M. SURESH KUMAR REDDY vs. CANARA BANK

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 7121 OF 2022 M. Suresh Kumar Reddy   …Appellant versus Canara Bank & Ors.                   ...Respondents J  U  D  G  M  E  N  T ABHAY S. OKA, J. FACTUAL ASPECTS 1. The   respondent­Bank   filed   an   application   under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short,   ‘the   IB   Code’)   before   the   National   Company   Law Tribunal, Hyderabad, Telangana.  The said application was filed against a Corporate Debtor M/s Kranthi Edifice Pvt. Signature Not Verified Ltd.   The   present   appellant   claims   to   be   a   suspended Digitally signed by Anita Malhotra Date: 2023.05.11 17:19:35 IST Reason: Director of the Corporate Debtor.   National Company Law Civil Appeal No. 7121 OF 2022 Page 1 of 23 th Tribunal (for short, ‘NCLT’), by an Order dated 27   June 2022,   admitted   the   application   filed   by   the   respondent­ Bank and declared a moratorium for the purposes referred in Section 14 of the IB Code.  The appellant claiming to be an aggrieved person preferred an appeal against the said Order before the National Company Law Appellate Tribunal (for short, ‘NCLAT’).  By the impugned judgment dated 5th August 2022, NCLAT has dismissed the appeal.  2. The first respondent, Canara Bank is the successor of Syndicate Bank, which made application under Section 7 of the IB Code to NCLT.  Syndicate Bank was merged into the first respondent­Canara Bank.   A letter of sanction dated nd 2   April   2016   was   issued   by   Syndicate   Bank   by   which credit facilities were sanctioned to the Corporate Debtor for th one­year   valid   up   to   28   February   2017.   A   Secured Overdraft   Facility   of   Rs.   12   crores   was   granted   by   the Syndicate   Bank,   apart   from   sanctioning   the   Bank Guarantee   limit   of   Rs.   110   crores.   Thus,   the   facilities granted   by   the   Syndicate   Bank   to   the   Corporate   Debtor were   fund­based   (Overdraft   Facility)   and   non­fund­based (Bank Guarantees).  Civil Appeal No. 7121 OF 2022 Page 2 of 23 3. In the application under Section 7 of the IB Code, the th Syndicate Bank stated that as on 30  November 2019, 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. st 4. On 21  October 2022, this Court while issuing notice, recorded   a   statement   of   the   learned   senior   counsel appearing for the appellant that a proposal for settlement under a One­Time Settlement Scheme has been submitted to the first respondent­Bank and a sum of Rs.6 crores has been deposited with the first respondent­Bank.  Eventually, the said proposal was turned down by the first respondent­ Bank.     Therefore,   the   present   appeal   was   taken   up   for hearing.  SUBMISSIONS 5. The   learned   Senior   Counsel   appearing   for   the appellant submitted that repeated efforts were made to have one­time   settlement   of   the   dues   payable   to   the   first respondent.  But the said request was not acceded to.  He Civil Appeal No. 7121 OF 2022 Page 3 of 23 relied upon a decision of this Court in the case of  Vidarbha 1 .   He Industries Power Limited v. Axis Bank Limited submitted   that   even   assuming   that   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.   For good   reasons,   NCLT   could   have   refused   to   admit   the application under Section 7 of the IB   Code.  He also fairly nd pointed out the Order dated 22  September 2022 passed by this   Court   in   a   Review   Petition   seeking   a   review   of   the 1 decision in the case of  . Vidarbha Industries He   invited   our   attention   to   the   correspondence 6. between the Government of Telangana and the Syndicate Bank.   There   were   contracts   granted   by   the   Telangana Government   to   the   Corporate   Debtor.     He   invited   our th attention to a letter dated 5  November 2018 addressed by the   Executive   Engineer   on   behalf   of   the   Government   of Telangana   requesting   the   Bank   to   extend   the   Bank Guarantees furnished by the said Bank on the request of th the   Corporate   Debtor.     Similarly,   by   a   letter   dated   7 August 2019, the Government of Telangana requested the Syndicate Bank to extend 29 Bank Guarantees mentioned 1 2022 (8) SCC 352 Civil Appeal No. 7121 OF 2022 Page 4 of 23 in the said letter.  He pointed out that the Corporate Debtor th addressed  a  letter   to  the  Bank   on  9   January   2020  by which a request was made to extend the Bank Guarantees. He also invited the attention of the Court to a letter dated th 8   January   2020   addressed   by   the   Government   of Telangana to the Bank requesting the Bank to extend the seven Bank Guarantees mentioned therein.  