Whether admission of a CIRP application under Section 7 of IBC is discretion of Adjudicating Authority (NCLT)?, Supreme Court various rulings

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Whether admission of a CIRP application under Section 7 of IBC is on discretion of Adjudicating Authority

Acceptance or rejection of the application [Section 7(4) and Section 7(5)]

The Adjudicating Authority (NCLT) shall, within 14 days of the receipt of the application under Section 7, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.[Section 7(4)]

As per the proviso to Section 7(4) of the IBC, inserted by amendment, by Act 26 of 2019, if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.

Where the Adjudicating Authority is satisfied that:

  • a default has occurred and
  • the application is complete, and
  • there is no disciplinary proceedings pending against the proposed resolution professional,

it may, by order, admit such application; [Clause (a) of Section 7(5)]

OR

  • default has not occurred or
  • the application is incomplete or
  • any disciplinary proceeding is pending against the proposed resolution professional,

it may, by order, reject such application.[Clause (b) of Section 7(5)]

Judicial Pronouncements

Hon’ble Supreme Court in Innoventive Industries Ltd. Vs. ICICI Bank & Anr. (2017) ibclaw.in 02 SC held that 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.

Hon’ble Supreme Court in Arcelormittal India Pvt. Ltd. Vs. Satish Kumar Gupta & Ors. (2018) ibclaw.in 31 SC held that before admission of an application under Section 7, the Adjudicating Authority is to first ascertain the existence of a default within 14 days of receipt of the application, as specified in Section 7(4). Upon satisfaction that such default has occurred, it may then admit such application, subject to rectification of defects, which the proviso in Section 7(5) says must be done within 7 days of receipt of such notice from the Adjudicating Authority by the applicant.

Hon’ble Supreme Court in E S Krishnamurthy & Ors. Vs. M/s Bharath Hi Tech Builders Pvt. Ltd. (2021) ibclaw.in 173 SC held that:

  • On a bare reading of the provision, it is clear that both, Clauses (a) and (b) of sub-Section (5) of Section 7, use the expression “it may, by order” while referring to the power of the Adjudicating Authority. In Clause (a) of sub-Section (5), the Adjudicating Authority may, by order, admit the application or in Clause (b) it may, by order, reject such an application. Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available.
  • 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.

However, Two-judge Bench of Hon’ble Supreme Court in Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd. (2022) ibclaw.in 91 SC held that:

  • Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.
  • The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary.
  • The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.
  • Even though Section 7(5)(a) of the 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.
  • Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the 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.
  •  It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Section 7(5)(a) of the IBC, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP.

Further, the Hon’ble Court in Vidarbha Industries Power Ltd.(supra) has specified grounds for using discretionary power to reject an application filed u/s 7, as:

  • 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 favour 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) of the 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 realisation. The example is only illustrative.

Note: A Review Petition filed against Vidarbha Industries Power Ltd.(supra) case has been dismissed by Supreme Court, reported at (2022) ibclaw.in 118 SC.

Hon’ble Supreme Court, two judge Bench, in M. Suresh Kumar Reddy Vs. Canara Bank & Ors. (2023) ibclaw.in 67 SC held that the decision in the case of Vidarbha Industries (2022) ibclaw.in 91 SC cannot be read and understood as taking a view which is contrary to the view taken in the cases of Innoventive Industries [2017] ibclaw.in 02 SC and E.S. Krishnamurthy (2021) ibclaw.in 173 SC. The view taken in the case of Innoventive Industries still holds good.

Furthermore, Hon’ble Court in M. Suresh Kumar Reddy (supra) held that 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 Section 3(12) of the Code. Thus, even the non­-payment 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 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.

Read here complete analysis on Section 7 of IBC.

commentary on IBC

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