S. 7 IBC | Corporate Debtor's Inability To Pay Not Relevant For CIRP Plea Admission: Supreme Court

The Supreme Court on Wednesday reaffirmed that the Adjudicating Authority cannot refuse to admit a financial creditor's plea under Section 7 of the Insolvency and Bankruptcy Code on the ground of the corporate debtor's inability to pay.

The only question at the admission stage is whether a financial debt exists and whether there has been a default. The inability of the corporate debtor to pay is not required to be examined at this stage.

Dismissing an appeal filed by Power Trust, promoter of Hiranmaye Energy Ltd., a Bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and Vipul M. Pancholi clarified the limited scope of inquiry under the Code.

“The Adjudicating Authority is not required to go into the inability of a corporate debtor to pay its debt. This is a clear departure from the scheme of winding up envisaged under Section 433(e) of the erstwhile Companies Act, 1956 which required the Adjudicating Authority to come to a finding with regard to the inability of the company to pay the debt and thereby arrive at a requisite satisfaction whether it is just and equitable to wind up the company. The Code restricts the scope of enquiry for admission of an insolvency process by a financial creditor merely to the existence of default of a debt due and payable and nothing more,” the court held.

The case arose from loans exceeding Rs. 2,300 crore advanced by REC Ltd. to Hiranmaye Energy Ltd. for setting up a thermal power plant at Haldia, West Bengal.

Restructuring proposals were discussed in 2020 but were subject to several pre-implementation conditions, including securing a favourable tariff order and creating a debt service reserve account. They never materialised. 

Subsequtently, the financial creditor filed a Section 7 application, recording March 31, 2018 as the date of default. The Adjudicating Authority admitted the plea. The appellate tribunal upheld the decision.

Before the Supreme Court, the promoter argued that the restructuring proposals had shifted the date of default into the Covid-protected period under Section 10A. It also claimed the company was a viable, running concern with billing of Rs. 906 crore and an EBITDA of Rs. 20 crore per month during the process. The respondents argued that the restructuring never crystallised and that once default was shown, viability was irrelevant.

Rejecting the reliance on Vidarbha Industries, the Bench distinguished the earlier ruling.

“In Vidarbha (supra), this Court had taken note of an award passed by APTEL in favour of the corporate debtor which far exceeded the claim of the financial creditor, and held in the setting of such facts, initiation of CIRP was unwarranted. In the present case, Appellant's contention regarding Corporate Debtor's viability is highly dubious. Though the Corporate Debtor strenuously demonstrates its commercial viability, the NCLAT has noted that the extent of outstanding liability as on 02.01.2024 was Rs. 3103.31 crore, which far exceeds the bills raised on WBSEDCL to the tune of Rs 906 crore and EBITDA of Rs. 20 crore per month during the CIRP,” the court observed.

Holding that the default dated back to March 31, 2018, and was therefore not barred by Section 10A (Covid-19 exemption), the court dismissed the appeal and vacated the stay on the insolvency proceedings.

For Appellant: Senior Advocate Joy Saha, Advocate Pranjit Bhattacharya, Advocate Salonee Shukla, Advocate Aashima Gautam, Advocate Sachin Jain, Advocate Vaibhav Niti, AOR

For Respondents: Solicitor General Tushar Mehta, Advocate Anoop Rawat, Advocate Vaijayant Paliwal, Advocate Saurav Panda, Advocate Charu Bansal, Advocate Mohana Nijhawan, Advocate Snigdha Saraf, Advocate S. S. Shroff, AOR, Senior Advocate Arvind Nayar, Advocate Madhav Kanoria, Advocate Srideepa Bhattacharyya, Advocate Neha Shivhare, Advocate Aditya Tanay Pandey, Advocate Vikash Kumar Jha, M/s Cyril Amarchand Mangaldas, AOR, Advocate N. Venkataraman, Additional Solicitor General, Advocate Pooja Mahajan, Advocate Savar Mahajan, Advocate Urvashi Girdhar, Advocate Srivatsava Beerapali Reddy, Advocate Avinash B. Amarnath, AOR, Senior Advocate Abhishek Manu Singhvi, Advocate Mandakini Ghosh, AOR, Advocate Yash Johri, Advocate Shivansh Baghel, Advocate Sayandeep Chakraborty