The Supreme Court has held that a company’s profitability cannot shield it from insolvency proceedings once a financial debt and a default exceeding the statutory threshold are established.
The Bench of Justices Dipankar Datta and Augustine George Masih has clarified that admission of a financial creditor’s application under Section 7 of the Insolvency and Bankruptcy Code, 2016 does not require a detailed reconciliation of accounts or a final determination of the precise amount outstanding.
The bench upheld the National Company Law Tribunal’s orders admitting the insolvency applications filed by Omkara Assets Reconstruction Private Limited and directed that the Corporate Insolvency Resolution Process against both companies proceed in accordance with law.
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The dispute arose from a loan agreement dated December 26, 2017, under which Piramal Finance Ltd., subsequently known as Piramal Capital and Housing Finance Ltd., extended facilities aggregating ₹600 crore to the two companies as co-borrowers.
These comprised a ₹450 crore term loan and a ₹50 crore rolling credit facility for GSTAAD Hotels, along with a ₹100 crore term loan for Neo Capricorn Plaza.
A cash management arrangement provided for the hotels’ gross revenue collections to be deposited into a revenue account. Of these collections, 66% was to be transferred towards operating expenses and 34% towards servicing the debt through a retention account.
The financing arrangements also contemplated debt service reserves of ₹8 crore for GSTAAD Hotels and ₹2 crore for Neo. An amount of ₹3 crore under the reserve arrangement remained undisbursed as of November 15, 2022.
GSTAAD Hotels subsequently obtained two separate facilities under the Emergency Credit Line Guarantee Scheme, amounting to ₹98 crore and ₹65 crore. Neo obtained a connected facility of ₹19.5 crore.
The lenders assigned the credit facilities to Omkara on December 27, 2022. Following registration of defaults with National E-Governance Services Ltd. (NeSL), Omkara recalled the facilities in February 2023 and filed insolvency applications against both companies in March 2023.
The NCLT initially admitted the applications in January 2024. However, the National Company Law Appellate Tribunal set aside those orders in January 2025 and directed fresh consideration of several issues, including the cash management arrangement, the debt service reserve and the treatment of emergency credit funds.
After considering additional affidavits, financial material and submissions, the NCLT again admitted both applications on July 8, 2025. The NCLAT affirmed those orders on August 19, 2025.
Before the Supreme Court, the appellants argued that proper application of the cash management and reserve mechanisms would demonstrate that no default existed. They also relied on the companies’ profitability and positive earnings before interest, taxes, depreciation and amortisation, or EBITDA.
The Supreme Court framed two principal questions: the evidentiary threshold necessary to establish default under Sections 3(12) and 7 of the Code, and the nature of documentary material on which the adjudicating authority may rely.
The Court held that Section 7 involves a summary determination based on documentary evidence and the preponderance of probabilities. It does not contemplate a full trial of accounting disputes.
The tribunal must ascertain whether a financial debt became due and remained unpaid, with the default satisfying the statutory threshold under Section 4.
The Court distinguished the occurrence of default from the precise amount ultimately recoverable.
Default crystallises when a debt, or part of it, becomes due and is not paid. The outstanding amount, however, may continue to change because of interest, charges, adjustments and subsequent repayments.
Accordingly, a dispute over interest calculations, penal charges or appropriation of payments does not necessarily disprove default.
The Court explained that requiring tribunals to reconcile every ledger entry before admission would defeat the summary process envisaged by Section 7. The statutory framework provides for detailed verification and quantification of creditors’ claims after admission into CIRP, under judicial supervision.
Where the documents establish an unpaid amount above the statutory threshold, unresolved disputes about the final quantum cannot by themselves prevent admission.
The judgment also established a hierarchy of documentary evidence for proving default.
At the first level is an authenticated record of default issued by an Information Utility. The Court held that such a record can independently provide a sufficient basis for a prima facie finding of default.
