M. Suresh Kumar Reddy Vs. Canara Bank and Ors. - (Supreme Court) (11 May 2023)

NCLT has discretion to admit an application under Section 7 of IBC on existence of a financial debt, unless there are good reasons to reject it

MANU/SC/0561/2023

Insolvency

The Respondent-Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal. The said application was filed against a Corporate Debtor. The present Appellant claims to be a suspended Director of the Corporate Debtor. National Company Law Tribunal ('NCLT'), by an Order admitted the application filed by the Respondent- Bank and declared a moratorium for the purposes referred in Section 14 of the IBC. The Appellant claiming to be an aggrieved person preferred an appeal against the said Order before the National Company Law Appellate Tribunal ('NCLAT'). By the impugned judgment, NCLAT has dismissed the appeal.

Present Court in the case of Vidarbha Industries vs. Axis Bank Limited held that, even though Section 7(5)(a) of 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 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.

There is no doubt that, the Corporate Debtor committed a default within the meaning of Section 3(12) of the IBC due to non-payment of the amounts due to the Bank. 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.

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. Hence, there is no merit in the appeal. Appeal dismissed.

Tags : FINANCIAL DEBT APPLICATION DISCRETION