Insolvency Law: Supreme Court Reconciles Conflicting Rulings On NCLT's Discretion

Certain conflicting rulings by the apex court on whether insolvency courts have the discretion to admit applications have unsettled the jurisprudence on the issue. Now the Supreme Court has cleared the air around this issue by reconciling the various rulings in its most recent pronouncement.

The top court has held that once the adjudicating authority, that is, the National Company Law Tribunal, is satisfied that a default pertaining to a financial debt has occurred, it has no other option but to admit the insolvency application.

This was the legal position established in Innoventive Industries, where the apex court said that it is not significant whether the debt in question is disputed so long as the debt is "due". Only when it can be proven that a debt is not due or is payable at some future date does the adjudicating authority have the discretion to reject the application.

The top court reiterated this view in the ES Krishnamurthy case, where it was held that the adjudicating authority only has to determine whether a default has occurred, i.e., whether the debt was due and remained unpaid. If the adjudicating authority is of the opinion that a default has occurred, it has to admit the application, unless it is incomplete.

But then last year, the Supreme Court held in Vidarbha Industries that if facts and circumstances warrant, the NCLT can keep the admission of an insolvency application in abeyance or even reject the application.

Citing Vidarbha, Kranthi Edifice Pvt. moved the apex court against Canara Bank, which had sanctioned certain credit facilities in favour of the company in 2016. The facility was valid for a year, and when Kranthi failed to pay back its dues, Canara Bank initiated insolvency proceedings against it. The NCLT admitted the bank's application, prompting the company to appeal.

Kranthi argued before the apex court that the NCLT was not under an obligation to admit the insolvency application even if the existence of financial debt and default was established.

The company pointed to several contracts that the Telangana government had granted it. The relevant government department had also written to Canara Bank to extend Kranthi's bank guarantees. The bank refused to do so, which led to the company defaulting on its obligations. These facts, combined with an order by the state high court barring the bank from taking any coercive steps against it, should have merited a refusal of the insolvency application, Kranthi argued.

The apex court disagreed.

Pointing to its decisions in Innoventive and ES Krishnamurthy, it said that once the NCLT is satisfied that a default has occurred, there is hardly any discretion to refuse admission. Vidarbha Industries was in the context of the facts and circumstances of the case, and it cannot be read contrary to Innoventive Industries, the Supreme Court held.

Innoventive industries, it said, still holds ground, it concluded.