Court’s Decision
The Supreme Court upheld the National Company Law Appellate Tribunal’s (NCLAT) decision allowing an additional 90 days for resolution efforts before admitting the matter to insolvency. The Court clarified that the Adjudicating Authority (NCLT) had erred by rushing to admit the matter under the Insolvency and Bankruptcy Code (IBC) despite the financial creditor’s request to defer proceedings to enable resolution. It observed:
“The Adjudicating Authority ought to have granted a reasonable time and adjourned the proceedings as was prayed for… [It] has acted rather in haste in admitting the application.”
The appeal was accordingly dismissed, confirming that resolution outside the rigours of insolvency is not only legally permissible but desirable when feasible.
Facts
A Section 7 petition was filed by a financial creditor before the NCLT seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the corporate debtor. The corporate debtor had defaulted in repayment of dues. However, during the pendency of proceedings, the financial creditor sought adjournments, requesting time to explore a settlement with the debtor, who had shown willingness to resolve the dispute. Despite this, the NCLT admitted the petition and initiated insolvency proceedings.
This prompted the debtor to file an appeal before the NCLAT, which reversed the NCLT’s order, restoring the position as it existed prior to admission. The NCLAT granted 90 days for the creditor and debtor to work out a settlement and directed the NCLT to consider the matter afresh if no settlement was reached.
Issues
- Whether the NCLT was justified in admitting the insolvency application despite the financial creditor seeking adjournment to explore settlement?
- Whether the NCLAT’s decision to remand the matter back for resolution violated the scheme of the IBC?
- Whether a creditor can be permitted to withdraw or defer an application under Section 7 of the IBC before its admission?
Petitioner’s Arguments
The petitioner contended that once an application under Section 7 is complete and the debt and default are established, the NCLT is bound to admit the application. It was argued that the NCLAT had exceeded its jurisdiction in reversing the admission and granting additional time for settlement when no settlement was placed on record. According to the petitioner, such an order diluted the IBC’s strict timelines and resolution objectives.
Respondent’s Arguments
The respondent argued that the financial creditor had not pressed the application and repeatedly sought time to amicably resolve the matter. The corporate debtor had been cooperating in exploring a viable resolution. The respondent submitted that the NCLT acted hastily in admitting the petition without considering the creditor’s request, and the NCLAT rightly exercised its appellate powers to correct the procedural impropriety.
It was further submitted that the Supreme Court had consistently emphasized that the IBC is not merely a recovery tool, but a framework for reviving viable businesses, and such intent must guide adjudicatory decisions.
Analysis of the Law
The Supreme Court analyzed the structure and spirit of the IBC and observed that its objective is not punitive but rehabilitative. The Court stressed that pre-admission stages under Section 7 allow parties the opportunity to resolve the dispute, and if a financial creditor does not wish to press the petition, the adjudicating authority must not act mechanically. The Bench cited Regulation 30A and relevant case law to support the view that the creditor’s intention to defer or withdraw the petition should be respected if no irreversible process has been set in motion.
Precedent Analysis
The Court referred to the following decisions:
- Swiss Ribbons v. Union of India – Emphasized that the IBC prioritizes resolution over liquidation and that stakeholders must be given the opportunity to revive the debtor if feasible.
- Innoventive Industries v. ICICI Bank – Clarified that the NCLT’s role under Section 7 is limited to examining the existence of debt and default, but did not restrict discretion in considering creditor’s subsequent conduct.
- Vidarbha Industries Power Ltd. v. Axis Bank Ltd. – Held that admission of insolvency applications is not automatic and the NCLT retains discretion in appropriate cases.
These judgments underscored the principle that a rigid application of the IBC should not defeat genuine efforts at resolution, and the adjudicating authority must factor in the creditor’s conduct and intent.
Court’s Reasoning
The Supreme Court noted that the financial creditor had not pressed for admission but instead sought time to amicably settle the matter. The NCLT’s action of proceeding with admission despite this request was found contrary to the objectives of the IBC. The Court emphasized:
“The adjudicating authority ought to have granted a reasonable time and adjourned the proceedings as was prayed for by the financial creditor… it has acted rather in haste.”
The Court also rejected the petitioner’s argument that the NCLAT lacked power to pass such an order, affirming that the appellate body is well within its rights to reverse orders where the adjudicating authority has failed to apply its mind to the circumstances and parties’ conduct.
Conclusion
The Supreme Court dismissed the appeal and upheld the NCLAT’s direction to keep the Section 7 application in abeyance for 90 days, facilitating settlement efforts. It reaffirmed the principle that insolvency should not be the first resort when resolution is still possible. The judgment emphasized the need for courts to balance procedural rigour with commercial sensibilities.
Implications
- Promotes Commercial Wisdom: The judgment affirms that creditors can pursue resolution outside of insolvency and courts should support such efforts.
- Protects Viable Businesses: By allowing time to resolve debts amicably, the decision protects viable companies from premature liquidation.
- Clarifies NCLAT’s Appellate Powers: Reinforces the view that appellate forums can step in to correct procedural lapses and ensure justice.
Referred Cases and Their Relevance
- Swiss Ribbons v. Union of India – Highlighted the central role of resolution in the IBC framework.
- Innoventive Industries v. ICICI Bank – Discussed the scope of inquiry under Section 7 and the role of NCLT.
- Vidarbha Industries v. Axis Bank – Affirmed the discretionary powers of NCLT in admitting Section 7 applications.
FAQs
Q1. Can a financial creditor withdraw or defer an insolvency petition before it is admitted?
Yes. The Supreme Court affirmed that if a financial creditor chooses not to press the petition before admission, the NCLT should defer or adjourn proceedings.
Q2. Does the NCLT have discretion not to admit an application even when debt and default are established?
Yes. Courts have held that admission under Section 7 is not automatic, and discretion can be exercised in deserving cases.
Q3. What powers does the NCLAT have in reversing an NCLT order admitting a Section 7 petition?
The NCLAT can reverse such an order if it finds that the NCLT did not properly consider the parties’ conduct, requests for adjournment, or acted hastily.