He submitted that   notwithstanding   the   requests   made   by   the   State Government,   Syndicate   Bank   did   not   extend   the   Bank Guarantees.   Thus, in a sense, the failure of the Bank to extend the Bank Guarantees forced the Corporate Debtor to commit default. He submitted that the Bank is responsible for triggering the default.  The learned counsel invited our th attention to the interim order dated 24  April 2020 passed by the learned Single Judge of the Telangana High Court by which the first respondent­Bank was restrained from taking coercive   steps   pursuant   to   letters   of   invocation   of   Bank Guarantees including handing over of Demand Drafts to the State Government.  He urged that in the teeth of this order, NCLT   ought   not   to  have   admitted  the   application  under Section 7. 7. Learned counsel appearing for the  first  respondent­ Bank firstly pointed out that the decision in the case of Civil Appeal No. 7121 OF 2022 Page 5 of 23 1 Vidarbha Industries  is in peculiar facts of that case, as is explained by the same Bench while disposing of the Review Petition.  He submitted that the decision of this Court in the case of   E.S. Krishnamurthy and others v. Bharath Hi­ 2 Tecch Builders Private Limited  still holds the field.  He, therefore, submitted that once NCLT is satisfied that there is a financial debt and a default has occurred, it is bound to admit an application under Section 7.   He submitted that the request made by the Corporate Debtor for extension of the   Bank   Guarantees   was   specifically   rejected   as th communicated by the first respondent by a letter dated 18 January   2021   addressed   to   the   Corporate   Debtor.   He would, therefore, submit that there is no error committed by NCLT in admitting application under Section 7. OUR VIEW We   have   given   careful   consideration   to   the 8. submissions.     This   Court   in   the   case   of   Innoventive 3 has Industries   Limited   v.   ICICI   Bank   and   Another   explained the scope of Section 7.  Paragraph nos.28 to 30 of the said decision read thus:­ 2 ( 2022) 3 SCC 161 3 ( 2018) 1 SCC 407 Civil Appeal No. 7121 OF 2022 Page 6 of 23 “28.  When   it   comes   to   a   financial creditor triggering the process, Section 7   becomes   relevant.   Under   the Explanation to Section 7(1), a default is in respect of a financial debt owed to  any  financial   creditor   of   the corporate debtor — it need not be a debt   owed   to   the   applicant   financial creditor.   Under   Section   7(2),   an application is to be made under sub­ section (1) in such form and manner as is prescribed, which takes us to the Insolvency   and   Bankruptcy (Application to Adjudicating Authority) Rules,   2016.   Under   Rule   4,   the application   is   made   by   a   financial creditor   in   Form   1   accompanied   by documents   and   records   required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of   the   proposed   interim   resolution professional in Part III, particulars of the   financial   debt   in   Part   IV   and documents,   records   and   evidence   of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post   to   the   registered   office   of   the corporate   debtor.   The   speed,   within Civil Appeal No. 7121 OF 2022 Page 7 of 23 which the adjudicating authority is to ascertain   the   existence   of   a   default from   the   records   of   the   information utility   or   on   the   basis   of   evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the   adjudicating   authority   is   to   be satisfied that a default has occurred, that the corporate debtor is entitled to point   out   that   a   default   has   not occurred in the sense that the “debt”, which   may   also   include   a   disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The   moment   the   adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to   rectify  the defect within 7 days of receipt of a notice from   the   adjudicating   authority. Under sub­section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission   or   rejection   of   such application, as the case may be. 29.  The scheme of Section 7 stands in contrast   with   the   scheme   under Civil Appeal No. 7121 OF 2022 Page 8 of 23 Section   8   where   an   operational creditor   is,   on   the   occurrence   of   a default, to first deliver a demand notice of the unpaid debt to the operational debtor   in   the   manner   provided   in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period   of   10   days   of   receipt   of   the demand notice or copy of the invoice mentioned in sub­section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre­existing—i.e. before   such   notice   or   invoice   was received by the corporate debtor. The moment there is existence of such a dispute,  the   operational  creditor   gets out of the clutches of the Code. 30.  