A Deep Dive into 2023's Insolvency Regime - Part 3 of 5

A Deep Dive into 2023's Insolvency Regime - Part 3 of 5

Continuing our exploration of the evolving insolvency landscape in 2023, Part 3 delves into two more landmark cases that further define the legal contours of insolvency proceedings in India.

M. Suresh Kumar Reddy vs. Canara Bank & Ors

Clarification on NCLT's Discretion in Admitting Section 7 Applications

In May 2023, the Supreme Court rendered a crucial judgment in M. Suresh Kumar Reddy vs. Canara Bank & Ors, shedding light on the National Company Law Tribunal's (NCLT) discretion in admitting applications under Section 7 of the Insolvency and Bankruptcy Code (I&B Code).


Syndicate Bank (now merged into Canara Bank) provided a secured overdraft facility and bank guarantees to M/s. Kranthi Edifice Pvt. Ltd. (Corporate Debtor). Disputes arose over extending bank guarantees, leading to Syndicate Bank's rejection. In response, Syndicate Bank filed a Section 7 petition against the Corporate Debtor, admitted by the NCLT. M. Suresh Kumar Reddy, a suspended director of the Corporate Debtor, appealed the decision.

Legal Analysis & Decision:

The appellant argued that the NCLT possesses discretion, citing Vidarbha Industries Power Limited v. Axis Bank Ltd. The Supreme Court distinguished Vidarbha Industries, asserting it was context-specific and doesn't contradict Innoventive Industries Limited v. ICICI Bank and E.S Krishnamurthy v. Bharath Hi-Tech Builders Private Limited.


In Innoventive Industries Limited, the Supreme Court clarified that if the NCLT is satisfied with debt and default existence, it must admit a Section 7 petition. This principle was reaffirmed in E.S Krishnamurthy.


The Supreme Court held that in the current case, there were no valid reasons for the NCLT to exercise discretion and reject the Section 7 petition. It upheld the NCLT's decision, emphasizing that once default is established, the NCLT has limited discretion in refusing admission under Section 7 of the I&B Code. This ruling underscores the obligation of the NCLT to admit petitions when satisfied with debt and default, reinforcing consistency in its application.


The judgment in M. Suresh Kumar Reddy vs. Canara Bank & Ors provides clarity on the discretionary power of the National Company Law Tribunal (NCLT) to admit applications under Section 7 of the Insolvency and Bankruptcy Code (IBC). The court emphasized that, even if the NCLT has the power to reject an application under Section 7 with good reasons, in the absence of such reasons, the NCLT is obligated to admit the petition.


The court concluded that, in the present case, the Corporate Debtor had unquestionably defaulted by not making payments to the Respondent, falling within the ambit of Section 3(12) of the IBC. The judgment explicitly states that, assuming the NCLT has discretionary powers to reject Section 7 applications under certain circumstances, in this particular case, no valid reasons existed for the NCLT to deny admission.


This judgment settles the debate regarding the discretionary power of the NCLT in admitting applications under Section 7 of the IBC. It highlights that the ruling provides authoritative clarification on the scope of the Vidarbha Industries Judgment. The latter had been previously used by corporate debtors seeking to avoid the admission of Section 7 applications, and this decision appears to conclusively address and clarify the issue.


Eva Agro Feeds (P) Ltd. v. Punjab National Bank

Clarity on Liquidator's Authority and Principles of Natural Justice

In February 2021, Amrit Feeds Limited underwent liquidation proceedings, with Punjab National Bank (PNB) contesting the NCLT's directive to proceed with the highest bidder, Eva Agro Feeds Pvt. Ltd. (Eva), in the auction.


The NCLAT reversed the NCLT's decision, justifying auction cancellation due to Eva being the sole bidder matching the reserve price. The NCLAT cited the e-auction process terms and granted the liquidator an absolute right to accept or reject any bid. Eva appealed to the Supreme Court.

Key Findings and Decision:

The Supreme Court clarified that Para 1(11-A) of Schedule I to the Bankruptcy Board of India (Liquidation Process) Regulations, 2016, required the liquidator to communicate reasons for rejecting the highest bid, applicable even before its introduction on 30-9-2021.


The Court rejected the argument that the liquidator had unfettered discretion based on auction process terms (Clause 3(k)) and emphasized that, in conflicts with the IBC or Regulations, the latter prevail.


Notably, the Court found no justifiable grounds for auction annulment. The liquidator's rationale of a single bidder and matching prices was questioned when the subsequent sale notice maintained the same reserve price.


The Court observed that, considering Schedule I provisions, the highest bid may be accepted unless there are statutory infirmities, collusion, or fraud in the bidding process.


In conclusion, the Supreme Court allowed Eva's appeal, reinforcing the importance of furnishing reasons for rejecting the highest bid and emphasizing adherence to statutory provisions over conflicting auction terms.


The Supreme Court's judgment in the Eva Agro Feeds case holds crucial implications for the discretionary powers of liquidators and the principles of natural justice within the framework of the Insolvency and Bankruptcy Code (IBC).


The case serves as a landmark decision, offering clarity on the extent of a liquidator's authority, especially concerning the rejection of the highest bid in an online bidding process. The Court emphasized the necessity of transparency, fairness, and accountability throughout the liquidation process, restraining the arbitrary exercise of the liquidator's discretion.


By carefully examining both the E-Auction Process Information Document and the IBC, the Court set a precedent that prioritizes fundamental principles of natural justice. It highlighted the significance of furnishing reasons for rejecting the highest bid, ensuring a fair and well-reasoned decision-making process by the liquidator.


The judgment establishes a balance between safeguarding the interests of the highest bidder and ensuring that the liquidator fulfils their responsibilities under the IBC. In doing so, it contributes to the evolution of insolvency and bankruptcy law, emphasizing the enduring relevance of natural justice principles in protecting the rights of stakeholders within the IBC framework.


As we conclude Part 3 of our deep dive into the 2023 insolvency regime, these cases highlight the ongoing evolution and refinement of insolvency laws in India. Stay tuned for Part 4, where we will continue to unravel more cases that provide valuable insights into the dynamic and ever-changing landscape of corporate insolvency laws.

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