Canara Bank vs. M. Suresh Kumar Reddy: NCLT’s Discretion in Insolvency Proceedings

The case of M. Suresh Kumar Reddy vs. Canara Bank & Ors. revolved around an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IB Code) against M/s Kranthi Edifice Pvt. Ltd., where the appellant, a suspended director of the corporate debtor, challenged the admission of the insolvency proceedings before the Supreme Court. The core issue was whether the National Company Law Tribunal (NCLT) had discretion to reject an application under Section 7 despite the existence of financial debt and default.

Background of the Case

Canara Bank, the successor to Syndicate Bank, had granted financial facilities to the corporate debtor, including a secured overdraft of ₹12 crores and a bank guarantee limit of ₹110 crores. When the corporate debtor failed to meet its obligations, the bank filed an application under Section 7 of the IB Code before the NCLT, which was admitted on 27th June 2022. The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal against this decision on 5th August 2022.

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Petitioner’s Arguments

The petitioner, represented by his senior counsel, contended:

• Repeated attempts were made for a one-time settlement (OTS) with Canara Bank, including a deposit of ₹6 crores, but the bank refused to consider it.
• He relied on the Supreme Court’s decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022) to argue that even if financial debt and default exist, NCLT has the discretion to reject an application under Section 7.
• The Telangana government had issued letters requesting the bank to extend the bank guarantees, but the bank’s refusal forced the corporate debtor into default.
• An interim order by the Telangana High Court had restrained the bank from taking coercive steps regarding the bank guarantees.

Respondents’ Arguments

The counsel for Canara Bank countered:

• The decision in Vidarbha Industries was case-specific and did not overrule the principle established in Innoventive Industries Ltd. v. ICICI Bank (2018) and E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd. (2022), where NCLT must admit an application under Section 7 upon establishing default.
• The corporate debtor had acknowledged its liability of ₹63.36 crores as of 5th May 2019.
• The corporate debtor had failed to pay its dues even after receiving a demand notice under Section 13(2) of the SARFAESI Act.

Supreme Court’s Observations

The Court reiterated the principles laid down in earlier judgments:

• Under Section 7, NCLT must admit an application upon establishing default.
• The discretion discussed in Vidarbha Industries does not override the fundamental principle that a defaulted financial debt must lead to admission.
• The corporate debtor’s claim that the bank’s actions led to the default was unfounded, as the bank had communicated its decision not to extend bank guarantees.

Key Judgment Excerpt

The Supreme Court emphasized:

“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.”

Final Verdict

The Supreme Court dismissed the appeal, affirming the decisions of NCLT and NCLAT, stating that there was no valid ground to reject the insolvency application under Section 7.

Petitioner Name: M. Suresh Kumar Reddy.
Respondent Name: Canara Bank & Ors..
Judgment By: Justice Abhay S. Oka, Justice Rajesh Bindal.
Place Of Incident: Telangana, India.
Judgment Date: 11-05-2023.

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