India: Non-Payment Of A Part Of The Debt When It Becomes Due And Payable Will Amount To Default On The Part Of The Corporate Debtor And Will Attract An Order U/S 7 Of IBC

The Supreme Court of India on May 11, 2023, in the case of, M. Suresh Kumar Reddy v. Canara Bank, [Civil Appeal No. 7121 of 2022], held that the non-payment of a part of the debt when it becomes due and payable will amount to default on the part of the corporate debtor and an order under Section 7 Insolvency Bankruptcy Code ("IBC") must follow. The Supreme Court also upheld the view taken in Innoventive Industries Limited v. ICICI Bank, [(2018) 1 SCC 407] ("Innoventive Industries") and E.S. Krishnamurthy v. Bharath HiTecch Builders Private Limited, [(2022) 3 SCC 161] ("ES Krishnamurthy") and the view taken in review petition of Vidarbha Industries Power Limited v. Axis Bank Limited, [2022 (8) SCC 352], cannot be read and understood as taking a view contrary to Innoventive Industries and ES Krishnamurthy.

Background:

The Respondent Bank is the successor of Syndicate Bank. Syndicate Bank had provided credit facilities which included secured overdraft Facility of Rs. 12 crores and Bank Guarantee limit of Rs. 110 crores to the Corporate Debtor, for a period on one year.

There were contracts granted by the Telangana Government to the Corporate Debtor for which Syndicate Bank issued bank guarantees. 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/-. Syndicate Bank refused to extend the bank guarantees.

Case Before Supreme Court:

The case of the Appellant is that the failure of the bank to extend the bank guarantees forced the corporate debtor to commit default and the bank is responsible for triggering the default. Secondly, there was an interim order dated April 24, 2020 passed by the learned Single Judge of the Telangana High Court ("High Court") by which the Respondent Bank was restrained from taking coercive steps pursuant to letters of invocation of bank guarantees including handing over of demand drafts to the State Government.

Canara Bank ("Respondent Bank") filed an application against M/s Kranthi Edifice Private Limited ("Corporate Debtor") under Section 7 of the IBC before the National Company Law Tribunal, Hyderabad, Telangana ("NCLT"), for the liability of the Corporate Debtor under the secured overdraft facility was Rs.74,52,87,564.93/- and outstanding bank guarantees was Rs.19,16,20,100/-. The said application was admitted and a moratorium in terms of Section 14 IBC was declared by order dated June 27, 2022, against the Corporate Debtor.

M Suresh Kumar Reddy ("Appellant"), a suspended Director of the Corporate Debtor filed an appeal against the order dated June 27, 2022, before National Company Law Appellate Tribunal ("NCLAT"). By the impugned judgment dated August 5, 2022, NCLAT has dismissed the appeal.

Appellant's contention:

Even if 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 of IBC.

Issue Involved:

If NCLT is satisfied that there is a financial debt and a default has occurred, is it bound to admit an application under Section 7?

Conclusion:

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 of IBC. A rejection of Section 7 IBC can only happen if there is a debt, but it is not due and payable.

Further, it was clarified by the order in review that the decision in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, [2022 (8) SCC 352] ("Vidarbha Industries"), was in the setting of facts of the case before this Court.

Hence, the decision in the case of Vidarbha Industries cannot be read and understood as taking a view which is contrary to the view taken in the cases of Innoventive Industries and E.S. Krishnamurthy. The view taken in the case of Innoventive Industries still holds good.

Please find attached a copy of the judgement.

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