On   the   other   hand,   as   we   have seen,   in   the   case   of   a   corporate debtor who commits a default of a financial   debt,   the   adjudicating authority   has   merely   to   see   the records of the information utility or other   evidence   produced   by   the financial   creditor   to   satisfy   itself that a default has occurred. It is of no matter that the debt is disputed so   long   as   the   debt   is   “due”   i.e. payable unless interdicted by some law or has not yet become due in Civil Appeal No. 7121 OF 2022 Page 9 of 23

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Civil Appeal No. 7121 OF 2022 Page 11 of 23 particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part   IV   and   documents,   records and evidence of default in Part V. Under Rule 4(3), the applicant is to   dispatch   a   copy   of   the application   filed   with   the adjudicating   authority   by registered   post   or   speed   post   to the   registered   office   of   the corporate   debtor.   The   speed, within   which   the   adjudicating authority   is   to   ascertain   the existence   of   a   default   from   the records  of  the  information utility or   on   the   basis   of   evidence furnished by the financial creditor, is   important.   This   it   must   do within 14 days of the receipt of the application.  It   is   at   the   stage   of Section   7(5),   where   the adjudicating   authority   is   to   be satisfied   that   a   default   has occurred, that the corporate debtor is   entitled   to   point   out   that   a default   has   not   occurred   in   the sense that the “debt”, which may also   include   a   disputed   claim,   is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority Civil Appeal No. 7121 OF 2022 Page 12 of 23 is   satisfied   that   a   default   has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant   to   rectify   the   defect within 7 days of receipt of a notice from   the   adjudicating   authority . Under   sub­section   (7),   the adjudicating   authority   shall   then communicate the order passed to the   financial   creditor   and corporate debtor within 7 days of admission   or   rejection   of   such application, as the case may be.                      * 30.   On   the   other   hand,   as   we have   seen,  in   the   case   of   a corporate debtor who commits a   default   of   a   financial   debt, the adjudicating authority has merely to see the records of the information   utility   or   other evidence   produced   by   the financial   creditor   to   satisfy itself   that   a   default   has occurred. It is of no matter that the debt is disputed so long as the   debt   is   “due”   i.e.   payable unless interdicted by some law Civil Appeal No. 7121 OF 2022 Page 13 of 23

Civil Appeal No. 7121 OF 2022 Page 14 of 23 are   pending   settlements”.   Eventually, the   adjudicating   authority   did   not entertain   the   petition   on   the   ground that   the   procedure   under   IBC   is summary,   and   it   cannot   manage   or decide upon each and every claim of the individual   homebuyers.   The adjudicating   authority   also   held   that since   the   process   of   settlement   was progressing “in all seriousness”, instead of examining all the individual claims, it would   dispose   of   the   petition by  directing  the respondent to settle all the remaining claims “seriously” within a definite time­frame. The petition was accordingly disposed of by directing the respondent   to   settle   the   remaining claims   no   later   than   within   three months,   and   that   if   any   of   the remaining   original   petitioners   were aggrieved   by   the   settlement   process, they would be at liberty to approach the adjudicating   authority   again   in accordance with law. The adjudicating authority's decision was also upheld by the appellate authority, who supported its conclusions. 34.  The   adjudicating   authority   has clearly   acted   outside   the   terms   of   its jurisdiction under Section 7(5) IBC.  The adjudicating authority is empowered only to verify whether a default has Civil Appeal No. 7121 OF 2022 Page 15 of 23

