial   debt, the  adjudicating  authority  has merely to see the records of the information   utility   or   other evidence   produced   by   the financial   creditor   to   satisfy itself   that   a   default   has occurred. It is of no matter that the debt is disputed so long as the   debt   is   “due”   i.e.   payable unless interdicted by some law    or   has   not   yet   become   due   in the  sense  that   it  is  payable  at some   future   date.   It   is   only when   this   is   proved   to   the satisfaction of the adjudicating authority that the adjudicating authority   may   reject   an application and not otherwise.” 33. In   the   present   case,   the adjudicating authority noted that it had listed   the   petition   for   admission   on diverse   dates   and   had   adjourned   it, inter alia, to allow the parties to explore the   possibility   of   a   settlement. Evidently, no settlement was arrived at by all the original petitioners who had instituted   the   proceedings.   The adjudicating authority noticed that joint consent   terms   dated   12­2­2020   had been filed before it. But it is common ground   that   these   consent   terms   did not cover all the original petitioners who were before the adjudicating authority. The   adjudicating   authority   was apprised of the fact that the claims of 140 investors had been fully settled by the   respondent.   The   respondent   also noted that of the claims of the original petitioners   who   have   moved   the adjudicating   authority,   only   13   have been settled while, according to it “40 are in the process of settlement and 39   are   pending   settlements”.   Eventually, the   adjudicating   authority   did   not entertain   the   petition   on   the   ground that   the   procedure   under   IBC   is summary,   and   it   cannot   manage   or decide upon each and every claim of the individual   homebuyers.   The adjudicating   authority   also   held   that since   the   process   of   settlement   was progressing “in all seriousness”, instead of examining all the individual claims, it would   dispose   of   the   petition by directing the respondent to settle all the remaining claims “seriously” within a definite time­frame. The petition was accordingly disposed of by directing the respondent   to   settle   the   remaining claims   no   later   than   within   three months,   and   that   if   any   of   the remaining   original   petitioners   were aggrieved   by   the   settlement   process, they would be at liberty to approach the adjudicating   authority   again   in accordance with law. The adjudicating authority's decision was also upheld by the appellate authority, who supported its conclusions. 34. The   adjudicating   authority   has clearly   acted   outside   the   terms   of   its jurisdiction under Section 7(5) IBC. The adjudicating  authority   is  empowered only  to  verify  whether  a  default  has    occurred   or   if   a   default   has   not occurred.   Based   upon   its   decision, the adjudicating authority must then either admit or reject an application, respectively.  These   are   the   only   two courses of action which are open to the adjudicating   authority   in   accordance with   Section   7(5).   The   adjudicating authority cannot compel a party to the proceedings   before   it   to   settle   a dispute.” (emphasis added) 

10. Thus,   once   NCLT   is   satisfied   that   the   default   has occurred, there is hardly a discretion left with NCLT to refuse   admission   of   the   application   under   Section   7. Default is defined under sub­section 12 of Section 3 of the IB Code which reads thus:  “3.     Definitions:   ­  In   this   Code, unless the context otherwise requires, (12)  “default” means non­payment of debt   when   whole   or   any   part   or instalment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor, as the case may be;” Thus, even the non­payment of a part of debt when it becomes due and payable will amount to default on the    part of a Corporate Debtoṛ.  In such a case, an order of admission under Section 7 of the IB Code must follow.  If the NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected.  Otherwise, there is no ground available to reject the application.  

11. Reliance is placed on the decision of this Court in the case of  Vidarbha   Industries1   and in particular, what is held therein in paragraph nos. 86 to 89 which reads thus:­ “86. Even though Section 7(5)(a) IBC may confer discretionary power on the adjudicating   authority,   such discretionary   power   cannot   be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise   of  discretion   in  a  particular manner, discretion would have to be exercised in that manner. 87. Ordinarily,   the   adjudicating authority   (NCLT)   would   have   to exercise   its  discretion   to   admit   an application under Section 7 IBC and initiate  CIRP  on  satisfaction  of  the existence   of   a   financial   debt   and default on the part of the corporate debtor   in   payment   of   the   debt,    unless there are good reasons not to admit the petition. 88. The adjudicating authority (NCLT) has to consider the grounds made out by   the   corporate   debtor   against admission,   on   its   own   merits.   For example, when admission is opposed on the ground of existence of an award or a decree in favor of the corporate debtor,   and   the   awarded/decretal amount   exceeds   the   amount   of   the debt, the adjudicating authority would have to exercise its discretion under Section   7(5)(a)   IBC   to   keep   the admission   of   the   application   of   the financial creditor in abeyance, unless there is good reason not to do so. The adjudicating   authority   may,   for example, admit the application of the financial creditor, notwithstanding any award or decree, if the award/decretal amount is incapable of realization. The example is only illustrative. 89. In   this   case,   the   adjudicating authority (NCLT) has simply brushed aside the case of the appellant that an amount   of   Rs   1730   crores   was realizable by the appellant in terms of the order passed by APTEL in favor of the   appellant,   with   the   cursory observation   that   disputes   if   any    between   the   appellant   and   the recipient of electricity or between the appellant   and   the   Electricity Regulatory   Commission   were inconsequential.” (emphasis added) 

