Tribunal’s Discretion Under IBC: Analysing the Suresh Kumar Reddy Case

[By Pavitra Priyadarshan & Dikshya Debipya Panda]

The authors are students of National Law University, Odisha.

 

Introduction

Section 7 of the “Insolvency and Bankruptcy Code, 2016” (IBC or Code) empowers a financial creditor to file a petition at the tribunal when the debt owed to him is due. This marks the initiation of the “Corporate Insolvency Resolution Process” (CIRP) against the Corporate Debtor (CD). The tribunal’s power at this stage to exercise its discretion in admitting or denying a petition has been a subject of a conundrum since the Vidarbha Industries Power Limited v. Axis Bank Limited (Vidarbha case).

In this article, the author attempts to examine the discretionary power of the tribunal with respect to the admission of the petition under Section 7 (u/s. 7) of IBC, taking into consideration the M. Suresh Kumar Reddy v. Canara Bank & Ors (Suresh Kumar Reddy case) as a case study.

In the Suresh Kumar Reddy case, the Supreme Court (SC) established that the ruling in the Vidarbha case will only be applicable to the facts and circumstances of the case and will not set a precedent against the settled position. Furthermore, the general norm is that the National Company Law Tribunal (NCLT) has to accept the petition filed u/s. 7 in the presence of a debt which is due and payable.

Consequently, regardless of whether debt or other default on the part of the CD exists, the Adjudicating Authority (AA) does not possess discretion at the stage of admittance of the insolvency application. Thus, the AA cannot reject the petition u/s. 7 based solely on its discretion.

Brief Facts

Canara Bank (Financial Creditor) provided credit facilities to “M/s Kranthi Edifice Pvt. Ltd.” (Corporate Debtor), that failed to pay it back. To start the CIRP against the CD, the Financial Creditor filed a petition with the NCLT u/s. 7 of the IBC. By order dated 27th June 2022, the NCLT accepted the respondent-Bank’s application and proclaimed a moratorium for the purposes outlined in Section 14 of the IBC.

Suresh Kumar Reddy, a suspended director of the CD, filed an appeal before the “National Company Law Appellate Tribunal,” claiming that he was an aggrieved party. However, the appeal was dismissed. Mr. Reddy then went to appeal the decision in the SC.

The appellant argued that the settled principle of the Vidarbha Case provides that despite the existence of debt and default being proven, the tribunal has the option of refusing to admit the petition u/s. 7. Therefore, the tribunal can exercise its discretion while admitting the petition.

Supreme Court’s Verdict

The Hon’ble SC identified the issue as to whether after a petition has been filed u/s. 7, the AA may reject a petition solely based on its own discretion, even though it has verified the debt to be due and payable.

The Court relied on the Innoventive Industries Limited v. ICICI Bank and Others (Innoventive Industries case), in which it was held that the tribunal must admit a petition u/s.7 once it is satisfied that a default has occurred on the financial debt owed. Following that, in E.S. Krishnamurthy and others v. Bharath HiTecch Builders Pvt. Ltd. (E.S. Krishnamurthy case), the SC outlined the tribunal’s powers by stating that it only has the power to ascertain if there is a default. Further, once the default’s existence has been verified, the said petition u/s. 7 must be admitted.

Further, the Court discussed the SC’s decision in the Vidarbha case, where the Court had opined that in a case where it has been proven that there exists financial debt and default on the part of the CD, the tribunal is empowered to exercise its discretion in admittance of the petition u/s. 7 unless there is a clear and compelling reason to admit the petition.

Finally, the SC in the Suresh Kumar Reddy case held that the rejection of a petition u/s. 7 could only be done when the debt is not due and payable.

Analysis of the Verdict

The Section 7(5)(a) of the IBC states that:

“Where the Adjudicating Authority is satisfied that–

  • a default has occurred, and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application.”

The word “may” in the provision has been interpreted differently by Courts. In the Vidarbha case, the Court interpreted “may” as discretionary and not mandatory. Whereas, in the Innoventive Industries case and E.S. Krishnamurthy case, it was interpreted to be mandatory. Therefore, “may” has been a matter of dilemma.

In Swiss Ribbons Private Limited v. Union of India (Swiss Ribbons case), the SC observed the Code’s primary objective as reorganization and insolvency resolution of the CD. The mandate of the Code is a prompt resolution of the CD in distress. This profoundly impacts supporting and developing the credit markets. In this case, the apex court observed that the Code is a facilitator for promoting credit availability in markets while ensuring the CD’s revival and continuous operations.

The bench in the Suresh Kumar Reddy case observed, citing SC decisions in the Innoventive Industries case and E.S. Krishnamurthy case, that once a default on the part of the CD is verified, the tribunal has no discretion to refuse to admit a petition u/s. 7. It is a settled principle that the only reason for the dismissal of a petition is that the debt has not become due and payable. Moreover, failure to pay a portion of a due and payable debt constitutes a default. In such circumstances, an admission of petition u/s. 7 becomes necessary. If it comes to the notice of the NCLT that a debt is not due and payable, then there is no scope to allow an application.

When Axis Bank Limited filed a review petition following the judgement in the Vidarbha case, the SC dismissed it in the order dated 22nd September 2022, with the observation that the elucidation made in the case was factual in nature and was only applicable to the Vidharba case. Therefore, the judgement of the Vidharba case cannot be construed as a principle to be followed for all applications u/s. 7. This has been reiterated by the SC in the Suresh Kumar Reddy case, and it observed that the ratio of the Innoventive Industries case still remains valid.

The initial idea with which the Code was enacted was to have quick revival of debt-ridden companies. Therefore, this Code lays down detailed provisions with respect to the restrictions and conditions for the admittance of the petition u/s. 7; this further ensures that no time is wasted at the nascent stage and leaves no room for error born out of subjectivity. Futhermore, it does not mean that the Court’s discretion is completely eliminated since the Code also provides for the exercise of discretion at the later stages of the CIRP. However, putting such power into the hands of the AA, although seems progressive, has wide ramifications. Upon a closer look, this will ultimately result in prolongation of the CIRP, which will defeat the object which the Code seeks to achieve.

Conclusion

The Suresh Kumar Reddy case has attempted to clear the air around the admissibility of a petition u/s. 7 of IBC. The case has reaffirmed the ratio held in the Innovative Industries case and the E.S. Krishnamurthy case by holding that when the existence of the debt is verified and is due against the CD, the tribunal must admit the petition.

Further, the Swiss Ribbons case elucidates and focuses on the primary objective of the Code, which is time bound revival of the CD. Additionally, the IBC has been drafted in a manner that ensures the streamlined resolution of the CD in distress. Therefore, the stance held in the Suresh Kumar Reddy case further ensures that this objective is achieved.

. The issue in question is the existence of the word “may” in Section 7(5)(a) of IBC which has resulted in an interpretation which is contrary to the spirit of the Code. Substitution of the same with “shall” will offer greater clarity and will further help in achieving the motive with which the Code was enacted.

Furthermore, this proposal is in consonance with the recent consultation paper by the Ministry of Corporate Affairs released on 18th January 2023. Even without such proposed amendments, the stance taken in the Vidarbha case is an exception to the rule established in Innoventive Industries and the E.S Krishnamurthy case. Therefore, the ruling of the Vidarbha case should not be an one size-fit all approach, as has been laid down by the Hon’ble SC in the Suresh Kumar Reddy case.

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