Ability Or Inability To Pay Not Relevant For CIRP Admission: Supreme Court

(MENAFN- KNN India) New Delhi, Feb 26 (KNN) The Supreme Court has reiterated that while considering a plea under Section 7 of the Insolvency and Bankruptcy Code (IBC), the Adjudicating Authority must only examine whether a financial debt exists and whether there has been a default. It cannot refuse admission based on the corporate debtor's ability or inability to pay.

A Bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and Vipul M. Pancholi dismissed an appeal by Power Trust, promoter of Hiranmaye Energy Ltd., holding that the IBC marks a clear departure from the winding-up regime under Section 433(e) of the Companies Act, 1956.

Under the Code, the inquiry at admission is limited to debt and default.

Background

The case concerned loans exceeding Rs 2,300 crore advanced by REC Ltd. to Hiranmaye Energy Ltd. for a thermal power project in Haldia, West Bengal. Restructuring proposals in 2020, subject to conditions, were never implemented. REC filed a Section 7 plea citing March 31, 2018 as the date of default.

The NCLT admitted the application, and the NCLAT upheld it.

Court's Findings

The promoter argued that restructuring shifted the default into the Covid-protected period under Section 10A and claimed the company was commercially viable.

The Court rejected this, holding the default dated back to March 31, 2018 and was not covered by Section 10A.

Distinguishing Vidarbha Industries Power Ltd. v. Axis Bank Ltd., the Bench noted there was no binding award in favour of the corporate debtor exceeding the creditor's claim.

With outstanding dues above Rs 3,100 crore-far exceeding revenue and EBITDA-the Court held commercial viability is irrelevant at the admission stage.

Finding the requirements of Section 7 satisfied, the Court dismissed the appeal and vacated the stay on insolvency proceedings.

MSME Implications

The ruling narrows the scope for MSMEs to resist admission into CIRP once debt and default are established. Claims of operational viability or future prospects will not prevent insolvency initiation.

While the decision strengthens creditor rights and expedites the process, it also increases the risk of faster insolvency admission for MSMEs that may be viable but facing temporary financial stress.

(KNN Bureau)

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