12. A Review Petition was filed by the Axis Bank Limited seeking a review of the decision of  Vidarbha   Industries1 on the ground  that  the  attention  of the  Court was  not invited   to   the   case   of  E.S.   Krishnamurthy2 .   While disposing of Review Petition by Order dated 22nd September 2022, this Court held thus:  “The   elucidation   in   paragraph   90 and  other  paragraphs  were made in the context of the case at hand. It is well   settled   that   judgments   and observations   in   judgments   are   not to  be  read  as  provisions  of  statute. Judicial   utterances   and/or pronouncements   are   in   the   setting of the facts of a particular case.  To interpret words and provisions of a statute, it may become necessary for the   Judges   to   embark   upon   lengthy discussions.   The   words   of   Judges interpreting   statutes   are   not   to   be interpreted as statutes.”   

13. Thus, it was clarified by the order in review that the decision in the case of  Vidarbha   Industries1 was in the setting of facts of the case before this Court.   Hence, the decision in the case of  Vivaria   Industries1  cannot be read and understood as taking a view which is contrary to the view taken in the cases of InnoCentive Industries3 and E.S.   Krishnamurthy2 .  The   view   taken   in   the   case   of InnoCentive Industries3  still holds good. 

14. In this case, we must note that the amount payable by the Corporate Debtor also included the amount repayable under fund based credit facility of secured overdrafts. The facility granted to the Corporate Debtor was not confined to Bank Guarantees.  

15. Moreover, a demand notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement   of   Security   Interest   Act,   2002   dated   29th August 2018 was issued by the first respondent.   As the Corporate   Debtor   did   not   honor   the   said   notice,   the original application for recovery has been filed by the first respondent   before   the  Debt   Recovery   Tribunal   at Hyderabad.  Moreover, the Corporate Debtor acknowledged the   debt   on   5th  May   2019   to   the   extent   of   Rs.    63,36,61,897.26.     Moreover,   the   Balance   Sheet   as   of 31.03.2019   of   the   Corporate   Debtor   reflects   the   said liability of the Corporate Debtor. 

16. It   is   true   that   as   far   as   Bank   Guarantees   are concerned, the Executive Engineer of the Government of Telangana   addressed  letters to   the  Bank  requesting  the Bank to revalidate the Bank Guarantees. On 8th  January 2020, the Government addressed a letter to Syndicate Bank to extend the seven Bank Guarantees mentioned therein. The letter mentions that if the action of revalidation or extension of the Bank Guarantees is not taken, the Bank Guarantees be realized and the amount be paid by Demand Drafts to the State Government. Thus, Bank Guarantees were invoked by the State Government. In view of the said letter,   on   9th  January   2020,   the   Corporate   Debtor addressed a letter to the Syndicate Bank mentioning that the issue relating to the foreclosure of the two contracts granted   by   the   State   Government   was   under  the   active consideration of the State Government. The letter mentions that if the Bank Guarantees were not extended, the same are likely to be encased by the Government.  Therefore, a request was made by the Corporate Debtor to the Bank to revalidate   the   Bank   Guarantees.     However,   the   first    respondent by a letter dated 18th January 2021, specifically informed   the   Corporate   Debtor   that   the   competent authority has not considered the proposal of the Corporate Debtor   for   extending   Bank   Guarantees   and   Secured Overdraft   Facilities.     By   the   same   letter,   the   first respondent called upon the Corporate Debtor to clear the outstanding immediately.  Thus, there is no doubt that the Corporate Debtor committed a default within the meaning of Section 3(12) of the IB Code due to non­payment of the amounts due to the Bank.  

17. There are a large number of Guarantees issued by the Bank.  The interim order of the Telangana High Court does not relate to all Bank Guarantees.   Moreover, there is no finding recorded in the interim order that the Corporate Debtor is not liable to pay the dues.  The interim order only prevents coercive action against the Corporate Debtor.   

18. Even assuming that NCLT has the power to reject the application under Section 7 if there were good reasons to do so, in the facts of the case, the conduct of the appellant is such that no such good reason existed on the basis of which NCLT could have denied admission of the application under Section 7.   

19. Hence, we find that there is no merit in the appeal, and the same is, accordingly, dismissed. There will be no order as to costs.

……..….……………J.     

(Abhay S. Oka) 

……...………………J.       

(Rajesh Bindal) 

New Delhi; 

May 11, 2023.