The authentication mechanism gives the debtor an opportunity to confirm or dispute the information. Its evidentiary significance therefore exceeds that of an ordinary private document.
However, the Court clarified that an authenticated record is not irrebuttable or legally conclusive in every circumstance. Its presumption can be displaced by clear, cogent, credible and compelling material. Bare denials or disagreements over bookkeeping are insufficient.
At the second level are other documents, including loan agreements, account statements, balance confirmations, acknowledgements of liability and contemporaneous correspondence. These must be assessed collectively to determine whether debt became due and remained unpaid.
Applying these principles, the Court noted that four default filings had been registered with NeSL on February 9, 2023, and stood deemed authenticated under the applicable framework.
The appellants objected that the filings recorded the full outstanding facilities before recall and did not correspond to the smaller, date-specific defaults relied on in the insolvency proceedings.
The Court rejected the contention as a ground to overturn admission. The Information Utility records supported the occurrence of default, while the broader documentary record established defaults exceeding the statutory threshold.
The Court referred to a default of ₹17,16,29,518 for GSTAAD Hotels as of November 15, 2022, and a corresponding minimum default of ₹2,64,99,473 for Neo.
These findings rested on account statements, review reports, recall notices and the companies’ own correspondence. Further reconciliation of the aggregate figures was a matter for the claims verification process during CIRP.
The Court found no legal error in the tribunals’ treatment of the cash management arrangement and debt service reserve.
The cash management mechanism channelled an agreed percentage of revenue towards repayment but did not exhaust the borrowers’ underlying obligation to service their debt from other acceptable sources.
The tribunals had also examined the alleged excess withdrawals and their timing. The disputed withdrawals related to April and May 2023, rather than the period relevant to the pleaded default.
On the reserve arrangement, the NCLT had tested the borrowers’ argument on their own methodology. Even assuming appropriation of the undisbursed ₹3 crore reserve and excluding default interest, substantial unpaid interest and principal remained.
The Supreme Court further noted the finding that available cash accruals remained insufficient to meet debt servicing obligations through December 2023.
Rejecting the profitability argument, the Court explained that operating profits and the capacity to meet debt repayments are distinct.
A company with positive EBITDA may still be unable to service debt where repayment obligations exceed available operating profits. Equally, a loss-making company may possess sufficient liquidity to discharge its obligations.
The Code therefore uses default as the trigger for intervention. It does not require a creditor to wait until the borrower suffers irreversible financial collapse.
The Court emphasised that early intervention serves the objective of preserving enterprise value and facilitating resolution before liquidation becomes the only realistic outcome.
The Supreme Court also rejected the attempt to reopen Omkara’s status as a financial creditor.
The assignment had already been challenged before the Karnataka High Court, and that challenge had failed. The Supreme Court had subsequently dismissed the special leave petition against the High Court proceedings.
The Bench held that the assignment issue stood settled between the parties and could not be litigated afresh through the insolvency appeals. The adjudicating authority under Section 7 could not sit in appeal over determinations of constitutional courts.
The judgment referred to the 2026 amendment to Section 7(5), recording that the amended provision requires admission when the statutory conditions are satisfied.
The Court explained that the substitution of “shall” for “may”, together with the accompanying explanations, excludes rejection on grounds outside the statutory requirements and reinforces the sufficiency of qualifying Information Utility records for ascertaining default.
It treated the explanations as clarificatory and stated that its reasoning would have been the same even without the amendment.
The Court recorded a separate incident concerning a compilation of authorities submitted for the appellants.
The respondents objected that the compilation contained AI-generated, non-existent judgments. The judgment records that the Advocate-on-Record sought to attribute responsibility to the appellants, while senior counsel accepted responsibility and sought forgiveness on their behalf.
The Court stated that exemplary costs had been contemplated. However, after it was informed of the first appellant’s death, it ultimately made no order as to costs.
Both appeals were dismissed, and the insolvency proceedings against the two corporate debtors were allowed to continue.
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