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Civil Appeal No. 7121 OF 2022 Page 17 of 23 unless there are good reasons not to admit the petition. 88.  The adjudicating authority (NCLT) has to consider the grounds made out by   the   corporate   debtor   against admission,   on   its   own   merits.   For example, when admission is opposed on the ground of existence of an award or a decree in favour of the corporate debtor,   and   the   awarded/decretal amount   exceeds   the   amount   of   the debt, the adjudicating authority would have   to   exercise   its   discretion   under Section   7(5)( a )   IBC   to   keep   the admission   of   the   application   of   the financial creditor in abeyance, unless there is good reason not to do so. The adjudicating   authority   may,   for example, admit the application of the financial creditor, notwithstanding any award or decree, if the award/decretal amount is incapable of realisation. The example is only illustrative. 89.  In   this   case,   the   adjudicating authority (NCLT) has simply brushed aside the case of the appellant that an amount   of   Rs   1730   crores   was realisable by the appellant in terms of the order passed by A PTEL  in favour of the   appellant,   with   the   cursory observation   that   disputes   if   any Civil Appeal No. 7121 OF 2022 Page 18 of 23

Civil Appeal No. 7121 OF 2022 Page 19 of 23 13. Thus, it was clarified by the order in review that the 1 decision in the case of   was in the Vidarbha Industries   setting of facts of the case before this Court.   Hence, the 1   decision in the case of   Vidarbha Industries cannot be read and understood as taking a view which is contrary to 3  the view taken in the cases of    and Innoventive Industries 2 The   view   taken   in   the   case   of E.S.   Krishnamurthy .   3     still holds good. Innoventive Industries   In this case, we must note that the amount payable by 14. the Corporate Debtor also included the amount repayable under fund­based credit facility of secured overdrafts. The facility granted to the Corporate Debtor was not confined to Bank Guarantees.  15. Moreover, a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and th Enforcement   of   Security   Interest   Act,   2002   dated   29 August 2018 was issued by the first respondent.   As the Corporate   Debtor   did   not   honour   the   said   notice,   the original application for recovery has been filed by the first respondent   before   the  Debt   Recovery   Tribunal   at Hyderabad.  Moreover, the Corporate Debtor acknowledged th the   debt   on   5   May   2019   to   the   extent   of   Rs. Civil Appeal No. 7121 OF 2022 Page 20 of 23 63,36,61,897.26.     Moreover,   the   Balance   Sheet   as   of 31.03.2019   of   the   Corporate   Debtor   reflects   the   said liability of the Corporate Debtor. It   is   true   that   as   far   as   Bank   Guarantees   are 16. concerned, the Executive Engineer of the Government of Telangana   addressed   letters   to   the   Bank   requesting   the th Bank to revalidate the Bank Guarantees. On 8   January 2020, the Government addressed a letter to Syndicate Bank to extend the seven Bank Guarantees mentioned therein. The   letter   mentions   that   if   the   action   of   revalidation   or extension of the Bank Guarantees is not taken, the Bank Guarantees be realized and the amount be paid by Demand Drafts to the State Government. Thus, Bank Guarantees were invoked by the State Government. In view of the said th letter,   on   9   January   2020,   the   Corporate   Debtor addressed a letter to the Syndicate Bank mentioning that the issue relating to the pre­closure of the two contracts granted   by   the   State   Government   was   under   the   active consideration of the State Government. The letter mentions that if the Bank Guarantees were not extended, the same are likely to be encashed by the Government.  Therefore, a request was made by the Corporate Debtor to the Bank to revalidate   the   Bank   Guarantees.     However,   the   first Civil Appeal No. 7121 OF 2022 Page 21 of 23 th respondent by a letter dated 18  January 2021, specifically informed   the   Corporate   Debtor   that   the   competent authority has not considered the proposal of the Corporate Debtor   for   extending   Bank   Guarantees   and   Secured Overdraft   Facilities.     By   the   same   letter,   the   first respondent called upon the Corporate Debtor to clear the outstanding immediately.  Thus, there is no doubt that the Corporate Debtor committed a default within the meaning of Section 3(12) of the IB Code due to non­payment of the amounts due to the Bank.  17. 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 18. 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. Civil Appeal No. 7121 OF 2022 Page 22 of 23 19. Hence, we find that there is no merit in the appeal, and the same is, accordingly, dismissed. There will be no order as to costs. ……..….……………J.      (Abhay S. Oka) ……...………………J.       (Rajesh Bindal) New Delhi; May 11, 2023.    Civil Appeal No. 7121 OF 2022 Page 23 of 23